By John Helmer, Moscow

Look carefully at who is in the driving seat.

The records of RTI Limited (formerly Rusal International Trading), the next to highest control entity in the corporate organization of United Company Rusal, show that it was registered on October 27, 2006, one day after the parent company was registered. At the time, the parent’s capital consisted of 10,000 nominal shares, and according to Point 6 of its memorandum of association, each Rusal share was worth one US dollar. A few weeks later, the parent’s annual return declared its shares were now worth one English pound, and that just two of them had been paid up. The owner of these two was EN+, not identified then as a personal holding company of Oleg Deripaska’s. By February 28, 2008, in Rusal’s next annual return, the shares were again denominated in US dollars, and all 10,000 were paid up. We’ll come shortly to who owned them.

According to the printed notes of the Jersey companies form, “the Annual Returns cannot be accepted until they meet the requirements of the Companies (Jersey) Law 1991, as ammended [sic].” There’s a lot the Jersey authorities don’t do in conformity with accepted practice – spelling is just one of them.

RTI’s capital, according to its Jersey records, consisted of 20,000 shares, twice the number of the parent’s shares. Denominated in US dollars, just two RTI shares were paid up; they were registered as owned by Rusal. At the same time, the Jersey record shows that 1,600 redeemable shares were issued and paid up, way outnumbering those owned by Rusal. They are the quasi-control shareholders of RTI. According to the Rusal initial public offering (IPO) prospectus, RTI has an exchangeable claim of $1 billion with Rusal. So it seems the redeemables own a billion-dollar slice of Rusal. At Rusal’s current market capitalization of $8.9 billion, that’s equivalent to just over 11%.

Who owns the redeemable shares is the key to who controls Rusal, if it isn’t Oleg Deripaska. Why the redeemables are hiding also invites investigation of why the recent company records show changes in the shareholding of the Hong Kong- listed company which Rusal itself isn’t acknowledging. These records show Deripaska’s nominal shareholding is dwindling and the size of the state-controlled stake is growing.

Deripaska’s oligarch peers at home, and the boards of the biggest banks which are Rusal’s creditors abroad, already know that both these things have been happening. What hasn’t been realized is that there is concrete evidence of it under everyone’s nose. Look again at the annual report of RTI from the companies register of Jersey. It is dated February 21, 2012.

RTI is depicted at the second command level of the organization, according to the prospectus which was presented to the Hong Kong Stock Exchange on December 31, 2009, days before the first sale of Rusal shares. The org chart on page 90 shows four command verticals – one reflecting the assets which Victor Vekselberg and Len Blavatnik brought into the Rusal combination with the merger in 2006-2007 of SUAL; this is registered in Bahamas. The second, registered at first in the British Virgin Islands and then transferred to Jersey in 2005, covers the core assets acquired by Michael Cherney (Mikhail Chernoy), Roman Abramovich, and others, then Deripaska. The third includes the Glencore assets included in the merger of 2007, but is controlled by an entity registered in Jamaica in 2001. The fourth command vertical, headed by Miradore Enterprises, a Cyprus company registered in 2004, controls the Bogatyr coal mine in Kazakhstan which Rusal bought from Blavatnik and shares with the Kazakh government’s wealth fund.

You need more than a spotlight and a magnifying glass to read the chart as it has been presented. Titled the “simplified corporate structure of the group”, it omits hundreds of companies which are used to move raw materials for making aluminium into smelters, and then trade the metal in the international market. These entities are registered in every known haven of the law-dodging world, many of them with mirror names to confuse investigation.

But what role in the organization does RTI play, if it doesn’t issue commands or supervise any of the company’s operating units?

At page 139 the Hong Kong prospectus claims that “RUSAL Marketing GmbH, which deals with exports to customers outside of the Russian Federation…acts as agent of RTI Limited.” The former, says Rusal, was created in Switzerland on May 22, 2007, seven months after RTI came into existence. At page I-93 of the prospectus, the auditor accountants KPMG reveal that RTI, along with RS International Gmbh, are “the Group’s major trading intermediaries”. In fact they are so major, by the end of 2008 their trading rights and cash and receivables had been pledged to secure loans to Rusal of $13.69 billion. RS International, by the way, is down the Rusal pecking order as a wholly-owned subsidiary of Rusal Marketing GmbH, which was registered in Cyprus in July 2006, before RTI existed.

So RTI seems to have multi-billion claims on Rusal’s sales revenues but does no business of its own directly. So what is it there for? The answer appears to be that it is a repository of shares Rusal is holding in a form of trust for (also by) individuals who think they own a stake in Rusal revenues, and who have been counting on Deripaska to keep the value of that stake in trust, and keep it secret. If their secret spills into the UK High Court, during the trial of Michael Cherney v Oleg Deripaska, the consequences for them, for Deripaska, and for Rusal as a regulated public company, along with its auditors and the Hong Kong and Jersey regulators, are enormous.

Two insiders, one of them a Rusal lawyer and one a Jersey expert, say the secret is opened by a close look at RTI’s articles of association, also on file in Jersey. According to the sources, when a redeemable share is redeemed, that share is cancelled and the company’s share capital is reduced
accordingly. According to the RTI articles of association, the 1,600 redeemables can be redeemed at any time after December 6, 2013 either by the issuer RTI, or by the shareholders who paid $1,600 to own them. The terms and conditions of this redemption process can be found at paragraph 8A of the articles.

The insiders know who the redeemables are owned by, but they are frightened to say, beyond the fact that Deripaska isn’t one of them. The Rusal prospectus doesn’t come clean about who they are. At page I-127, where RTI’s function is called trading, the shareholding is reported as the 2 parent-owned shares, but the redeemables are not reported. It is possible that KPMG, the author of this section of the prospectus, didn’t know; it’s possible Rusal intended to conceal the redeemable shareholders from the auditors. Legal responsibility for concealing the identity of those with a billion-dollar claim or more against the company would still be KPMG’s, as well as the chief executive’s, along with the board of the company.

Before the IPO, the Deripaska shareholders held 53.35% of the company; the SUAL shareholders (Vekselberg and Blavatnik), 17.78%; Prokhorov, 19.16%; and the Glencore group (Glasenberg), 9.7%. The listing and sale of shares in January 2010 cut 10.8% from each of those stakes. In the new lineup, the four cornerstone investors were the state bailout bank Vnesheconombank (VEB) with 3.15%; Nathaniel Rothschild and John Paulson, 0.47% each; and Kuok Hock Nien, 0.09%. That left the underwriters and the market with 6.46%.

RUSAL SHAREHOLDING, ACCORDING TO PROSPECTUS OF 2009, WEBSITE, AND JERSEY COMPANY REPORT

Shareholder	Prospectus post-IPO	Current Rusal website	Jersey report, 28-2-2012
EN+	47.59%	47.41%	38.01%
SUAL Partners	15.86	15.80	16.03
Amokenga/Glencore	8.65	8.75	8.74
Onexim	17.09	17.02	—
VEB/VTB Capital	3.15	—	10.04
HKSCC Nominees Ltd	—	—	27.14
“Public float”	7.49	10.75	—
“Management”	—	0.26	—
Of which Deripaska	—	0.22	—

This chart shows that for some reason Rusal is registering shareholding data in Jersey, where it is obliged to disclose in private to the official regulator, which are quite different from the shareholding data disclosed to the Hong Stock Exchange and the market. The differences between these data are thus discovered here for the first time.

Of minor significance, for example, is the disappearance of Mikhail Prokhorov’s stake of about 17% into a nominee holding fronted by Hong Kong Securities Clearing Company (HKSCC) Nominees Ltd. This outfit is a wholly-owned subsidiary of the Hong Kong Stock Exchange and functions as a depository and nominee holder.

Of more significance, is where the remaining 10% Rusal shareholding now in the hands of HKSCC has come from.

To start the answer, look at the evidence in the tabulation that Deripaska’s personal holding company EN+ is recorded as now holding just 38.01% of Rusal, not the 47.41% which appears on the Rusal website. Has Deripaska sold 9.4% of the “control stake” without telling the creditor banks? And if so, to whom? The state bank stake in Rusal also appears to be three times larger than was recorded in the prospectus of 2009-2010, adding 6.89%.

Onexim, the Prokhorov holding, won’t answer questions about the size of its current shareholding in Rusal; and more particularly Onexim refuses to say if Prokhorov has sold part of his stake for cash, or simply transferred it under cover of HKSCC. If the latter, and if Deripaska’s missing stake of 9.4% was also moved under the same camouflage, that would add up to a total of 26.42%. Almost, but not quite all of the shares the front company is holding, according to the Jersey records. But why hide such things in plain sight, since the company website keeps proclaiming at every instant that Deripaska and Prokhorov are partners with 64.43% between them. In fact, Onexim’s loss of confidence in Deripaska’s management of the company’s cashflows has begun to leak publicly, and the passive stance Prokhorov has displayed towards that management is beginning to stiffen. Until now, Prokhorov thought he had a priority claim on Rusal’s cash repaymernt obligations. The Jersey evidence reveals that in December 2013 the redeemables would have a superior priority.

What of the behaviour of Vnesheconombank (VEB), VTB Capital and Sberbank, the three state institutions whose control of Rusal was once hinted at by former Finance Minister Alexei Kudrin to be much greater than the publicly released shareholding figure? Has the Kremlin ordered Deripaska to transfer an extra bloc of about 7% (maybe more), not in securitization of debt but in discharge of obligations?

Were anything like these transactions to be conducted in another country but Russia, there would be political, public and if need be, judicial insistence on full disclosure, especially since public money and the state budget are exposed to commercial risk, and also because of the significance of the company to Russia’s economic security. Jersey, however, is the country where Rusal is hiding from the Russian legal requirements, and also from the Hong Kong regulator. The writ of UK law and market regulation, enforced by the Financial Services Authority (FSA) in London, doesn’t run in Jersey. Here’s why: according to the memorandum signed between the FSA and the Jersey Financial Services Commission in May of 2004, they may cooperate with each other, but Jersey will guard its secrets according to its “laws and overall policy”.

So what is happening, according to the Jersey evidence, is that Deripaska is transferring some of his nominal shareholding control of the company to the state bank, and to a nominee which is serving as a blind, possibly for a change of control itself.

Who then is calling these shots?

In the UK High Court, where Deripaska is defending himself from charges of having defrauded his former partner and patron, Michael Cherney (Mikhail Chernoy) of a 13% shareholding in Rusal, Deripaska is claiming that Cherney was a gangster who forced Deripaska to accept a criminal protection scheme (krysha) in return for payoffs (dolya). The evidence of Deripaska’s personal “money diaries”, first introduced in court on July 9, shows this to be false.

What remains to be exposed when the trial resumes late in September is that there is a krysha for which Deripaska has been paying dolya, and that this operation has de facto control of Rusal’s shareholding. Only it’s not Cherney. The evidence of Deripaska’s krysha is in the Jersey records of RTI, and in the disclosure of the 1,600 redeemable shares and their owners.

Against Cherney Deripaska has already suffered a defeat in the attempt to introduce secret testimony about the alleged krysha by having the presiding judge Justice Andrew Smith issue so-called witness protection orders. In his first trial ruling on July 9, the judge announced that he was dismissing all but one of Deripaska’s applications. “The evidence”, according to the ruling, “will be given in the usual way in open court, by which I mean either by the witnesses being present in court or by video link.”

The judge also refused Deripaska’s appeal on this point, warning against his attempt to delay or derail the trial by protracting his application on the secrecy claim at the UK Court of Appeal. “I hope that the position will be resolved before we start to hear the evidence in September,” the judge told the lawyers on July 9.

The gangster (krysha) case against Cherney, according to the court presentation last week by Mark Howard QC, Cherney’s advocate, will fall apart when the evidence of the business operations Deripaska kept for himself is revealed, and Deripaska faces cross-examination. According to Howard, “one cannot wear a bullet-proof vest all the time.”

The evidence of the Jersey records is that Deripaska devised the scheme of RTI redeemable shares to buy himself protection from their owners between October 2006 and December 2013. The bullet-proof vest, it now turns out, is RTI: it ties the hidden shareholders to Rusal’s cashflow, and it postpones the billion-dollar payoff until next year. The dolya for this krysha turns out to be at least $140 million a year – that’s the $1 billion claim between RTI and Rusal, divided by the seven years of the deal between Rusal and the redeemable owners. As a krysha, it dwarfs the $30 million to $40 million Deripaska is telling the High Court he was asked to pay Cherney.

The practical implication of the new evidence, as this is being analysed now in Moscow, is that the redeemable shareholders have a better chance of keeping their secret and getting their money if they make their deal, not with Deripaska, but with the other shareholders of Rusal, including Vekselberg, the state banks, and Cherney as a 13% stakeholder. Together, they hold a potential 39% of Rusal, compared with the 38% Deripaska has disclosed in the Jersey record.

Add Prokhorov’s 17%, if he still has it, and if he detects which way the wind is blowing, and Deripaska is a minority shareholder. The arithmetic of this combination is of less significance than the public significance – financial, legal, and political — of the secret of the owners of the redeemable shares.

A magnifying glass cannot identify them in Rusal’s public documents, but a pair of ears will do when the High Court resumes the Cherney proceeding in a few weeks’ time.

by John Helmer - Sunday, July 15th, 2012