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By John Helmer in Moscow

In the business of bloodsucking, noone does it better than Glencore of Baar, Switzerland. They call it trading.

The way it works is that Glencore sinks its teeth into anyone unknowing, foolish, impoverished or desperate enough to come within range. Glencore then trades on 18% or higher profit margins for export sales, which no producer would tolerate if he’s in his right mind and health. So Glencore turns him into a corpse, semi-alive in order to keep up the flow of the red stuff. The profits from trading commodities from companies in which Glencore owns equity positions is even better than the straight trading ventures. In Russia, this is known as transfer pricing or cash and asset stripping. It’s illegal, although the law is almost never enforced.

When the Soviet Union collapsed in 1991, destroying the domestic cash flow which had kept the state aluminium smelters in production, Glencore charmed the plant directors with something like Dracula’s famous invitation: “Welcome to my house. Come freely. Go safely; and leave something of the happiness you bring!” Glencore took control of Mechel, the steelmaker, Dalpolimetal (lead, zinc, tungsten), Sredneuralsky (copper), and a number of other enterprises. The happiness the trader then took out far exceeded the happiness he brought in.

It was inevitable, therefore, that as soon as Russian proprietors could manage their own working capital requirements, borrow from banks, market and transfer-price their metal, and stash the profit offshore in their own accounts, they would drive a stake through Glencore’s heart.

One of the last Russian enterprises to be too weak to break free of Glencore has been United
Company Rusal, controlled by Oleg Deripaska. He and Glencore’s chief executive, Ivan Glasenberg, are also friends of a sort – they watched the World Cup finals together in Cape Town, where Glasenberg, a South African national, is at home. In the textbooks of vampyrology, noone can be friends for long. Vlad the original
Dracul, for example – aka The Impaler – is famous for what he did to his rivals, and not for having friends. Deripaska’s aluminium business is like that, too.

But he started out in 2000 thinking much more of himself than a Glencore retainer. There was a simple business calculation. Having driven those who put him into the aluminium business out of it, Deripaska also thought that all profit from the trading should be his. That was easier done than said, it has turned out for Deripaska. In a few weeks’ time, he will go on trial in London for stealing the aluminium trading chain and a 13% shareholding in Rusal from Mikhail Chernoy; that claim is for at least $4 billion. He has already settled out of court with the Trans World Metals group’s Simon and David Reuben, paying them more than $100 million on their claim that he stole metal out of their joint trading agreement.

Deripaska tried everything he could think of to push Glencore out of the trade of Russian aluminium to Japan and China, and sell his metal products directly to the consumers in those markets. He despatched CEO Alexander Bulygin to Japan, and commercial director Gulzhan Moldazhanova to China. Bulygin succeeded in part; Moldazhanova failed. Rusal proved to be so clumsy in dealing with the Chinese that at first they spurned his advances; Rusal was refused accreditation in Beijing, and direct trading was impossible. Deripaska was obliged to acknowledge that he was more dependent on Glencore than he wanted to be.

But by 2004, Rusal was able to announce that “practically all” its US sales, about half of European sales and more than 25% of Asian sales, were moving direct to end-users and consumers. A fresh flow of direct trade credits from European banks, and novel forms of security over Rusal aluminium held in warehouse, obviated the dependency on Glencore for cash up front of deliveries.

Between October of 2006 and March of 2007, vampire and victim made an unusual switch, and Deripaska sank his teeth in Glencore’s alumina businesses — the Aughinish refinery in Ireland; a 93% equity interest in the Windalco refineries and bauxite mines and a 65% equity interest in the Alpart refinery and bauxite on the sheet pane mine, all in Jamaica; and the remaining 43.84% equity interest in the Eurallumina alumina refinery in Italy, as well as the Kubikenborg aluminium smelter in Sweden.

In exchange, Glencore took a 12% shareholding in Rusal; Glasenberg sat on the new Rusal board; and Glencore obliged Rusal to deliver for onward trading much of Rusal’s alumina and aluminium. A Rusal publication says: “ The Group sold to Glencore approximately 36% of its excess alumina in 2008. The Company also has a variety of supply contracts with Glencore for alumina and primary aluminium, including long-term supply contracts, and Glencore was the Group’s largest customer of alumina and primary aluminium in the six months ended 30 June 2009, accounting for approximately 21% of the Group’s sales of primary aluminum and alloys.”

Rusal has never explained why it reversed strategy in order for Deripaska to embrace Glasenberg. But the reason is obvious — it wasn’t the shine in Glasenberg’s eye, but the cash in Glencore’s pocket – in 2007 revenues of $142 billion; earnings of $7.7 billion; net income of $5.2 billion.

What happened was that Deripaska’s profligacy with Rusal’s cash, using it to fund the buildup of the non-aluminium assets in his Basic Element holding, had left Rusal trading while insolvent when the crash of aluminium prices and the loss of sales demand struck in autumn of 2008. According to Rusal’s records, “Glencore, one of the Group’s largest customers, accounted for approximately 7%, 9%, 10% and 21% respectively of the Group’s sales of primary aluminium for the years ended 31 December 2006, 2007 and 2008 and the six months ended 30 June 2009.”

The collapse of the direct sales strategy occurred because the end-users had stopped buying. In desperation for cash, Deripaska reverted to traders providing money or credit to keep him from bankruptcy. He had run his company backwards into the past – Glasenberg once more had his teeth in Deripaska’s neck. According to the Rusal listing prospectus issued in Hong Kong in December of 2009, “during the six months ended 30 June 2009, approximately 21% of the Group’s primary aluminium and alloys sales was made directly to end-customers, and 79% through traders. In the year ended 31 December 2008 approximately 54% of the Group’s primary aluminium and alloys sales was made directly to end-customers, and 46% through traders. The increase in the amount sold to traders during the first half of 2009 was in line with the Group’s strategy to expedite cash collections and improve its working capital position. “

The problems Glencore helped to solve included a jump in the time buyers took to pay Rusal for deliveries; the period had been 27 days in 2007 – it was 44 days in 2009. Even more serious, сash flow from sales had plummeted from $1.9 billion in the first half of 2008 to $232 million in the first half of 2009.

But Glasenberg, 53, an accountant by training and then a coal trader, decided he would try to exploit the 25% stake which Rusal held in Norilsk Nickel to do to the latter company’s nickel, copper and other metals trade what he was already doing to Rusal’s trade in aluminium. Following the Hong Kong Stock Exchange listing of Rusal on January 27, 2010, Glasenberg and his partners in Glencore owned 8.65% of Rusal through a Bermuda front company called Amokenga. Glasenberg has revealed that he is aiming to use this stake, and the ongoing trade financing he provides Rusal, as a platform from which to mount the takeover, with Deripaska, of Norilsk Nickel, with up to $16 billion worth of annual metal sales (2007 peak).

This is precisely what Norilsk Nickel ‘s management and its western shareholders realize. They understand too the bite that Glencore takes out of the bottom-line profitability of metal producers; they aren’t prepared to share their dividends with Glasenberg. This is also well understood by Prime Minister Vladimir Putin and his metals commissar, Deputy Prime Minister Igor Sechin.

Today in Russia, according to the Glencore website, the company or its subsidiaries have coal and coke trading contracts; they also export Russian grains and import sugar for Russian consumption. Vostsibugol appears to be the coal-mining unit closest to Glencore, but then Vostsibugol, based in Irkutsk, is owned by Eurosibenergo, which in turn is owned by En+, the energy holding belonging to Deripaska.

The only two Russian producing assets identified by the company officially are Rusal, and the oil producer, Russneft. “From February 2005 to date, Glencore through its subsidiaries has acquired 40-49% interests in various oil production subsidiaries of Russneft.” Russneft has been the target of several years of transfer pricing and tax evasion investigations, which drove the controlling shareholder, Mikhail Gutseriyev into exile in London; drew Deripaska into ownership; and then concluded with permission for Gutseriyev to return and recover control. Russneft refuses to say what relationship he currently has with Glencore. Russian press reports claim that Glencore has been trading all of Russneft’s oil exports, worth about $2.5 billion per annum.

In Russian oil trading, it is clear that Glencore’s position was much stronger more than a decade ago, and that it has been steadily eroded, or attacked, by Gennady Timchenko and his Gunvor group. The contest between Glasenberg and Timchenko, and between Deripaska and Gutseriyev, is so sensitive, one oil trade specialist said when asked about it: “I don’t want to be thrown into prison for that.” The fear is palpable; the hint is that Timchenko and his allies in government have unfinished business to settle with Glasenberg.

The Moscow office of Glencore declines to say what other Russian metals or minerals they are currently trading. Urals Mining and Metallurgy, which is owned by Iskander Makhmoudov, appears to have bought control of Sredneuralsky Copper from Glencore, but will not say if it trades any copper for export through the group. The Russian Copper Company admits to trading some of its exports through Glencore, and won’t disclose details. The same reluctance to talk is apparent among Russia’s lead and zinc producers, who have had trading relationships with Glencore in the past.

A source at the Russian Grain Union said Glencore’s subsidiaries (one is called International Grain Company) traditionally hold from 10% to 12% of grain exports from Russia. “Last year it was 12%,” the source said. “Some time before it was 10%, but generally their level doesn’t change much.” It may do so if the state-owned and recently consolidated United Grain Company has anything to do about it. Established in 2009, the Russian counterpart to such grain trading organizations as the Canadian Wheat Board and the Australian Wheat Board, UGC and its Kremlin backers see Glencore as a foreign interloper.

If there is renewed pressure on Glencore from Russian producer and trade rivals, and the latter have largely succeeded in ousting Glasenberg from copper, zinc, lead, oil, with grain next, what chance does the Glasenberg-Deripaska alliance have outside the Rusal group? Not much; for the Norilsk Nickel takeover attempt to be decided at the shareholder’s meeting on October 21, not at all.

In Bram Stoker’s version Dracula insisted that “time is on my side.” But that was in Transylvania.

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