By John Helmer in Moscow
Prime Minister Vladimir Putin, who also chairs the Russian bailout bank Vnesheconombank (VEB), asked Friday for the US Government to signal its support for at least two oligarch-owned Russian companies in the US.
The remark, which has taken State Department officials by surprise, mentioned Norilsk Nickel and steelmaker Severstal, whose controlling shareholders are Vladimir Potanin and Alexei Mordashov, respectively. But Putin is believed to be thinking also of two other, heavily indebted oligarch groups with American interests and US bank obligations — steelmaker Evraz, controlled by Roman Abramovich (left image), and Oleg Deripaska (right image), owner of United Company Rusal and the Basic Element automobile group.
According to the prime ministry’s website transcript, Putin said publicly after meeting US Secretary of State Hillary Clinton, on March 19: “As to our economic cooperation, our large companies are, of course, interested and expect support from both parties. General Electric, Boeing, [and] the [US] oil companies have been working in Russia for a long time and have been doing that successfully. And, of course, they require support both from sides, the authorities of the United States of America, and from the Government of Russia, and the same is true for our companies. Our Norilsk Nickel, one of the world’s largest companies in this sphere, [and] our other large companies are already investing in the United States and working there. Severstal, for example. They certainly require support. They need signals showing them they are welcome both in the Russian and US economy.”
In 2003, Potanin was the first Russian oligarch to be allowed by Putin to export earnings from his shareholding in Norilsk Nickel, the world’s largest producer of nickel and Russia’s largest mining company, and invest them in a US corporation. After protracted review by the White House, and lobbying from the Kremlin, Norilsk Nickel bought a 55% control stake in the Montana-based palladium miner, Stillwater Mining. Since then, Stillwater has been a loss-maker in every year, except for 2004 and 2006.
Even counting the net losses over seven years of $438 million, Potanin spent just a fraction of the amounts Mordashov and Abramovich have paid out, and lost, for their US assets. According to the Norilsk Nickel records, the control stake of Stillwater cost a total of $133 million in cash, plus 877,000 ounces of palladium. The precious metal was assigned a value of $157 million in the transaction, but was at the time unsellable in the market.
By contrast, in 2008 alone – as the US and global steel markets headed for the crash — Mordashov paid out $2.2 billion for three US steelmills. They made Mordashov one of the largest steelmakers in the US – and also one of the most profligate. In 2007, Severstal North America reported losses (gross figure) of $43 million; $522 million in 2008; and $674 million in 2009. That grand total of $1.2 billion, added to his $2.2 billion buying spree in 2008, makes Mordashov the second biggest Russian loser in American history.
First prize in that class goes to Abramovich, along with his Evraz co-stakeholder, Alexander Abramov: they paid $5.1 billion to buy steel, pipemaking, and scrap assets in the US and Canada over 2007 and 2008. Evraz does not break down its profit and loss account to make its US mill performance visible. The group accounts also manipulate the revenue, earnings, and profit and loss figures, so that it is impossible to judge how much profit earned in Evraz’s Russian steel operations offset what sized losses in the US and elsewhere. Evraz is also slow to report the bad news.
The last financial report issued by Evraz is for the six months ending June 30, 2009. At that stage, Evraz was running a consolidated group loss (gross) of $1.3 billion. The total debt, accumulated in large measure to pay for the North American asset purchases, was $10 billion at the end of 2008; $8.5 billion at June 30, 2009.
Buying offshore haven assets at premium prices is a well-known tactic of the Russian oligarchs to protect their global fortunes and their Russian concessions from Kremlin penalties or reassignment. Russian steelworker unions have observed also that they have lost jobs and wage gains to the oligarchs, in order for the relative profitability of the Russian mills to subsidize the loss-making in the US haven operations. US steelworkers have charged that profits have been stripped from the North American mills to show higher losses on the US balance-sheets, where tax rates are higher.
Not a word of criticism of these business practices has escaped from the Russian government, the Russian parliament, or the state auditor, the Accounting Chamber. In last week’s recommendation to Secretary Clinton for “support signals” from the US Government, Putin appeared to asking for more than benevolent silence from Washington.
During a hostile takeover attempt in 2007 and 2008 by oligarchs Oleg Deripaska and Mikhail Prokhorov against Norilsk Nickel, Putin protected Potanin, and warded off Deripaska. When Deripaska’s Rusal then toppled into insolvency in November 2008, Putin arranged for VEB to protect Rusal’s 25% stake in Norilsk Nickel from forfeit to a consortium of banks, led by Bank of America Merrill Lynch; they had loaned $4.5 billion to Rusal for the purchase of Norilsk Nickel shares from Prokhorov, and Deripaska couldn’t pay the loan back.
Bank of America Merrill Lynch has gone on to become the biggest US financial institution promoting Deripaska, acting as lead bookrunner in Rusal’s Hong Kong Stock Exchange listing in January. No other US bank has done so much. Neither Morgan Stanley nor Goldman Sachs, which advised Rusal in its abortive London Stock Exchange listing in 2007, agreed to try again. JP Morgan sources say they want nothing to do with Rusal’s share promotion. A recent Merrill Lynch report on Rusal urged investors to buy Rusal shares because “Rusal presents good value vs aluminium peers”: and “is the “best of a ‘challenged’ bunch’.” In the small print, the report also warns that Merrill Lynch “may have a conflict of interest that could affect the objectivity of this report.”
With friends like Mother Merrill on the bandwagon, what more does Putin want from Washington? The Prime Minister’s press office was asked: “What support from the US Government was the Prime Minister referring to in his remark to Clinton? For example, does Mr Putin believe the US Government should bail out Severstal’s debts on loss-making steelmills Mr Mordashov purchased in the US — debts and losses which Severstal’s Russian steel operations currently subsidize? And does Mr Putin intend or imply that he believes the US Government should do more to support Oleg Deripaska in the US, including the lifting of his visa ban, and permission to buy into the US auto industry?” There has been no reply.
Norilsk Nickel and Severstal also declined to answer what support or signal they would like from the US Government. “We do not comment on actions or utterances by state officials,” said a Norilsk Nickel spokesman.
Last month, Admiral Dennis Blair, Director of National Intelligence in Washington, told the US Congress that “criminally linked oligarchs will enhance the ability of state or state-allied actors to undermine competition in gas, oil, aluminium and precious metal markets.” The list appears to refer, among others, to Deripaska’s Rusal, Prokhorov’s Polyus Gold, and Potanin’s Norilsk Nickel. Without naming Russian individuals or companies, Blair referred explicitly to the problem of “a growing nexus in Russian and Eurasian states among governments, organized crime, intelligence services, and big business figures.” Blair hinted that the US Government should intervene to deal with the Russian oligarch “nexus” and its threats of “bribery, fraud, violence, and corrupt alliances with state actors to gain the upper hand against legitimate businesses.” Did Blair mean to imply that the “nexus” threatened Stillwater Mining?
There has been speculation in Washington that US Government shareholding control of General Motors (GM) could, and should be applied to pressure the auto company into procuring Stillwater’s palladium. Stillwater reported last August that it was in discussions with GM to do just that, after the latter terminated its Stillwater palladium purchasing contract, ostensibly as part of GM’s July 2009 bankruptcy court procedures.
In a press release, Stillwater said that “the termination of the [GM-] Stillwater contract puts good paying American jobs at risk at the same time GM is receiving massive federal government funding of U.S. taxpayer dollars with which GM emerged from bankruptcy.” The outcome of the talks, added Chief Executive Frank McAllister, “did not yield any positive results for our Company, its employees and other stakeholders or the communities in which we operate. At issue is the termination of the Stillwater contract while at the same time GM continues to purchase palladium from foreign suppliers in Russia and South Africa, funded with U.S. tax payers’ dollars.”
Since then, Stillwater has had little to say about GM; and nothing about US Government aid.
The GM contract cancellation was offset, according to financial data released by Stillwater on February 25, by rising palladium prices and improved demand: “Palladium realizations, which benefit from floor price provisions in the Company’s automotive supply agreements, averaged $374 per ounce in the fourth quarter, up from $360 per ounce in the third quarter and — despite the loss of the General Motors agreement in early July — above the $364 per ounce realized in this year’s first and second quarters. In this environment, the Company has had no difficulty receiving full market prices for the metal displaced by the GM contract cancellation.”
Although CEO McAllister noted last month that the mining company’s contract with Ford runs out at the end of this year, he was generally upbeat on this year’s production, price, and profit prospects. “Mine production for 2010 is projected at 515,000 PGM ounces, as we disclosed previously. This guidance is actually a little lower than the 529,900 ounces that we produced in 2009. Our management focus in 2010, however, will continue to center on strengthening our cost performance and improving mining efficiency, rather than on seeking to maximize mine production.”
The US Embassy in Moscow was asked what it knows of the discussions between Putin, Clinton and other officials on US Government aid for Russian oligarchs. A spokesman said the Embassy has no comment on Putin’s public remark. And if he and Clinton discussed the subject privately, the Embassy added it could not comment at all.
Speculation that Clinton might do favours for friends and associates from her presidential campaign who have been engaged in a Washington lobbying campaign by Deripaska surfaced last year after the firm, Endeavor Group, filed the required foreign agent’s registration form on May 8, 2009. This revealed that Deripaska was paying $40,000 per month for the group to work on persuading US Government officials to lift the bar on his entry visa; and to support Deripaska’s bid to buy the Opel unit from GM: http://www.fara.gov/docs/5934-Exhibit-AB-20090508-1.pdf