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By John Helmer, Moscow

In Oleg Deripaska’s short career history, his Russian partners don’t last for long.

The record for sufferance is held by Mikhail Chernoy (Michael Cherney), whose agreement to lend Deripaska money and grant him trustee rights over Chernoy’s 13% shareholding in United Company Rusal lasted for more than five years – between 2001 and 2006 – before Chernoy concluded that Deripaska was cheating him, and opened contract enforcement and recovery proceedings in the UK High Court.

Deripaska made the 2001 contract with Chernoy to block him from making a separate deal to sell his Rusal shares to rivals Deripaska was afraid were after his control of Rusal — Victor Vekselberg, who then had the second Russian aluminium company SUAL; and Roman Ambramovich, who had enabled Deripaska to expand his relatively small Sibirsky Aluminy by merging and adding the Bratsk smelter and other assets which Abramovich controlled. Deripaska borrowed from Abramovich to buy out the latter’s 50% stake in Rusal. With his payoff, Abramovich went his separate way after two years, 2002-2003. But Deripaska had emptied Rusal of its cash to make those payments, and had none left over to pay Chernoy. So Chernoy allowed the extra repayment time Deripaska asked for.

The first non-aggression pact between Deripaska and Victor Vekselberg suspended their fighting over aluminium smelters in northwest Russia for just one year, 2003-2004. But two years later Deripaska ended up with the Kremlin’s go-ahead to take them from Vekselberg anyway. Their current pact, seating Vekselberg as chairman of the Rusal board in 2008, has lasted less than three years.

And now there is Mikhail Prokhorov, who sold Deripaska his 25% stake in Norilsk nickel between October 2007 and April of 2008 for a combination of cash and shares. The cash Deripaska has been unable to repay, and that makes Prokhorov Deripaska’s single largest individual creditor. There are signs Prokhorov is losing patience, and wearying of the terms of their partnership.

He recently admitted to his friends there is a “great game” under way over who will own shareholding control of Rusal. By that he was implying he isn’t sure it is a good idea for Rusal’s share value for Deripaska to continue acting as both the controlling shareholder and the chief executive.

This week Prokhorov took another step away from Deripaska, this time in public. According to his financial advisor and head of his Onexim holding, Dmitry Razumov, Rusal should sell its 25% stake in Norilsk Nickel back to Norilsk Nickel at the latter’s amended offer of $12 billion. Rusal immediately issued a statement dismissing the offer. But Razumov, on Prokhorov’s instruction, has announced this is not to be the end of the matter. The offer allows the Rusal board until 3 pm on December 28 to respond officially.

The new Norilsk Nickel offer is a 33% improvement on the $9 billion bid initially made in October, after Rusal failed in its final effort to vote in a new board of directors at Norilsk Nickel. The new price also represents a 7% to 15% premium to Norilsk Nickel’s share price, depending on how it is calculated. According to a report to clients today by Uralsib Bank analyst Dmitry Smolin, Deripaska wants to push the bid price up to $14.5 billion, which is what he and Prokhorov agreed on for their sale and purchase transaction in April of 2008, after Deripaska upped an earlier term sheet of November 2007. “It remains to be seen whether Norilsk Nickel will be able to improve its offer by another 20%”, adds Smolin.

Rob Edwards, metals analyst in London for Renaissance Capital, one of Rusal’s share promoters, told clients the latest offer is “is bullish for RUSAL and neutral-to-negative for NN, in our view. We do not believe that markets discount Norilsk according to its shareholder structure, although the market does discount RUSAL because of its high level of debt. RUSAL paid $6,092mn in RUSAL stock and $7,138mn in cash in November 2007 for its stake in NN, valuing NN at a little over $277/share. As we have previously highlighted, we do not believe that 47% RUSAL shareholder En+ is inclined to sell, but other key shareholders may be so inclined. Accepting this offer, perhaps with the addition of some Russian base metals licences that NN does not intend to develop over the medium term, would enable RUSAL to totally recapitalise, move on and pursue growth.”

Renaissance Capital is half-owned by Prokhorov. And Prokhorov thinks the new offer should be accepted. He has also made plainer than anyone has ever dared before that Deripaska lacks the authority (read shareholding power) to reject it. “This offer must be reviewed by RusAl’s board,” his spokesman Razumov is reported as saying. “This offer looks much more realistic compared with the previous one.”

Razumov’s call for a Rusal board meeting to review the $12 billion offer is the first time any shareholder of Rusal has challenged Deripaska. It is a tacit threat to outvote Deripaska on the board in favour of the sale. But how many shares does Deripaska actually control? And how many votes on the Rusal board?

According to the Rusal prospectus, issued when Rusal began selling its shares on the Hong Kong Stock Exchange on December 31, 2009, Deripaska claimed to hold a 53.35% stake in Rusal; Prokhorov claimed to hold 19.16%; Vekselberg and his partner, Len Blavatnik, 17.78%; and Glencore (through Amokenga Holdings), 9.7%.

After the IPO on January 27, 2010, Deripaska claimed to hold, through his EN+ holding, 47.59%. When he subsequently received a bonus share issue for the purported IPO success, an additional 0.36% stake was added to his nominal total. Thus, the accumulated stake in Rusal claimed by Deripaska amounts to 47.95%. The Rusal website reports Deripaska’s combined stake in Rusal at 47.63%.

Prokhorov’s post-IPO stake is reported in the prospectus to be 17.09%. But Rusal’s website statement of shareholders claims Prokhorov’s stake is only 17.02%. There are other discrepancies between the size of the post-IPO shareholdings in the prospectus and Rusal’s website claim. Glencore, for example, has gone up from 8.65% in the prospectus to 8.75%. Why is Prokhorov’s stake seemingly diminishing, while Glencore’s is growing? Rusal doesn’t answer these questions.

There are high-ranking Russian businessmen and associates of Deripaska who believe that, in reality, he has transferred shares from his personal holding to cover his Russian debts; they believe that he owns a minority stake of less than 40% which can now be outvoted if a powerful figure like Prokhorov gains the approval of the other shareholders, and Deputy Prime Minister Igor Sechin. Sechin’s role is crucial because he continues to supervise the oligarch resource concessions; he has repeatedly blocked Deripaska from taking over Norilsk Nickel, recommending instead a commercial settlement between Deripaska and the Norilsk Nickel shareholders; and because Sechin is in a position to command the state banks, which not only hold Rusal debt, but also Rusal shares, as well as Rusal assets in hock.

At page 222 of the Rusal prospectus, it is claimed that one of the principal objectives of Rusal’s management has been to “give the Company greater time and flexibility to meet its debt obligations in anticipation of the expected aluminium price recovery.” Among other things, “this has been achieved,” Rusal claims, by “converting into equity a substantial obligation to Onexim.”

However, when Igor Petrov, spokesman for Onexim, was asked this week to say how much of Deripaska’s debt to Prokhorov (Onexim) has been converted to Rusal shares now owned by Onexim, he refused to say. So Petrov was asked to say how much is Deripaska’s current debt balance to Prokhorov. He replied: “I have no such information”. Does Rusal, he was asked? “No,” he replied, adding: “That means they [Deripaska and Prokhorov] have agreed on that point.”

When the publicly listed company was presenting itself for the first time in Hong Kong in January, this secret apparently wasn’t so sensitive. At page 244 of the prospectus document, this is how Rusal reported the terms of a debt extension and repayment agreement between Deripaska and Prokhorov (Onexim), indicating that Deripaska failed to make any cash repayment to Prokhorov after October of 2008. Following the IPO, it appears that Prokhorov received $387 million of the cash debt he was owed. It should be noted that some portion of the balance of the debt – exactly how much isn’t made clear – was converted by Prokhorov into Rusal shares.

Terms of Onexim Debt Restructuring
On 1 December 2009, the Company entered into an amendment agreement in relation to a stock purchase agreement between the Company, Onexim and certain other parties relating to the acquisition of shares in Norilsk Nickel to restructure deferred consideration in the amount of US$2.7 billion plus interest accrued thereon. In accordance with the amendment agreement, the Company’s obligations in respect of US$880 million plus interest accrued on the total amount of deferred consideration from 6 November 2009 until the date of effectiveness of the international override agreement (in the amount of approximately US$15 million) plus any interest capitalised thereon during the override period will be settled out of excess cashflow and other proceeds used to prepay debt (being proceeds of asset disposals and equity and subordinated and other debt fund raisings) during the term of the international override agreement on the same terms as those applicable to the international lenders with limited exceptions. The remaining obligations were converted into Shares representing approximately 6% of the Company’s share capital on the date of effectiveness of the international override agreement. The deferred consideration in the amount of US$880 million (together with additional interest accrued from 6 November 2009 until the date of effectiveness of the international override agreement) will accrue interest on the same terms as international debt as set out in the international override agreement. See “— Terms of International Debt Restructuring — Margin”. The interest accrued until and including 5 November 2009 on the total amount of the deferred consideration and a restructuring fee in an aggregate amount of US$275 million were or are to be paid in cash: US$160 million was paid by the Company within one day of the date of the effectiveness of the international override agreement and US$115 million will be paid out of the net proceeds of the Global Offering.

The prospectus explains elsewhere the “international override agreement” was signed on December 7, 2009, and will expire on December 6, 2013.

So Petrov was asked to review the prospectus statement and say whether, since January of this year, Deripaska has converted more of his debt to Prokhorov, and if so, what are the respective debt and credit balances between the two of them, and the respective shareholdings in Rusal. Again, Petrov refused. Apparently, Deripaska’s shareholding is now a secret which it was not at the time Rusal was selling shares to the market. Could that be because, as several high-level Russian sources believe, Deripaska has been selling his shares, and no longer has de facto command of the control stake?

There are also reports from Hong Kong and London sources close to the Rusal management that Deripaska has been losing his operational grip. It has been confirmed this month by the South China Morning Post that the head of Rusal’s investor relations for Hong Kong, Catherine Shiang, has resigned and left the company following a dispute. Her replacement, also Chinese, initially accepted the appointment, but then after visiting the Moscow headquarters, he refused to work for the company.

In London there are reports, not yet corroborated, that the legal team which has been representing Deripaska in his losing battles with Chernoy in the UK High Court faces replacement.

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