By John Helmer in Moscow
Two weeks ago, without fanfare, the US Government decided it will not allow General Motors (GM), in which the government owns the controlling 60% stake, to sell its European automobile division to a Russian combination of the state savings bank Sberbank, Oleg Deripaska’s GAZ auto plant, and Deripaska’s Canadian partner, Frank Stronach’s Magna. Compared to the refusal of the US to grant Deripaska a visa to enter the country, this was a more powerful, definitive, and public message.
Deripaska conceded this week in an interview with a Moscow newspaper that his attempt to go international with the acquisition of Opel of Germany (as well as the UK’s Vauxhall and Sweden’s Saab units) has failed, because of the US government’s veto. Asked if the “attitude towards Russian business abroad is still ambiguous”, Deripaska replied: “Unfortunately, yes. But in the Opel case, the US Department of State’s prejudices are also a problem.”
Deripaska is the only Russian businessman of oligarch size who has been vetoed by the US. Roman Abramovich, Alexander Abramov, Vladimir Lisin, Alexei Mordashov, and Dmitry Pumpyansky have all bought American steel, pipemaking, and coalmining enterprises; Igor Zyuzin’s Mechel is listed on the New York Stock Exchange; Victor Vekselberg had a New York home, car, and for a time, a green card; Vladimir Potanin, a palladium mine in Montana; Dmitry Rybolovlev, the most expensive private residence in Florida; Vagit Alekperov, petrol stations and other oil port and fuel distribution networks. In 2007, when Abramovich and Abramov bought a pair of steelmills in Oregon and Colorado — one of which produced special steel for US Army tanks — the transaction was analyzed by the Committee on Foreign Investment in the US and the State Department, and cleared by the White House without demur.
That it may be Deripaska himself, not Russian business, that is vetoed is a possibility Deripaska himself admitted, awkwardly, in a BBC interview in July. Then he accused the Americans, and specifically the State Department, of putting pressure on him to betray Russia. “They try to push me in a corner,” Deripaska said, “maybe believing I would cooperate with them [with information].” He had resisted, Deripaska claimed: “There is a Russian interest I would never go through.”
Deripaska’s public hostility to the State Department is odd, not least of all because the black-ball against the Russian deal with GM was cast by the US Treasury Department’s Automobile Task Force (ATF), a high-level government committee, in which Hillary Clinton’s State sat on only one of the chairs.
Three months before the ATF voted him down, though, documents Deripaska’s lobbying agents filed with the US Department of Justice in Washington revealed that he was hoping personal links to Clinton might work to persuade the US to back the GM transaction, as well as to issue his visa. Deripaska, the filing says, was paying $40,000 per month for this effort.
The Endeavor Group is run by Adam Waldman and includes among its staff, advisors, consultants a number of veterans of the Bill Clinton administration and the Hillary Clinton presidential campaign. On May 6, Waldman signed the legally required foreign agent’s filing. This confirms that his group had been engaged by Deripaska (personally) to assist him “in the preparation of a US visa application and advocates [sic] for US approval of such application. Endeavor Group also advises on and assists in the execution of commercial transactions.” Waldman’s filing elaborates on what these are – one, to “interact with the United States Trade Representative Office to encourage US participation in the intra [sic]-governmental global aluminum discussions”; and second, to “engage with the Department of Treasury’s Auto Task Force regarding the prospective acquisition of General Motor’s [sic] European operations”. http://www.fara.gov/docs/5934-Exhibit-AB-20090508-1.pdf 
Waldman declined to respond to questions asking whom he and his staff had contacted on Deripaska’s behalf on the visa, aluminium, and GM issues. Waldman also did not explain why, in his Justice Department filing, he had claimed that Deripaska was not receiving foreign government financing, although it is well-known that a loan of $4.5 billion had been given to Rusal last November by the Russian state bank, VEB, chaired by Prime Minister Vladimir Putin, to save default and forfeit by Rusal of its shareholding in another Russian metals company, Norilsk Nickel. The VEB loan to Rusal is the biggest bail-out granted by the Russian government to any Russian company.
In Moscow this week, Deripaska was asked to say why he thinks the US lobbying campaign failed. The spokesman for Basic Element, Deripaska’s holding, said that questions about autos go to the auto division of the holding, Russian Machines. From there, spokesman Yekaterina Pankova said her group doesn’t comment on the Opel-Magna transaction.
US media reporting of the board vote acknowledges that the US Treasury Department’s ATF was responsible for the recommendation that directed the GM decision.
While no US or GM official has amplified the reasons in public, the implications for Deripaska’s future are serious. If he cannot secure the endorsement of the US Government, or GM, to conduct auto business, then it is increasingly doubtful that he will be able to achieve an international share listing for United Company Rusal, a Jersey-listed vehicle for his international bauxite, alumina, and aluminium businesses. Before last year’s crash, these added up to the third largest producer of aluminium in the world, with a value Deripaska and his associates put on the company of more than $50 billion.
Deripaska is now the biggest debtor in Russia, and Rusal the most indebted company. Deripaska acknowledged this week that altogether, counting Rusal’s $16 billion trading obligations and other debts owed by Basic Element, his total indebtedness is “slightly” under $20 billion.
Deripaska currently owns 53.8% of the still privately incorporated Rusal, and he is the company’s chief executive. In 2007, he attempted to arrange a London Stock Exchange listing for the company, but notwithstanding the backing of Goldman Sachs, Morgan Stanley, and JP Morgan – the US banks engaged – he failed. A banker who led the listing effort said at the time that the US visa problem was just one of the negative sentiments towards the listing on the part of institutional investors and the UK listing regulator, the Financial Services Authority (FSA). The source, who asked for anonymity, said the US banks offered to secure the visa. Deripaska also promised to deliver a commitment letter from the Russian government, securing the foreign shareholders against nationalization in future. Neither piece of paper materialized, and the listing campaign was abandoned.
Rusal collapsed into insolvency last autumn, as the price of aluminium plummeted on global markets, cutting its revenues at the moment when Deripaska desperately needed the cashflow to repay the heavy borrowings he had contracted. As of this summer, 144 domestic money claims against Rusal were before the Russian Arbitrazh Court system; roughly 1.1 cases against Rusal are being ruled on in the courts each day. The average court filing against Rusal amounts to Rb2.4 million ($74,000); the smallest Rusal has not paid is the equivalent of $124; the largest, the equivalent of $2.1 million for electricity supply in Krasnoyarsk region and $4.2 million for construction works. The court records show that orders to pay are being appealed, and payments delayed.
After VEB handed over $4.5 billion, so that Rusal could repay its foreign bank lenders for the ill-fated Norilsk Nickel transaction, the Prime Minister ordered special security service investigators and state auditors from the Accounting Chamber into Rusal. They spent at least two months there. Accounting Chamber sources confirm what they did, and the report and recommendations they sent to the government in January. The report has been classified secret ever since.
A former senior lawyer for Rusal says that prolonging the Arbitrazh court cases is one way, legal under the Russian bankruptcy code, of staving off an insolvency ruling, and the transfer of the company’s administration to independent, court-supervised administrators.
On July 31, Rusal and Deripaska suffered another major blow. This was the unanimous ruling of three senior judges of the UK Court of Appeal, dismissing Deripaska’s appeal against the order of a year earlier, July 3, 2008, that he should face trial in the UK High Court. Deripaska is being sued by his former patron and founding shareholder, Michael Cherney (Mikhail Chernoy), for enforcement of their trust agreement and contract of March 2001. The value of the claim amounts to at least $5 billion, or more than 13% of Rusal’s shareholding. In 2008, Justice Christopher Clarke had ruled in favour of Cherney, judging: “I am satisfied that Mr Cherney has a reasonable prospect of success in respect of his claim.” Further, Clarke had ruled against Deripaska: “I am persuaded that the risks inherent in a trial in Russia (assassination, arrest on trumped up charges and lack of a fair trial) are sufficient to make England the forum in which the case can most suitably be tried in the interests of both parties and the ends of justice and, accordingly, the proper place for the determination of this claim.”
After two days of hearings this past July, and hundreds of pages of argument and evidence, the Appeal Court ruled against Deripaska for the second time: “I am satisfied,” noted Justice Sir Martin Moore-Bick, “that the judge [Clarke] was right to have regard to matters that might prevent Mr. Cherney obtaining justice in Russia when deciding whether, viewed overall, England was the appropriate forum for the trial of the action…The judge held that there was no evidence that Mr. Cherney had been involved in criminal activities and Mr. Malek [Deripaska’s advocate] did not seek to challenge that finding. It follows, therefore, that there is a real possibility that any charges brought against him would not be well-founded.”
Deripaska’s lawyers have two rights to take their appeal to the final UK court. Formerly known as the court of the House of Lords, it is renamed the Supreme Court from October 1. The first of Deripaska’s applications for leave to appeal was rejected on August 19. The second, to be filed on September 17, is a near-certainty for dismissal, according to UK legal and constitutional experts.
The Cherney case has been interpreted by Deripaska as a judgement of the Russian legal system. In fact, as the trial judge and the three appeal judges have been at pains to point out, it is their view that it is Deripaska’s perceived power that sways Russian courts, and prejudices the outcome of their proceedings. Just days after the Court of Appeal ruling was issued in London, Russian prosecutors appear to have reopened old claims against Cherney, and sent an application to Israeli prosecutors to interrogate him.
Tactics like these are also under constant discussion inside Deripaska’s circle of advisors. Dozens of pages of emails, typescripts, budgets and plans — apparently exchanged among lawyers, PR men, and others working for Deripaska – surfaced in August. Posted at http://picasaweb.google.com/newfiles.2009 , the documents reveal involvement of Deripaska’s advisors in madcap schemes to influence the British media; pressure the High Court in London; and involve officials in Israel and Cyprus on Deripaska’s side against Cherney.
Thus, the evidence mounts that Deripaska’s troubles with governments are spreading from Washington and London to Israel, Cyprus, and most recently, Nigeria. There a government source has leaked details of a report prepared for President Umaru Yar’ Adua by the National Council on Privatisation. This has been investigating alleged abuses of deals arranged during the administration of former Nigerian president, Olusegun Obasanjo. The latest report, leaked on August 26, has found fault with Deripaska’s and Rusal’s takeover of the Aluminium Smelter Company of Nigeria (Alscon) in 2006; and concluded there have been subsequent violations of investment, production, and infrastructure development conditions of its takeover. The report recommends the cancellation of Rusal’s concession, and open international bidding to replace it.
A trial for Deripaska in London, before Justice Clarke, is likely to be ordered to start within the next six months. A win would make Cherney the largest individual, and most secured of Deripaska’s creditors, with de facto veto over Rusal’s future share listing. But even before the trial, its inevitability, along with the judge’s ruling that Cherney’s claim has “a reasonable prospect of success”, obligates Rusal’s auditors to show a provision for a litigation loss of up to $5 billion on the company books. This in turn threatens all of the debt arrangements Deripaska is trying to arrange.
The credit and risk committees of more than 70 foreign creditor banks are now obliged to ask their lawyers whether, with a trial of Deripaska’s signature about to start in the High Court, the court rulings make it legally impossible for the banks to accept Deripaska’s signature on any paper whatever. Other signatures by Deripaska, including those the European Bank for Reconstruction and Development and the World Bank’s IFC division required from him as a condition for a $150 million loan, are also subject to the material change condition triggered by the London rulings.
Cherney’s priority also threatens the minority shareholders of Rusal – Mikhail Prokhorov with 18.5%, Victor Vekselberg and Len Blavatnik with 18%, and Glencore with 9.7% — who are holding similar undertakings signed by Deripaska, which Cherney is seeking to enforce now. These oblige Deripaska to achieve an international share listing for Rusal, and hence a guarantee of international value for the company’s shares, within deadline. Failing that, Deripaska has agreed he must pay the stakeholders in cash at an agreed valuation. As the deadlines run out between now and next spring, Deripaska faces another $14 billion to $25 billion in claims, depending on the Rusal value formula that applies.
The only way Deripaska can pay is for Rusal to recover its market value in an LSE listing. But this looks to be impossible if Deripaska remains the controlling shareholder and chief executive. Deripaska himself has acknowledged ambiguously that he is looking to sell shares. This week he said: “We are going to involve new capital by means of partners. Such partners can essentially improve the position of [our] companies in the markets…That we are looking for such partners, we declared one year ago. One of these transactions we can announce by the end of the year. What exactly, I will not tell yet.”
For powerful Russian shareholders like Prokhorov and Vekselberg, there are alternatives to Deripaska. Already there is evidence that Prokhorov’s Russian banking advisers have been considering options for their man to replace him. Prokhorov’s disadvantage is that he lacks the confidence of senior Russian government figures, who hold the key to deciding whether Deripaska stays or goes; and if the latter, when. Plans for the Russian government to restructure the company without Deripaska’s liabilities have also been tabled with Deputy Prime Minister Igor Sechin and others. A decision by the government is unlikely until the domestic economy shows signs of stable recovery.
In the meantime, outside Russia, the global aluminium market is suffering from jitters on account of Deripaska’s and Rusal’s problems.
An apparent attempt by a Rusal executive to exploit the fatal explosion and loss of power output at the central Siberian hydroelectric station, Sayano-Shushenskaya on August 17, by pushing up the spot aluminium price in the London market, failed after a day’s trading. The brief spike in the metal price was followed by a drop of $200 per tonne (10%). This uncertainty is putting pressure on Rusal’s foreign bank creditors. They have told metal traders they are trying to stabilize Rusal’s output, and with Glencore acting as trader, hold metal off the market in order to keep Rusal’s cashflow stable, and debt repayment more predictable.
Market sources describe what they think happened after the power station accident. There had been steep downward momentum in the aluminium price in the last days of the week ending August 13-14. This carried over the weekend and into the opening hours of Monday, August 17, before the news of the Sayano-Shushenskaya accident arrested it. The price then shot up to close at $1,971, up 2.3% on the day.
Driving this upward movement into the following day was a public claim by Rusal’s strategy director Artyom Volynets that there might be a future loss of up to 500,000 tonnes of aluminium production (60% of the capacity of the Sayansk and Khakas smelters). This triggered trader and broker speculation with upward price pressure in the market. But Volynets also aroused their suspicion — why not less output now, rather than later? they asked. According to London Metal Exchange sources, Volynets’s statement caused an intra-day price spike. But not for long. Suspicion of Rusal’s motives helped reverse the gain, and put the price on the same downward slide it had been following before the accident.
In the two weeks since the accident, there has been public bickering between Rusal and RusHydro, the listed company which owns Sayano-Shushenskaya, over how the repair and replacement costs will be paid for: http://www.rusal.ru/en/news_details.aspx?id=6586  The terms of this argument further illustrate the weakness of Deripaska and Rusal in Russian policymaking at present.
Naturally, Deripaska is sensitive to what may be happening behind his back. In this week’s Moscow newspaper interview, he called for the state to get out of his business. “As to the anti-recessionary policy of the state,” he said, “then it is necessary to speak, not about its efficiency, but that the initiative for changes should now pass to business. Until now the priority was at the state level – it was the initiator of all processes. The role of business, which has been strongly belittled, should now increase. And it seems to me the country’s leaders understand this. However, by inertia, some officials continue scaring business.”
Deripaska also sought this week to correct the impression that, on June 5, as the national television cameras rolled, Prime Minister Putin tossed a pen at him, and told him to sign an agreement to revive the chain of cement production on which the small Leningrad region town of Pikalyevo depends. “The problem was,” Deripaska said, “that the reality of the meeting event and the picture, which was transmitted by the television channels, did not coincide. This was a simple case of editing. Actually, everything went in another way. What happened at the meeting was very productive; the decisions taken to revive manufacture have been implemented.”
Asked whether the entire problem could have been settled “without the intervention of Prime Minister Vladimir Putin”, Deripaska replied; “I think, yes.” He was the victim of a conspiracy, he intimated. “Someone with personal interests wished to manipulate the situation. Who? — I do not know.” Putin’s intervention was, he added, “a dangerous precedent”.