By John Helmer, Moscow
Oleg Deripaska’s sole defence against having to pay Mikhail Chernoy (Michael Cherney) the dividends, assets, interest, and the corpus of his patron’s stake in United Company Rusal is that Cherney extorted the money by presenting him with a trust agreement and contract, and threatening to break his bones if he didn’t sign it. This is the gangster defence. It has already been curtailed by several preliminary UK High Court rulings; Justice Christopher Clarke, who presided in the trial of the jurisdiction issues in the case, ruled that he didn’t believe it .
But there is one respect in which it is almost certainly true that someone tough has been forcing Deripaska to run Rusal the way he has. That man, the control shareholder of Deripaska’s nominal 47.41% shareholding, is Boris Yeltsin.
But he is as dead as Anton Malevsky, the alleged gangster whose ghost Deripaska’s lawyers will try to pin on Cherney, notwithstanding the testimony Malevsky’s widow will give about her husband’s relationships  with both Cherney and Deripaska. With his boots on, Malevsky kicked the bucket on November 6 , 2001 – six months after Deripaska and Cherney signed their multi-billion dollar pact. How Malevsky’s ghost twisted Deripaska’s arm to do what he says he didn’t want to do for the decade that has followed will be testified to on oath by Deripaska’s witnesses in the High Court trial which began today.
Without his boots on, Yeltsin kicked his bucket on April 23, 2007. By then Deripaska was into his seventh year of marriage with Yeltsin’s son-in-law’s daughter , becoming thereby a stepped, quarter-blood member of what all Russians nickname as The Family. In this one, like most families, inheritance is the scheme by which the loot of the dead gets transferred to the surviving heirs, so long as they aren’t wastrels, don’t turn on each other, tell tales in court, etc. Did Yeltsin tell Deripaska he would break his bones if he didn’t do with Rusal what he was told? – that’s a question several witnesses will be able to answer if they are called to testify in London in October. What happened to the inheritance is a related question for the courtroom, the answer to which will help explain why Deripaska has been acting as if someone tough has been calling his shots — even if it wasn’t Cherney, the man who had treated the fatherless Deripaska more like a son than Yeltsin did.
Yeltsin survived just long enough to see that Victor Vekselberg’s and Len Blavatnik’s Siberian Ural Aluminium (SUAL) was barred from listing itself separately, and competitively, on the London Stock Exchange. Instead, by March 2007 SUAL’s assets were merged into Rusal, and the latter, registered on the island of Jersey, became the monopoly producer of aluminium in Russia. Deripaska’s nominal stake at the time was at least 66%.
Had Yeltsin lived longer, he is bound to have thought it a good idea for Rusal to take over Norilsk Nickel, and become the kind of Ministry of Nonferrous Metals Yeltsin was comfortable with when he was a Communist apparatchik on the make. Deripaska’s raid against Vladimir Potanin’s property began a few weeks after Yeltsin’s departure.
Deripaska hasn’t kept secret from his friends how Yeltsin’s death triggered a change in the way the shareholdings Deripaska managed for the family were organized. What the friends learned was that not long after April 23, 2007, there were two new stakeholders with much the same interest Yeltsin had had in Rusal. That year — according to the prospectus Rusal issued to shareholders at the end of 2009 — Rusal generated a profit of $2.8 billion. Supposing Deripaska’s shareholding amounted to 66%, the dividends to be divvied up might have been almost $2 billion. About half of that, almost $1 billion according to the best estimates of those familiar with the matter, would have been paid to Deripaska’s undisclosed co-shareholders.
A note of understanding for Deripaska’s position, as his associates say he saw it. In March 2001, Deripaska was fearful that Vekselberg might do a deal with Cherney, make their own deal with Roman Abramovich, and take control of Rusal away from him. So he convinced Cherney to accept the trust agreement Deripaska drafted for them. In 2004, as the Abramovich trial recently revealed, afraid that Abramovich might still take Rusal away from him, betray him with Yeltsin, the Kremlin, etc., Deripaska stripped as much free cash as Rusal could generate at the time, $2 billion, in order to pay Abramovich to go away .
That still left Deripaska beholden to his silent partner. One way to deal with the risk that he might still do to him what Deripaska had done to the others was to keep stripping cash out of Rusal’s operations, before dividend payment time, and use it to build up a parallel conglomerate of assets, trading schemes, and havens where Deripaska felt himself secure, alone. Yeltsin and his family weren’t clever enough to regulate that. His successors have proved to be cleverer and tougher.
After the breakdown of the Communist value system, think of this in religious terms. Until Deripaska had disposed of Abramovich, his partners — most of them of Jewish origin like Cherney, Malevsky, Vekselberg, Abramovich, Shvidler, David and Simon Reuben, Yury Shlaifstein, Ivan Glasenberg — had tried to convey bits of the Judaeo-Christian play-book they understood, at least the one about the loaves and the fishes; and the other one about not doing to others what you wouldn’t have them do to you. They tried to teach Deripaska that in capital-raising and debt collection a little religion of this type goes a long way. By contrast, the only true cross Yeltsin and his family believed in was the cross between Darwinism and Marxism — they believed they should do to others before they were done in.
Along came the year 2008. In the first half, profits and dividends looked to the new shareholders, who now included Vekselberg, Blavatnik, Glasenberg of Glencore, and Mikhail Prokhorov, to be even better than they had been the year before. Net income to June 30 was $1.4 billion. But then came the global crash and the collapse of the aluminium market. By October, Rusal was virtually bankrupt, on the point of defaulting on the $4.5 billion loan which had been used to finance the acquisition of Prokhorov’s 25% stake in Norilsk Nickel. The Deripaska shareholders saw their dividend disappear into a year-end loss of $6 billion.
As for future dividends, Rusal was to be saved, but on the condition Deripaska agreed to sign with Rusal’s foreign creditors, according to the prospectus: “the terms of the restructuring agreement …do not permit the Company to pay dividends unless the Group’s debt (other than its debt to VEB and Onexim) has been repaid by at least US$5 billion, its ratio of total net debt to Covenant EBITDA is 3 to 1 or less, there are no outstanding defaults under the international override agreement and the Group has sufficient cash to pay proposed dividends”.
The conversion of Rusal into a publicly listed shareholding company on the Hong Kong Stock Exchange in January 2010 also threw a spanner in the works of dividend distribution, limiting how much profit could be paid out. According to the latest Rusal annual financial report, not only have no dividends been paid in 2009, 2010, and 2011; but “if and when dividends become payable, they are limited to no more than 50% of the Group’s annual net profit (excluding earnings, but including dividends, of Norilsk Nickel) in any one year.”
Before the IPO, the Deripaska shareholders held 53.35% of the company; the SUAL shareholders (Vekselberg and Blavatnik), 17.78%; Prokhorov, 19.16%; and the Glencore group (Glasenberg), 9.7%. The listing and sale of shares in January 2010 cut 10.8% from each of those stakes. In the new lineup, the four cornerstone investors were the state bailout bank Vnesheconombank (VEB) with 3.15%; Nathaniel Rothschild and John Paulson, 0.47% each; and Kuok Hock Nien, 0.09%. That left the underwriters and the market with 6.46%.
Dividends are for shareholders.But since Yeltsin’s time Russian metal producers have also paid out of cashflow to select shareholders, before the dividend line is calculated on what remains on the balance-sheet. The evidence about to be introduced in the High Court will also reveal how cashflow was managed by Cherney when Deripaska was an employee, how many cash diversion schemes Deripaska arranged for himself and Roman Abramovich; and then for himself alone. Did I say alone? Silly me.
The Rusal executives who supervised these schemes were naturally aware what the difference was between the cashflow diversion and the dividend payouts, and for whom the beneficiation worked. After the financial collapse of 2008, however, something new appeared inside the company. For a start, there was less cash to keep everybody – the shareholders, friends, and senior (knowing) employees in the comfort to which Deripaska’s management had accustomed them. This in turn triggered outbreaks of what Russians of Yeltsin’s generation used to call “proletarian vengefulness”. That’s the disgruntlement that occurred when Deripaska was seen taking enormous amounts of cash out of the struggling company, favouring some at the expense of others. Winks, code names, and tongues started wagging, threateningly.
There was also the conviction among the senior (knowing) employees that after VEB provided the bailout money to rescue Rusal, commissars were introduced at the senior management level. They didn’t take all of their orders from Deripaska, and he found he couldn’t control them.
That Deripaska was facing a problem with his concealed shareholders just before and just after Yeltsin died will be one of issues the High Court trial will now investigate to a degree that would be impossible in Russia. This is because the timing coincides with the decision Deripaska took to default on his March 2001 agreement, and refuse to pay Cherney for his 13% stake in Rusal. According to their initial agreement, Deripaska had committed himself to buying Cherney’s shares no earlier than March of 2005, and not later than March of 2007. After Deripaska claimed there was no agreement, no Cherney shareholding, and no payback obligation, Cherney launched his London lawsuit for enforcement of their contract on November 24, 2006.
By then Deripaska was busy creating new entities for the takeover of SUAL, preparing for a share sale for the publicly recognisable shareholders, concealing Yeltsin’s hand, and dispossessing Cherney. According to Rusal’s 2009 prospectus, an entity called RTI Limited is owned by United Company Rusal Limited. But unlike other entities on the organization chart in the prospectus, it sits at the top of the chart, and is unconnected to anything else. Elsewhere in the prospectus it is claimed this entity is connected to Rusal’s export trading, but exactly how isn’t described. In accounting terms, RTI Limited is reported in the prospectus as having “retained negative equity of approximately US$1 billion. Under the recapitalisation procedure, the Company will not have to make any payment to RTI in respect of its undertaking to pay (as referred to above) until December 2013 at the earliest. In the event that RTI trades solvently through December 2013, then the receipt of monies from the Company to RTI and the payment of redemption monies by RTI to the Company are likely to cancel each other out.”
This is intentionally obscure. What is clearer from the Jersey company register is that on October 27, 2006, the company was first established as RTI Limited. Link here  to registration doc. On February 2, 2007, it changed its name to Rusal Trading International Limited. Then between June 26 and July 19, 2007, there was another name change, this time back to RTI Limited. According to the most recent company filing in Jersey, there are 20,000 ordinary shares of this company, plus 1,600 redeemable shares. But just two of the ordinaries are paid up and appear to be owned by Rusal. Link here  to RTI annual Return. Who owns the remainder of the shares, and how much of Rusal’s trading revenues these other shareholders are entitled to, remain concealed.
The concealment may be part of a trading scheme to book losses on Rusal’s balance-sheet, and divert actual trade revenues elsewhere. It may be part of a transfer scheme to benefit shareholders who are not the publicly identified minorities.
When, as the London trial is about to hear, Cherney asked Deripaska in 2006 for an accounting under their agreement of what he had been doing with Cherney’s 13%, Deripaska was in no mind to explain who owned 19,998 shares of RTI Limited as of October 2006. To those who owned those shares, he was also unwilling to admit that according to his March 2001 agreement with Cherney, at least 13% of Rusal Deripaska had sold to the silent partner was in fact owned by and owed to Cherney.
This duplicity has not been made public before. The gangster defence will also not prevent the hidden shareholders from listening to the court proceedings and in realizing what has happened, to suspect that the fate of Cherney’s stake may also be theirs. They may even calculate that Cherney’s interest now coincides with theirs.