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By John Helmer, Moscow

In the wake of Foreign Minister Sergei Lavrov’s negotiations in Washington this week, US State Department documents have leaked from 2009 and 2010, revealing that American and other international banks were given an ultimatum by Deputy Prime Ministers Igor Shuvalov and Igor Sechin – either roll over the debts Oleg Deripaska had run up, or else the Kremlin would see they would get nothing at all.

The US banks under the gun were Citibank, Morgan Stanley, and JP Morgan Chase.

The State Department believed at the time that Deripaska owed substantially more foreign debt than has been publicly disclosed, creating a falling-domino risk for US creditor banks, not only of a possible Rusal default, but of defaults from other Russian oligarch debtors.

One classified document is dated in April of 2009 – one month after Rusal had signed with its international creditors a “standstill and waiver agreement”; eight months before Rusal announced it had signed an “international override agreement” with more than seventy foreign banks. In April 2009 the State Department was calculating the Rusal debt total was “at least $15 billion, including $7.5 billion due to foreigners this year, and may be as much as $30 billion in debt.” Rusal has never acknowledged the latter number. In the presentation of its debts to the Hong Kong Stock Exchange, Rusal claimed its total bank loan debt came to $10.6 billion on December 31, 2008; $10.4 billion on June 30, 2009.

From the leaked documents, it is evident that US government officials were reporting in 2009 that there were “concerns among Western bankers, who are turning to the GOR [Government of Russia] for assurances in default and near-default situations.” In one reported conversation, an aide to Finance Minister Alexei Kudrin was quoted as saying “to us in March [2009] that the Ministry was firmly signaling to both the companies and their creditors that there would be no government bailouts. They would have to restructure or deal with the consequences of defaults.”

But that wasn’t the real position for Deripaska’s Rusal, the State Department documents now disclose.

Two well-known global banks are reported as warning that Rusal was bankrupt, and that “nobody knows how much Deripaska owes, including Deripaska himself… only 10-15 percent of investors understand the firm is bankrupt, and that many foreign banks demanding that they be repaid are probably doing so in vain. If Rusal defaults on large chunks of this debt, according to [name withheld], its creditors would probably reduce lending to Russian firms for years, even if global credit markets open soon.”

According to one source recorded by the State Department, Deputy Prime Minister Igor Shuvalov had claimed the November 2008 loan by Venesheconombank (VEB) of $4.5 billion to Rusal had “overpaid” Deripaska. But the Americans suspected Shuvalov of a ploy, intended to signal that if the foreign banks pressed Deripaska and Rusal too hard for repayment, there would be no further bailout by the Kremlin. The Americans believed this to mean that Rusal would be allowed to go into bankruptcy, followed by a state takeover, leaving the banks without hope of recovering much, if any, of their cash.

An international banker is reported in one of the classified documents as having received an ultimatum from Shuvalov and Deputy Prime Minister Igor Sechin. The banker “told us privately that he sits on a bank coordinating committee working with Deripaska on the Rusal debt. The committee includes the western banks with significant exposure (in the $200-400 million range for each bank) to Rusal debt, including Royal Bank of Scotland, Societe Generale, Citibank, Calyon, and BNK Paribas. [Name withheld] said Shuvalov and First Deputy Prime Minister Sechin had bothspoken to the Western institutions, emphasized the GOR’s new policy, and made clear that they would need to agree to the standstill agreement or deal with the consequences.”

The State Department document goes on to spell out what these consequences were. The US source “added that he personally favored the standstill agreement, without which the foreign banks would have been frozen out of the restructuring process. That might have resulted in a situation like that of the Yukos affair, where the foreign banks had been required to abrogate their claims in order to get anything back on their loans. With the standstill agreement and the possibility of a more orderly restructuring, the foreign banks at least had a chance at acquiring a portion of Rusal’s underlying assets, rather than see them slide back to the state or political insiders, with “dirty hands” all over the deal.”

Rusal’s prospectus to the Hong Kong Stock Exchange, released on December 31, 2009, ahead of its initial public offering (IPO), reports the first standstill agreement was signed with the international banks on March 11, 2009, for just two months. It suspended repayment by Rusal of its loan principal, and stopped all bankruptcy action by the creditors, including a waiver of “existing defaults and cross-defaults”.

The Kremlin ultimatum which followed the next month, as reported by the Americans, got Deripaska an extension of these protections until the bank syndicate and he completed their override and debt restructuring agreement on December 7, 2009. That in turn gave Rusal another four years to clear its debts, and paved the way for the Hong Kong share sale demanded by Deripaska’s Russian shareholding partners, Mikhail Prokhorov, Victor Vekselberg, and Len Blavatnik. The prospectus reveals that the creditor banks got Rusal to pay $82 million in fees for the standstill and waiver deal; and another $119 million in charges for the override agreement.

In a State Department report dated February of 2010, an international banker is reported as telling US officials he “doubted Rusal would undergo an evolution into a transparent, modern corporation as a result of its restructuring or the IPO. He discounted the influence of new shareholders over the company, claiming that, “minority shareholders don’t get squat in Russia.” Deripaska, the State Department reports its source as saying, “does not have a ‘big dictionary’ of corporate governance.”

Deripaska has also used the Kremlin ultimatum to write in special protection for himself if either the bankers or the Kremlin get rid of him. According to Rusal documents, the international creditors have signed their agreement that “the debt restructuring agreements provide for the acceleration of debt repayment if a person other than Mr. Oleg Deripaska acquires effective control of the Company.”

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