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By John Helmer in Moscow

Litigators and analysts look for cash inside Russia’s global aluminium giant.

Most of the trouble Oleg Deripaska, controlling shareholder of United Company Rusal, has faced in the court claims confronting him in the past, and the one from Mikhail Chernoy (Michael Cherney) he currently faces in London, comes from the fact that Deripaska seems not to have the money, with which to meet his debts and obligations.

The claims of Cherney’s High Court lawsuit, including shares, dividends, proceeds from Rusal asset sales, and Rusal-funded transfers to Deripaska’s personal holding and other companies can be estimated at more than $5 billion. These claims are against Rusal, Deripaska, his Moscow holding Basic Element, and his worldwide assets.

By contrast, Deripaska’s considerable wealth is either an extrapolation of the paper value of his shareholdings; some of them with acquisition prices that are unknown; or a multiple of enterprise earnings, minus debts that have been passed through a series of related-party transactions. Accounting for these is as problematical as judging the winner of a roulette spin, before the ball drops.

Although not publicly announced, KPMG has been acting as the auditor to US Rusal for its IPO. A banker to the deal has told Mineweb the firm has supervised the consolidation of the trading units used by Rusal in its tolling schemes, so that their revenues are now reflected on a single balance-sheet. KPMG has also “signed off that the company has paid all its tax”. KPMG should know what loans from Rusal to Deripaska companies remain outstanding, and whether, in the meantime, Rusal is cash-positive. Netting this cash against the size of the contingency claims Rusal and Deripaska are facing is unlikely to leave a positive number.

The numbers are also obscured by Rusal’s custom of announcing huge forward undertakings to spend money, and then quietly dropping short. This month already, Rusal has announced promises to spend more than a billion dollars on a new smelter and nuclear power station in the Russian region of Saratov; and more than $3 billion in a similar combination in Kyrgyzstan. Multi-billion dollar promises for aluminium and power complexes are also in the offing for Venezuela and Indonesia, and in several other regions of Russia. Rusal also claims to have already invested $1.1 billion on various metal projects in the first nine months of this year.

At the same time, Deripaska has been publicly buying stakes in a Canadian auto-parts builder, and Austrian construction companies, costing almost $3 billion. The financing of these transactions is not so obvious as the sale and purchase price. But there is good reason to suppose that the cash element of the deals comes from Rusal, by way of lending to Basic Element. The reason is that this is exactly how Deripaska conducted his business before, when details of the Rusal balance-sheet became publicly visible for a brief instant.

One of the problems the investment market in London faced recently, when it considered Rusal’s proposed share sale on the London Stock Exchange – world’s biggest IPO that never was — was that none of this financial interaction was visible. Market briefings in June revealed just five figures from Rusal’s balance-sheet – sales revenues; Ebitda; Ebit; net debt; and capital expenditure. Even they were unaudited in the briefing papers circulated to analysts in June and July. According to those papers, Rusal said it “is committed to sustaining a capital structure that makes efficient use of its balance sheet.”

Efficiency for whose balance-sheet was a question that took months of argument among the banking syndicate when Rusal applied for a debt restructuring loan of almost $1 billion in October 2003; at the time, that was the biggest loan Deripaska’s metal company business had sought.

Then, Deripaska was in urgent need of cash, because he had just agreed to buy Roman Abramovich’s 25% stake in Rusal for a price estimated at the time between $1.5 and $2 billion. A premium was paid, because Deripaska was afraid that Abramovich might offer the stake to a rival, threatening Deripaska with being put out of business. Two years earlier, in 2001, he had done something similar. Fearful that Chernoy would sell his 20% stake to rival Victor Vekselberg, Deripaska proposed buying him out; offered $250 million in cash, but then complained he didn’t have enough money to pay the balance. A few months later, Deripaska signed an agreement with Chernoy to borrow another $100 million or so.

In 2001 and 2002, Chernoy was very obliging. In 2003, knowing what happened to him, Abramovich insisted on at least $500 million in cash up front. Rusal sources claimed Deripaska was forced to pay everything, but there is some uncertainty over whether Abramovich relented to allow Deripaska to pay a balance in six-monthly instalments. But for a few weeks in September of 2003, Deripaska’s London banks knew he was extremely short of cash, and short of collateral to borrow against.

A loan he secured from the state savings Sberbank created a potential default on Deripaska’s prior borrowing agreement with then current international lenders; they included BNP-Paribas, Natexis,. Credit Suisse First Boston (CSFB), ING, Societe Generale, Westdeutsche Landesbank, and Standard Bank London. They admitted they were worried that the collateral Deripaska had pledged for the Sberbank loan included aluminium already securing the other bank loans. Accordingly, they insisted on unprecedented financial disclosures, and highly unusual securitization of Rusal’s metal. Rusal thought the syndicate negotiations would take weeks. They dragged on for months.

It was during this time that details of the Rusal balance-sheet leaked. Mineweb published them on October 16, 2003. Rusal refused to corroborate the details directly. But it dispatched a letter to each member of the London banking syndicate, warning that if a banker was found disclosing such details, the bank would be evicted from the syndicate.

At the time, the London bankers were less troubled at losing their client than losing their shirts. For the balance-sheet details indicated that Rusal had been advancing substantial short-term loans to entities reported as “related parties”. In 2002, these loans totaled $980 million. Over the year, the balance-sheet documents claimed, $694 million of these loans were repaid.

At the time, the balance-sheet for Rusal also revealed that, as of December 31, 2002, the company held just $98 million in cash at hand. A year earlier, there was only $37 million in the kitty. The source for the balance-sheet told Mineweb “cash has been taken out in great volume from Rusal in dividends for shareholders and in loans to related parties.” The shareholders in 2002-2003 were Deripaska and his holding, Basic Element, and Abramovich and his holding, Millhouse. What was happening was that Deripaska was emptying Rusal, in order to fund his buy-back of Rusal shares, along with other assets for the holding. He kept telling Chernoy there wasn’t enough cash to pay his obligation from 2001.

In 2002, according to its balance-sheet, Rusal paid $834 million in dividends to its shareholders. Basic Element, with a 50% stake, is presumed to have taken half, or $417 million; while Millhouse, the holding controlled by Abramovich and his associates, took the other $417 million. Until Abramovich’s sale to Deripaska at the end of September, 2003, the same 50/50 sharing of dividends should have occurred.

Related party loans between Rusal and Basic Element are allowable, according to the Russian civil code, if the board of directors and shareholders vote to approve them. When Deripaska arranged the cash to buy Abramovich’s 25% stake, Millhouse directors on the Rusal board should have approved a Rusal loan. But they declined at the time to say if they had done so; one of the directors had trouble remembering if he had been asked to vote. But once that transaction took effect, Millhouse appointees were replaced by Rusal ones, and the dealing between Rusal and Basic Element was now confined within the family.

But family, in the literal sense, can carry exceptional financial risks. One of Deripaska’s colleagues, Suleiman Kerimov, acknowledged them when he took Polymetal, a gold mining asset he owns, to IPO in London last February, intimating that if he and his wife divorced, she might be entitled to half the value of his Polymetal shareholding. “Any event or circumstance,” recorded the Polymetal prospectus at page 21, “affecting Mr. Kerimov as a natural person, such as divorce, incapacity or death, may have an impact on the control over, and ownership of his interest in, the Company, or may lead to a change of control of the Company.”

What was also known at the time, making the divorce risk poignant, if not pressing, was that Mrs Kerimov owned 50% of the company which Kerimov had used to buy Polymetal from its previous owners. By contrast, when Roman Abramovich divorced his wife, Mrs Abramovich evidently did not enjoy comparable asset title. And for this and the Kerimov reason, if Deripaska and Mrs Deripaska were to go down the same path, he is likely to be obliged to disclose, at least to current and potential shareholders of Rusal, what assets he may have shared with his wife, and what terms of marital asset dissolution he may have agreed to.

This isn’t the place to gossip about marriage. Still, when companies are run the way Rusal and Basic Element are run, cash default risk looms in the most unexpected places.

Bankers to the attempted IPO have told Mineweb that Deripaska’s debts and legal liabilities ought not to impact on the market assessment and valuation of Rusal, because the company is distinct from the shareholder proprietor, and doesn’t share in his liabilities. The lawyers to the IPO argued that Chernoy’s lawsuit, the liability which has preoccupied the backroom discussions, was Deripaska’s problem, not Rusal’s.

The argument went like this: “In the event that Chernoy were successful in his High Court claim, Deripaska would have to settle with him. That is between Deripaska and Chernoy. The market would ask, how will Deripaska pay? He might pay by selling shares in Rusal equal in value to the Chernoy claim. Or he might pay by borrowing against or liquidating other assets. If he is obliged to sell Rusal shares, the free float would increase, so the company would gain standing in the market.”

A banker to the deal concluded: “I don’t see any impact on Rusal.”

However, there is a crucial omission. That is the balance-sheet item, labelled related-party transactions, where it is disclosed how much Rusal has advanced to Basic Element, and other Deripaska companies, and how much he and they were (are) obligated to repay. Joined at the head in this fashion, Deripaska and Rusal face Deripaska’s liabilities together. Trying to separate them could be financially paralyzing to both.

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