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By John Helmer in Moscow

When United Company Rusal, the international aluminium producer controlled by Oleg Deripaska, invited a 37-man delegation of Chinese reporters and cameramen to Russia last month, the aim was to get across the message that China is the central kingdom in the Deripaska empire; that as much or more investment is promised for China than Rusal has so far committed to Russia itself for the next few years.

Deripaska’s future, wrote a reporter for the Hong Kong Standard, “may depend on China. It is the mainland’s voracious appetite for raw materials that has fueled a boom in aluminum prices that is expected to continue unabated.”

Another Chinese reporter in the delegation reported Rusal chief executive, Alexander Bulygin, as describing a roadshow in Hong Kong, which Rusal ran in parallel to the media tour of Russia: “How can I not like Hong Kong. I have been there twice in the past six weeks.” That roadshow, Bulygin confided, was aimed at finding a handful of Chinese investors to buy into Rusal, ahead of a public share listing. “We plan to find a whole spectrum of strategic investors – not one, but five to seven different investors representing different sectors,” he said. The private Chinese placement was intended to sell a 2% shareholding stake in Rusal; a later IPO at selling between 10% and 20%.

At this point, the unlisted private Rusal shareholding breaks down into 56.8% for Deripaska; 18.9% for Victor Vekselberg and Len Blavatnik, whose rival Russian aluminium firm SUAL was merged into Rusal on Kremlin orders two years ago; 14% for Mikhail Prokhorov, a former stakeholder in Norilsk Nickel, Russia’s largest mining company, and Glencore, the Swiss-based global trader, with 10.3%. Deripaska’s stake is the subject of a legal challenge in the UK High Court, where Mikhail Chernoy (Michael Cherney) is claiming that, according to a 2001 contract signed with Deripaska, Chernoy owns at least 11.4% of Rusal, and possibly more of Deripaska’s holding company, Basic Element. On appeal for the moment, the English judge has ordered a trial to adjudicate who owns what.

According to the briefings Rusal gave Chinese reporters and investors in September, the strategic plan is to put Chinese investors in the company second only to Deripaska. If implemented, this would be unprecedented for a strategic Russian resource company. It’s also a reversal of strategic direction for Rusal, which began as a China-first company, and then turned in a different direction.

How had Rusal come so far so fast, one of the Chinese delegation asked Bulygin in Moscow. According to the Chinese press report, by following the Chinese example. Replied Bulygin, “Let me ask you a question. How can Chinese sportsmen be so successful in the last Olympics? The answer is: the hard work of ambitious people.” According to the Standard, “just like Chinese Olympians, we think UC RUSAL will go far.”

When Rusal was first formed in 2000, China was the dominant buyer of Russian metal, though at the time Deripaska, Bulygin, and their commercial director, Gulzhan Moldazhanova, were unhappy at having to cede control of the metal exports and cashflow to traders like Glencore and Gerald Metals; they bought from Moscow, warehoused in Hong Kong, and shipped into China when the profit margin was optimum. Bulygin and Moldazhanova thought that if they could develop direct Russia to China sales, they could cut out the middleman, and earn more for themselves. But since the traders were able to preserve their role with greater cash on hand to finance the delays between production, shipment, and payment, the two Russians were keen to negotiate a substantial working capital loan from the market.

The first big roadshow to Hong Kong that was launched by Rusal was led by Moldazhanova in mid-2000. She met there representatives of Standard Bank, Billiton, and a US law firm specializing in the China trade. She also took the ferry to Nanhai to negotiate direct sales of Rusal metal to Chinese buyers – without having to go through the Hong Kong intermediaries, their warehouses, and commissions.

Moldzhanova, who is an ethnic Kazakh, didn’t feel comfortable in China, and her negotiations for direct trade failed. There were disagreements between Chinese buyers, who wanted to fix contract prices as close to the delivery date as possible, and Rusal, which wanted to lock in price far in advance. Rusal executives were inexperienced at bridging such contract differences, because they had never had to deal directly in China before.

The first Hong Kong roadshow was successful on one score, however, because it kicked off a process with London-based Standard Bank, Societe Generale, and ING, which resulted in Rusal signing its biggest financing for the year 2001. The $125 million loan that followed, according to a company announcement at the time, would “finance Russian Aluminium’s purchases of raw materials and other inputs”.

Sales to China did not take off, however. Moldazhanova, Bulygin and Deripaska agreed that they stood to make a greater margin of profit on aluminium exports if they went elsewhere. A Moscow brokerage report on Rusal, dated Febuary 2000, noted that Asia, with 39% of Rusal’s exports at the time, was the primary market; Europe took 31%, and the Americas, 30%. But the analyst, Vladimir Titkov warned, “maintaining its market share in Asia…will pose the biggest challenge to the [Rusal] group, as the region is currently experiencing high growth in its own aluminium production (most notably in China).”

There were troublesome delays also in getting the government in Beijing to let Deripaska open a representative office for the country. It now has two, one in Beijing, one in Shanghai.

As a closely held private concern, Rusal doesn’t issue audited public reports, and its trade figures are only approximate. Fast forward to last month, and it is clear that, after an interval when Rusal’s priorities turned away from China, there has been another change of direction. According to a presentation by sales director, Sergei Belsky, Rusal is “a natural partner for China as strategic supplier.” Breaking the company’s exports of aluminium geographically, Asia now receives 46%; Western |Europe, 23%; the former Soviet states, 23%; and the US, 8%. The importance of the Asian market is accelerating. “By 2015,” Belsky said, “UC Rusal expects to supply 50% of its output to Asia, of which 70% is projected to China.” That means one-third of all Rusal exports will flow to China. The projections are based on international estimates of a growing shortfall between domestic production of aluminium in China and home consumption. That gap is expected to grow even wider – to Rusal’s advantage – elsewhere in Asia.

But the trade projections aren’t the only drivers of Rusal’s new ambition in China. To supply the Russian smelters with cathodes, Deripaska has bought the Lingsi cathode plant in Shanxi provice; capacity is being expanded from 15,000 tonnes to 25,000 tonnes. A second cathode plant is at Bagouan, also in Shanxi. Expansion of capacity there to 20,900 tonnes will cost an estimated $20 million.

That’s small beer, Rusal officials have acknowledged in their presentations to the Chinese market. They are hoping to ride on the shoulders of Chinese partners in the mining of bauxite and refining of alumina – the raw materials required for smelting into metal – in the west African country of Guinea; and to power with newly generated electricity a new 500,000-tonne smelter in Qinghai province, northwestern China. The price-tags include $1 billion for the new smelter; $300 million to $500 million to build a new cathode plant; and another $100 million to $200 million for a new foil rolling plant in China.

According to the Chinese press of Hong Kong, Rusal says it will invest more than $3 billion in China projects over the next five to ten years. How much of that will come from Chinese investors in Rusal has not been made clear. But in September Rusal told the Chinese media, and those who met Bulygin on his Hong Kong roadshow, that the group wanted to sell $200 million in shares of an affiliated mining company, StrikeForce Mining and Resources; and then up to 20% of Rusal.

No valuation was made public in Rusal’s Hong Kong presentations. But when Rusal made a similar presentation to investors in London in June 2007, the company valued itself at $30 billion. The London Stock Exchange listing failed to materialize, however. In April of this year, when Prokhorov and Deripaska agreed on the sale and purchase of Norilsk Nickel shares for Rusal shares, plus cash, Prokhorov accepted a valuation of Rusal at above $50 billion. More recently, Bulygin has told the Chinese media that he plans to have a capitalization of over $150 billion (HK$1.17 trillion) within five to ten years.

At minimum, if the Hong Kong IPO were to sell 10% of Rusal, and if the market capitalization settled above $30 billion, then more than $3 billion in Chinese cash would be handed over. On top of the proposed SMR share sale, the strategic plan appears to have required Chinese investors to fund even more of Rusal’s investment plan than it has said it will spend in China.

According to one Chinese press report in September, ahead of the roadshow, a market source said the company was expected to raise “at least HK$70 billion”. That is US$9 billion – far more than had been targeted anywhere else in the world.

But that was September. One month later, after the global equity crash, Deripaska’s holding has been obliged to meet margin calls and loan refinancings, for which he and his companies lack the available cash. Three major assets in Canada and central Europe have already been liquidated and lost.

Rusal’s spokesman, Vera Kurochkina, has announced that Rusal is now seeking a $5 billion bail-out loan from a Russian state bank to prevent the loss of Deripaska’s stake in Norilsk Nickel from being forfeit to a London bank consortium. This move followed abortive attempts reported in the Russian press to convert the $4.5 billion loan from last April into a Eurobond; add more collateral; or cut the borrowing total. Sources at Basic Element, the Deripaska holding, say they are also seeking more state money.

Kurochkina has declined to answer Asia Times’s questions regarding the extent of Rusal’s indebtedness and its repayment deadlines. State banking sources say that the list of applicants for state bank loans currently numbers 55, but they won’t say if Rusal or Basic Element are among them. A maximum loan limit of $2.5 billion has also been suggested for the emergency financing.

The domestic pressure has led one Rusal executive to say that the Hong Kong share sale has been postponed from this year until 2010. According to press statements by Bulygin, the flotation could take place in 2009, and it might be in Hong Kong or London.

“Of course Russia is affected by the turbulence in the international financial markets,” Bulygin said,.“definitely. Russia is an export economy and with the slowdown of physical demand, Russian producers will face problems. But not fundamental ones. To manage the consequences of the crisis in Russia is much easier, as like China, like Brazil and like India, we are not in the epicentre of this crisis.”

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