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By John Helmer in Moscow

The oldest form of Chinese wrestling (jǐao dǐ) involved the contestants literally locking horns with the objective of head-butting each other into insensibility. Half a millennium later, the Chinese emperors decided that there was more military value in training their soldiers to knock opponents off their feet.

Horn-locking and head-butting are techniques Oleg Deripaska, chief executive of the Russian aluminium monopoly Rusal, tried last week in Australia, in an attempt to persuade BHP Billiton (BHPB), the world’s largest mining company, to cooperate in a new arrangement for fixing their asking-price for bauxite and alumina, the ingredients required to produce aluminium metal; and to compel The Australian, Rupert Murdoch’s national newspaper, to withdraw a line about Deripaska’s business reputation. Although Deripaska advertised part of what he had in mind for BHPB in a speech to a Melbourne mining club, he didn’t intend that The Australian would add this to the report of what he said: “Inevitably, Deripaska is, like so many of Russia’s oligarchs, linked to organised crime”. But publish that line The Australian did last Saturday. The timing could not have been more appropriate — or more untimely for Deripaska.

Appropriate, because in London, the first preliminary proceeding, a case management conference, will open next month in the UK High Court trial of Michael Cherney’s charges against Deripaska for defrauding him and converting his 13% stake of Rusal (for an estimated loss of more than $4 billion). The UK Appeals Court has ruled that High Court Justice Christopher Clarke had properly considered all the evidence and correctly ordered that Deripaska should face trial on Cherney’s claims. According to Clarke’s ruling of July 3, 2008, “Mr Deripaska, himself, is the subject of serious allegations”. A recital of these, including Deripaska’s association with a dead Russian gangster, follows: http://johnhelmer.net/wp-content/uploads/2008/07/michael-cherney-v-oleg-vladimirovich-deripaska.doc

The judge also reported, with apparent approval, that “in July 2006, the US authorities revoked Mr Deripaska’s entry visa. According to the Wall Street Journal, the entry ban related to concerns by US law enforcement officials that Mr Deripaska had ties with organised crime in Russia.”

As to the crux of the case, Clarke ruled: “I am satisfied that Mr Cherney has a reasonable prospect of success in respect of his claim…. the account which Mr Cherney gives, both as to the background to and the making of the agreement, and what happened thereafter is detailed and plausible and consistent with contemporaneous documentary material.”

The timing of The Australian’s reference is also appropriate, because in Washington, DC, on February 2, the US Director of National Intelligence, Admiral Dennis Blair, referred to Deripaska’s Rusal when he reported there is “a growing nexus in Russian and Eurasian states among government, organized crime, intelligence services, and big business figures. An increasing risk from Russian organized crime is that criminals and criminally linked oligarchs will enhance the ability of state or state-allied actors to undermine competition in gas, oil, aluminum, and precious metals markets.” For Russian aluminium in the Blair report, read Rusal.

For Deripaska to be the target of such carefully considered charges is no news at all. Rusal’s bankers acknowledged in their prospectus for the sale of Rusal shares on the Hong Kong Stock Exchange, issued on December 31, that “there has been negative coverage in the media recently [sic] relating to the rejection by U.S. authorities of Mr.Deripaska’s application for a visa to enter the United States. Some of such coverage includes speculation that the rejection was due to alleged connections to organised crime.” Deripaska has repeatedly professed his innocence, and he will have the opportunity to demonstrate that when the High Court opens its trial on Cherney’s suit.

For The Australian to report that Deripaska is “linked to organized crime”, was to report the currency of the charges in court, in US government files, in the Hong Kong stock market, and in the business media — not their outcome.

But Admiral Blair went a little further. “IOC [international organized crime] penetration of governments,” he said, “is exacerbating corruption and undermining rule of law, democratic institution-building, and transparent business practices.” He also implied that it is an “organized crime” to operate resource and commodity pricing cartels; and that the Russian in charge of aluminium is suspected by the intelligence chief of the US Government of trying to do just that. How awkward then for Deripaska and Kloppers to be sitting down in Melbourne, Australia, to discuss mutual cooperation for pricing bauxite and alumina.

Over Saturday and Sunday, Deripaska ordered his lawyers into the embarrassing breach. They claimed that the newspaper’s line meant that it had judged Deripaska’s reputation, not that the UK courts and the US Government are in the process of judging him. The lawyers for The Australian were threatened that their company would face costly legal proceedings unless they swiftly eliminated the offending line. The threat carried special force, not because The Australian’s lawyers believed they were on shaky factual or legal ground, but rather because Deripaska was threatening to inflict up to half a million dollars worth of costs in the preliminaries.

There is an irony in Russia’s, and the world’s largest debtor threatening to outspend with money not quite to be counted his own, in order to compel an Australian national newspaper to withdraw a line that was acceptable in print in his own prospectus, on a matter of business risk affecting the valuation of an internationally listed stock. There is no sign, however, that The Australian’s legal counsel appreciate irony, or thought they could afford to call Deripaska’s bluff. On Monday, April 19, The Australian decided to withdraw and apologize for more than it had published:


Apology to Mr Oleg Deripaska

A REPORT in The Weekend Australian on Saturday (“Deripaska’s hard stare has vision”, Page 25), which was also published online, made reference to Russian businessman Oleg Deripaska and links to organised crime. The Australian accepts it has no evidence whatsoever to support the allegation, it withdraws any implication to that effect and unreservedly apologises to Mr Deripaska for any harm he may have suffered as a result of the publication.

Neither BHP Billiton nor Rusal will officially admit that Deripaska met in Melbourne with Marius Kloppers, the BHPB chief executive. Kloppers’s spokesman Ruban Yogarajah was asked to confirm the date and purpose of the meeting. He responded: “I’m afraid we wouldn’t comment.” Rusal did not reply at all.

A source with special access confirms not only that Kloppers and Deripaska met, but also that Deripaska asked Kloppers to consider a joint approach to managing their commodity asking-prices, and to substitute an alternative to the aluminium-based formula of the London Metals Exchange currently used for contracting the sale of bauxite and alumina to major global consumers like China. Kloppers’s spokesman was asked if the topics of their discussion included cooperation on bauxite and aluminia pricing; expanded access for Rusal to Australian bauxite deposits; and equity or other links between BHPB and Rusal. The spokesman responded: “we don’t confirm any details of meetings held by our executives.”

In the textbooks of market concentration and commodity cartels, bauxite is recorded as highly concentrated with almost 70% of worldwide production in just four countries. Just four companies control most of the mine output and global trade.

Rusal calls itself “the world’s largest aluminium producer”, with output, according to an April 12 release, of 3.9 million tonnes of aluminium; 11.3 million tonnes of bauxite; and 7.3 million tonnes of alumina. Most of Rusal’s bauxite comes from Guinea, Australia, and Russia.

BHP Billiton, calling itself “the world’s sixth largest producer of primary aluminium”, says it counts “a total production capacity of approximately 1.3 million tonnes of aluminium, approximately 15.6 million tonnes of bauxite and 4.5 million tonnes of alumina per annum.” Most of BHPB’s bauxite and alumina comes from mining and refining in Australia; it also has a 36% bauxite mining stake and a 15% alumina refining stake in Brazil.

Chinalco says it is the largest mining company in China, and the largest alumina and aluminium producer in that country. It hasn’t updated its 2007 production figures, but in that year Chinalco claims it turned out 3.6 million tonnes of aluminium, 10.5 million tonnes of alumina, and 4.8 million tonnes of bauxite. Estimates of Chinalco’s growth since then, notwithstanding the global crisis in mineral production and metal consumption, have been running at over 30% per annum.

Alcoa of the US describes itself as “the world leader in the production and management of primary aluminum, fabricated aluminum, and alumina”. Its plants have capacity to produce 18 million tonnes of alumina per annum; and almost 5 million tonnes of aluminium. Alcoa’s position in bauxite is modest – a 60% share of a 3-million tonne mine in Brazil.

Rio Tinto Alcan calls itself “a global supplier of bauxite, alumina and aluminium”. In fact, it is the global leader in the first two commodities. Annually, according to the company website, it produces 4.3 million tonnes of aluminium, 8.7 million tonnes of alumina, and 30 million tonnes of bauxite. All of the alumina and bauxite comes from mines and plants in Australia and New Zealand.

In the northeastern Australian state of Queensland, Rio Tinto holds an 80% stake in Queensland Alumina Ltd., while Rusal holds a 20% stake it bought in 2005 from the bankrupt US operator, Kaiser. At the time of that transaction, Rio Tinto and Australian government sources report, there was an understanding among the Australians to limit Rusal’s position in local bauxite and alumina to this stake; to oblige Rusal to continue depending on Rio Tinto’s exports to Rusal’s refineries and smelters; and to bypass a potentially hostile review of the implications of Rusal’s entry by the government in Canberra.

If anyone were to be thinking now of a global bauxite and alumina cartel to fix prices – apart from Admiral Blair, noone else is publicly suggesting the possibility – then Rio Tinto and Chinalco would control more than half the global production; Rusal and BHPB a little less than half. An equity combination between Rio Tinto and Chinalco, proposed at the start of 2009, was planned to invest more than $2 billion in new bauxite, alumina and aluminium projects, and give Chinalco 30%, 49% and 50% stakes in several of Rio Tinto’s Australian operations. But the combination was opposed by Rio Tinto shareholders and the Australian government, and it failed to materialize.

Rusal’s approach to BHPB isn’t as market dominant as the Rio Tinto-Chinalco combination would have been. For the time being, it also isn’t so visible.

By itself Rusal lacks pricing power, compared to the others. This is especially obvious from the evidence of the bank covenants, refinancing conditions, and commodity deals it has been compelled to accept in order to avoid bankruptcy. In addition, if Rusal loses its six-month old fight with the Guinean Government to retain bauxite mining and alumina refining concessions in that country, it would lose 30% of its bauxite reserves; little bargaining power would be left to Deripaska in the bauxite and alumina trade. If he then goes to trial in London, and loses to Cherney, the impact on his reputation will be as great as the diminution of his shareholding stake.

In their weekend wrestle with The Australian, Deripaska’s lawyers have gained nothing to influence the outcome of these crucial tests. And if BHPB and its shareholders are persuaded by the apology The Australian has been obliged to publish, that would be a surprise.

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