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By John Helmer in Moscow

Insomniacs count sheep to get off to sleep, but after that, dreams come plentiful and cheap.

When Oleg Deripaska lays his head on the pillow these summer evenings, wishful thinking appears to have led him to a colossal miscalculation. Even worse, Deripaska appears to have been dozing, when he made two catastrophic statements to a London financial newspaper this week. They have undermined, perhaps fatally, Deripaska’s ambition to vault over the latest of the consolidations by Rio Tinto and Alcan, in order to strike an eventual deal with Xstrata or Alcoa.

The statements lie, like depth-charges, under what was intended to be the Financial Times’s profile of best business practice in the history of the Russian aluminium sector. Deripaska spoke explicitly on the two topics, which his lawyers and investment bankers have repeatedly cautioned him to avoid. They were the two great unmentionables at the briefing for investment bank analysts, arranged by JP Morgan in London, on June 29. But in London, as in the preceding sessions in Frankfurt, New York and Boston, they were recognized as the two prime investor risks, which have been deterring almost all the bankers from recommending a main-board London Stock Exchange (LSE) listing for United Company Rusal – in which Deripaska owns the controlling stake of 66%.

Call them the Cherney and the Putin risks.

By an odd twist of fate, insiders around Deripaska now realize, and ruefully admit out of earshot of the boss, the two are tied together. Unless Deripaska makes a settlement with Michael Cherney (Mikhail Chernoy), who can prove he owns a 20% stake in Deripaska’s aluminium assets, Deripaska’s attempt to place an initial public offering (IPO) of the contested shares will fail. Failure means there will be no market price for Rusal, and hence, none for Deripaska’s shareholding.

If that happens, Deripaska will be unable to demonstrate to the Kremlin that the purported national aluminium champion Putin authorized last August, will need Deripaska for much longer. Worse, compensation to the Russian state for Rusal’s tax and trading practices may have to be paid by surrendering Deripaska’s equity, not by paying cash out of his IPO proceeds. Cherney’s claim directly assists Putin’s strategy for recovering strategic assets for the benefit of the state; and both of them gain, at Deripaska’s expense, if the IPO proceeds. But this cannot proceed until, and unless, the underwriters are convinced it will be lawful for them to persuade sharebuyers that they aren’t buying into a fraud, or into a candidate for sub-value nationalization.

The argument over Cherney’s business relationship with Deripaska is currently pending in the UK High Court. For all practical purposes, however, it was settled last autumn, when the United States Government decided to revoke Deripaska’s entry visa for the US. That move persuaded the US banks advising Rusal, led by Morgan Stanley, that they cannot risk the liability of misstating Deripaska’s relationship with Cherney, and the latter’s trust agreement with Deripaska, which continues in effect. Morgan Stanley has therefore told Deripaska not to fudge the disclosure obligations of a full London Stock Exchange (LSE) listing. Morgan Stanley has been backed by Goldman Sachs and other banks seeking to participate in the Rusal IPO. Their proposal is to opt for a lower level of disclosure for Rusal, and lower liability risk for themselves, with an issue of General Depositary Receipts (GDRs).

The problem with this option – Morgan Stanley has conceded to JP Morgan-Cazenove – is that it would be tantamount to an admission to the market that Rusal’s paper is discount-value. Unstated by Deripaska so far, but clear in the minds of the bankers’ camp, is that, if Deripaska can sell his Rusal stake down to 50% at IPO, he is considering a further sale, in the form of a share swap or merger with another minerals and metals international. With main-board LSE

listed scrip, this would be possible; with GDR paper, no hope.

Anglo American was publicly touted as a candidate by Brian Gilbertson, when he was still chairman of US Rusal, and the merger with SUAL and Glencore’s alumina assets was still going through. But after Gilbertson’s removal – followed by the refusal of Mike Salamon of BHP Billiton to take his place – the candidacy of Xstrata of Switzerland has been discussed with Deripaska. And so too, Alcoa of the US.

Xstrata, a diversified minerals group, has a current market capitalization of $67.4 billion, more than double Rusal’s target value, and substantially more than the premium price Rio Tinto has just assigned in its acquisition of Alcan for $44 billion. Alcoa, a pure aluminium play, has a current market cap of $39.4 billion.

Inside the Deripaska camp, Mineweb has been reliably informed, there has been interest in a post-IPO deal with Alcoa. There has also been a discussion of whether the anti-trust regulators of Europe and the US would agree to a further aluminium industry consolidation in the wake of Rio Tinto-Alcan. It is being argued that a buy-out of Deripaska by Xstrata might be easier for the authorities to approve, as Xstrata’s market share in aluminium starts out smaller than Alcoa’s.

The idea of a sale to Alcoa of Deripaska’s 50% stake, or a little less, may be one way the US Government could be persuaded to allow him back into the country. For many years, when the visa ban was first in place, Rusal executives were convinced it was there, because Alcoa wanted to hobble Deripaska’s rise as a global rival. Then in 2004, Rusal and Alcoa made it up, and the Kremlin was persuaded to allow Alcoa to buy two of Rusal’s downstream aluminium fabrication plants, in Samara and Rostov. The next year, Deripaska could his visa. Could Deripaska persuade Putin, or the next President of Russia, to accept a 49% sale to Alcoa, and Deripaska’s exit from the aluminium business?

The bankers advising Deripaska have told him that, before he tries to go that far, he must procure a letter from the Russian Government to neutralize Putin risk. This letter must say that Rusal is safe from renationalization. Naturally, the likelihood that Putin himself will sign is negligible. Who may sign it in Putin’s place, and what the text would be worth, now, or after the presidential changeover next spring, is debatable. For the time being, there isn’t a letter at all.

Some of the advisors think the letter idea is folly. They argue there can be no protection against a sovereign takeover; but if it is managed at a premium to the market price, investors will get all they can or should expect. Think Rosneft, they have told Deripaska, not Yukos. But without an IPO, they go on, there can be no market price for calculating a premium.

Deripaska has also been advised that he – along with Victor Vekselberg, the principal controlling shareholder of SUAL, who controls 22% of the new Rusal – must sign an undertaking that they are agreeable to taking seats on the Rusal board, and will comply with all of the non-interference clauses the underwriting banks think they should concede.

Naturally, such an undertaking is planned for presentation to the market as proof that Deripaska has turned over a new leaf. How the London market could judge Deripaska to be fit and proper for a director’s seat at an LSE-listed company, when the US Government has nixed him for sightseeing at Niagara Falls, is one problem the bankers say they have the lawyers working on, day and night.

Why Deripaska’s signature on the bottom of the parchment should be reassuring is another matter. The pending Cherney claim, plus testimony already presented in the High Court after he served the claim on Deripaska at his London home last November, are a convincing demonstration that Deripaska is capable of denying his signature, and hiding behind his butler, if need be.

High-value London bankers can’t be expected to grasp the uncertainties of securing a letter of reassurance from the Kremlin. But they all know what happened to Mikhail Khodorkovsky, once upon a time the proprietor of oil company Yukos, who in the spring of 2003 arranged to sell about 40% of his stake to ExxonMobil. He sent the Americans to the door of then Prime Minister Mikhail Kasyanov (nickname Misha Two-Percent) for their deal-making letter. ExxonMobil got what they called for. But it was a pass to a dead-end. For it was Putin who was in charge. And he it was, who sent Kasyanov packing, and Khodorkovsky to jail. In time, Putin authorized state-owned Rosneft, which had absorbed the Yukos assets, to sell its shares on the international market.

If anyone imagines that Deripaska may take leave of the Russian aluminium champion, without Putin’s explicit approval, they are dreaming. Perhaps he hasn’t briefed the Russian President on everything he and his bankers have been discussing. For the time being, Putin doesn’t need to sign anything. For he can sit back and wait on Cherney to get Deripaska to honour the spoon-shaped scrawl that is his signature on the trust agreement of March 10, 2001.

It isn’t known precisely what the President thinks of Deripaska and Cherney, nor whether Cherney has been chatting to the Kremlin lately. It is reputed that Putin doesn’t esteem either man more or less than the other. Naturally, Putin is well informed on the truth of the matters in the US Government’s dossier. This leaves the Kremlin in little doubt about the business relationship between Cherney and Deripaska. Putin and Cherney share one additional point – that Deripaska hasn’t yet paid his dues, and should.

Putting a fair price on those is a banker’s job; and Deripaska is employing a legion of them. But what they have so far been unable to do is to get him to calculate the price of releasing claims that will block the IPO altogether, if he doesn’t.

Just how truculent Deripaska is, and how frustrating for his financial and legal advisors, can be found in his two remarks to the Financial Times on Cherney risk and Putin risk. “This person,” Deripaska is quoted as saying about Cherney, “had no relation to my business.” That looks like the long goodbye for Cherney. But noone believes it.

Asked about Putin risk, Deripaska said he’s ready for the big sleep. “If the state says we need to give it up, we’ll give it up,” the Financial Times quotes him. “I don’t separate myself from the state. I have no other interests.” If Deripaska were thinking of selling shares to investors, and taking a seat on the Rusal board, this disclaimer of their interests is careless beyond belief. If JP Morgan-Cazenove, Morgan Stanley, and Goldman Sachs believe they can come up with a letter from the Russian government assuring shareholders that Deripaska is their best protection against a Kremlin takeover, they are dreaming.

Deripaska has been plotting his exit from Rusal, and there are just two people in position to do something about it. Putin is not going to allow Deripaska to sell to Xstrata or Alcoa, But before he gets around to thinking about that, he wants to get Rusal’s assets and cashflows consolidated lawfully; its tax stream widened and deepened; and its value fixed in the market. From the Kremlin’s point of view, this is what the IPO process is meant to do. But unless Cherney’s shareholding is paid for, all of this will be impossible. It is one of the great turnups in the history of the Russian aluminium industry that Cherney, whom Deripaska has slandered for a decade, will help return to Russia what Deripaska tried to take away, all for himself.

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