MOSCOW (Mineweb.com) –Among the world’s top producers of aluminium, all are public companies regulated by the laws, securities market and anti-trust regulations, and disclosure requirements of the United States and the European Union, save one. The exception is Russian Aluminium (Rusal), which is owned by Oleg Deripaska, a young Russian.
What Deripaska allows to be known is that Rusal sells about 3 million tons of primary metal per annum for about $5 billion in revenues, and carries more than $2 billion in debt. In output volume and market value, Rusal ranks third in the global aluminium league. Alcoa of the US ranks first, with a current market capitalization of $20 billion. Alcan of Canada – which acquired Pechiney of France – ranks second with a market cap of $12 billion. Although the commodity price of aluminium has been climbing, the share price of these two companies has been falling – by roughly 30% apiece so far this year.
Rusal is privately owned by Deripaska. But when he bought out the 50% stake owned by Roman Abramovich and his friends at Millhouse, a London holding, over the past three years, the exit price (still secret) put a valuation of about $8 billion on the entire company. A year or so later, and Moscow investment bankers believe that Rusal is currently worth $10 billion, a purported gain of 25%.
How to realize this value, and enjoy it at the same time, is Deripaska’s biggest problem. How to get him to share it with Russia is the problem to which the Kremlin has been giving attention recently.
Aesop once told the fable of the man who turned his earnings into gold, and buried it. Every day he went to the spot to contemplate how rich he was. But a passing labourer spotted him, dug up the gold, and made off with it. When the owner returned and discovered his loss, he started to tear out his hair. A wise passerby told him not to despair. “When you had all that gold,” he said, “you didn’t really have it.” He advised burying a stone, and imagining it to be gold, for that would serve the same purpose. The moral of his story, Aesop thought, was that possession is nothing – without enjoyment.
Deripaska’s contemplative and recreational habits are a matter of rumour, but his financial strategy is straight out of Aesop. This was made clear by his friend, junior shareholder, and chief executive of Rusal, Alexander Bulygin. He has suggested that the best way to hang on to the gold would be to take it away from Russia, and leave a stone in its place. A few weeks ago, he told the Sunday Times of London – the city where everyone goes to bury their gold, and display their enjoyment – that Rusal is thinking of making a share flotation to foreign investors.
Exaggerating the value of the assets left behind in Russia, and minimizing their indebtedness, he claimed “we are very close to announcing that our company is fully compliant with the principles required by the stock exchanges with regard to issues such as corporate governance, transparency and accounting.”
Bulygin came closer to the truth when he added that Russian “companies are using floats to hedge against political risks. They hope foreign investors will defend them against any politically motivated tax risks.”
As show ponies go for these foreign investors, Deripaska is something of a piebald. He produces the aluminium metal in Russian smelters, but as his former spokesman, Yevgenia Harrison once admitted, most of the value (read profit) in Rusal is earned offshore. “To a very large extent,” she said, “we are processors of imported raw materials. Thus, a relatively large portion of Rusal’s value added is created outside of the Russian Federaton.”
This is done through what are known in the metals trade as tolling schemes. Tolling is a chain of contracts, according to which raw materials, such as alumina, are supplied to a smelter, which electrolyzes it into metal. This is then returned to the owner of the alumina and the trading chain. In Russia, this scheme eliminates 18% internal value-added tax and other taxes payable when the alumina enters the country, and the metal leaves it. But if the scheme is owned and secretly controlled by a single Russian owner, with the objective of avoiding tax, then, according to the letter of the law, it is illegal. The perpetrator of such a scheme could thus be vulnerable to back-tax claims, penalties, and interest.
Deripaska’s domicile and Rusal’s also have enormous tax implications because Russian law on transfer pricing and on tax residency could be interpreted and applied in such a way as find Deripaska, Rusal and Basic Element, Deripaska’s Moscow-based holding, liable for hundreds of millions, if not billions of dollars in obligations to the government. That’s what Bulygin has admitted he is afraid of.
It is possible to make a rough calculation of what Rusal avoids paying in tax through its tolling schemes by estimating the difference between the price at which Rusal aluminium is declared when it enters an import market with reliable customs statistics, like the United States; and the price it was declared at for export, when it left the shores of Russia. For the first half of 2004, for example, there was a difference of $423 per ton. Multiplying that by the 525,000 tons imported in the period to the US produces a value of $222 million. The US is not the most significant of Rusal’s export destinations, and if you were to multiply the differential by Rusal’s full export volume, you are likely to guess that the gold Deripaska is burying outside Russia may be worth about $1 billion a year.
That is a lot to gloat over, and enjoy. But it is far too much to hide from passersby. And so, a flotation in London for Rusal is only one of the two big options which Deripaska must now consider, if he is to preserve his fortune. His second option is to follow the example of his fellow oligarch Roman Abramovich, and sell Rusal to the Russian state. Selling, you should understand, is much better than having the property confiscated as the outcome of a tax and fraud claim and a federal prosecution. That has proved to be the fate of the Yukos oil company oligarch, Mikhail Khodorkovsky, and his fellow shareholders. Deripaska has been taking pains to ensure he does not follow them into exile or prison.
He has, however, acquired a residence in Belgrave Square, London, establishing himself there as England’s 6th richest man. For a time, Downing Street and the Home Office were obliged to issue Deripaska a waiver of the visa ban which had been applied by the US Government, and which, under UK visa rules, is generally applied to the same people the US blackballs. According to an Australian government official, Australia, which belongs to the US-UK intelligence-sharing network, also granted Deripaska a waiver to visit there too.
Then on October 1, Deripaska announced through a brief posting in the Financial Times that he had been granted a visa to enter the US. According to the newspaper, the restriction on Deripaska had just been raised “after the American immigration authorities lifted a long¬standing visa ban. Georgy Oganov, deputy director general of Basic Element, said yesterday US officials had not given any reasons for lifting the ban.”
Oganov should not have said this, because it implied the reasons the ban had been imposed in the first place.
Deripaska has been trying to lift this US visa ban for almost a decade, and he has employed well-known US law firms and Republican Party politicians to lobby in Washington for him. But he has never admitted there was a visa ban – until Oganov did so. This could be why for the past two weeks Oganov has refused to answer questions from Mineweb to clarify what he told the Financial Times. Oganov also ordered his deputy Eleanora Vaitsman, and everyone else in the Basic Element office in Moscow, to pretend that they were not on the receiving end of telephone-calls or emails, seeking clarification of the matter.
For if Deripaska is now free to cross the US border, he is also free to enter US legal jurisdiction to answer the charges the FBI and other investigative and law enforcement agencies have deemed credible enough to block his visa for so long. What these charges are can be found in federal US court documents stretching back for several years. Although the US courts have so far ruled that they had no jurisdiction to try the civil claims, the American press, along with the US stock market regulators, have yet to assess these charges publicly.
Just how damaging this review could be for Deripaska’s prospects of floating Rusal shares to US investors was signaled in a ruling of the federal US District Court for the District of Columbia on September 27. In that case, Deripaska’s fellow Russian oligarchs, Mikhail Fridman and Pyotr Aven, controlling shareholders of the Alfa Bank group, lost a libel suit they had waged for five years against the Center for Public Integrity, an investigative journalism group in Washington, and two journalists who had reported that Fridman and Aven had acted criminally in the acquisition of their Russian assets and fortune. The initial publication had relied on a variety of evidence, including Russian government agency documents, as well as US intelligence agents’ testimony and US government reports.
But federal judge John Bates ruled to dismiss the case without trial, and without cross-examining the documentary evidence or witnesses. In his ruling, the judge declared that, under the US constitution and decided case law, Russian businessmen like Fridman and Aven are “limited public figures for purposes of the public controversy involving corruption in post-Soviet Russia.” The very extent of Fridman’s and Aven’s effort, through media they have sought out, and public relations they have paid for, established themselves as appropriate targets for investigation, criticism, and public opinion. “Serving as the target of criticism -sometimes false — is the burden our system of laws quite consciously places on the shoulders of public figures,” the judge declared.
Now criticism is not something Deripaska tolerates. But he has also found that the best way to deflect, or inhibit criticism is not to sue for libel – he has tried that in Germany – but rather to persuade the managements of publications that Rusal can be a generous donor, sponsor, or advertiser. The effect is a demonstrable loss of editorial interest at several publications in investigating the charges against Deripaska, Rusal and their companies, which have been aired in courts around the world, or settled out of court by payments from Deripaska.
Deripaska has also tried to remove some of the reason for the criticism – the claims that have been lodged in court alleging he stole the assets currently making up Rusal’s value, or defrauded his partners on trading and import-export contracts. A few days ago, the Sunday Times began reporting the most recent case, currently before the High Court in London. “According to court documents seen by the Sunday Times, Ansol [the plaintiff] alleges that Deripaska unlawfully broke the terms of the joint venture by personally brokering a new deal with the president of Tajikistan in which Rusal was granted complete control of the lucrative smelter [in Tajikistan].” Stealing assets is not a new charge Deripaska, Bulygin, and Rusal have faced, and which they consistently deny. But they have settled the other claims, and this is the first time the charges may be tried in an English court.
The Sunday Times went further, reporting the counter-claim in the court documents which contains “serious allegations, including details of a plot by Deripaska’s office to kidnap Nazarov [the smelter’s former supplier and investor].” According to the initially talkative Oganov, “we want to develop our involvement in Tajikistan…Our lawyers are looking at the allegations in the counterclaim. It will take some time but it is a matter for the court.”
Another misspeak by Deripaska’s spokesman, for the London judge has already intimated that he has grave doubts about Rusal’s veracity. According to a court transcript of proceedings in July, Justice William Blackburne said that “on the face of it [Rusal] is as involved in all of this as is Ansol.” That being the case, he surmised, “Rusal is at the back of this and it is the pot calling the kettle black.”
Is Deripaska ready to invite the readers of a Rusal prospectus to put on Blackburne’s judicial wig, and decide whether to put their money in a black pot?
For any man to put his reputation on trial in a court of law, or in the stock market, there is always the risk of adding to his notoriety, and thus, win or lose on the legal issues, to reinforce the impression that he is the very bad man he has been made out, so wrongly, to be. After all, it is not the exoneration, or esteem, of the man in the street, or the reader of newspapers, that an oligarch is seeking when he goes to court. His target is a bankers’ head of risk, the chairman of the credit committee, the insurer of officers and directors’ liability, the independent auditor, and the legal drafter of his next prospectus for an unsecured Eurobond or American Depositary Share. That’s a small, sophisticated audience, who know the unprintable truth. They are not greatly influenced by guilty or innocent verdicts in libel cases.
Deripaska’s men can make mistakes as bad the one Aesop warned of , in the case of the man who stared too hard at the gold he had hidden. Entering the High Court in an attempt to launder the takeover of the Tajikistan aluminium smelter may be recognized as one. Instructing his spokesman to announce his US visa may be another. Both are a funny way of preparing investor sentiment for a Rusal IPO.
But there is an alternative, and it is plain that Deripaska has begun pursuing it.
A direct sale to the Kremlin – I mean the Russian state – is more straightforward to accomplish than selling an IPO to foreign investors. For one thing, there are no international regulations, no disclosure requirements, no accounting rules, no transparency required. The state buyer is also in a position to agree relatively easily to the asking price, if international lenders like Citigroup, BNP Paribas, Morgan Stanley, and so on, are willing to put up the loan money. Securing multi-billion dollar loans for a deal like this has already proved swift and uncomplicated for the banks when the state-owned oil company Rosneft recently took over Yukos; and when Gazprom proposed buying Abramovich and the Millhouse holding out of Sibneft. You might say that so long as President Vladimir Putin appears to be pledging the full value of the state’s credit, and commodity prices can be expected to remain high enough for the payback period, then the banks are only to happy to open their ATMs.
What has yet to happen, however, is that the Kremlin will decide to apply their model of state interest beyond the oil and gas sector of the economy to the metals. That, too, is what Deripaska has had reason to be afraid of, at least until now, not least of all because he is just one of two proprietors of aluminium in Russia; and it might seem to a commonwealth-minded policymaker that everyone would be better off if they were consolidated under control that was invulnerable to offshore supply manipulation, paid taxes, and complied with the law.
Kremlin officials have also noted that Deripaska has appeared to have political ambitions for himself, regionally perhaps to start with, and then perhaps nationally. Then he tried to sell two of his aluminium finishing plants to Alcoa – a deal that offended the national interest lobby in the government for months, until Deripaska found the way, and the means, to persuade officials that they could share in the transaction, and in the offtake of metal, once Alcoa took over producing it.
The cool sentiment towards Deripaska on the part of Putin’s men has also ensured that he was barred from several transactions which he tried to take over on his terms – hydro-electricity generation and heavy-machine building were two in which he has recently failed.
But that does not mean that Deripaska does not have a deal to offer for selling Rusal that would be difficult to refuse – more difficult, that is, for Russian officials than for foreign investors.