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By John Helmer in Moscow

Oleg Deripaska, the controlling shareholder and chief executive of Rusal, Russia’s bauxite and aluminium monopoly, is attempting to run the gauntlet of international courts and Hong Kong stock exchange investigators, as time runs out for him to meet his cash-or-list obligations to his shareholding partners, Russian oligarchs Mikhail Prokhorov and Victor Vekselberg. They, like Michael Cherney, Deripaska’s founding partner in the aluminium business, hold signed undertakings from Deripaska that if their private shares in Rusal do not achieve a public market listing by deadline, Deripaska must buy back their shares for cash.

And as Russia’s most indebted man, with about $20 billion in obligations, not counting the share value, Deripaska has no money to spare.

The pressure on the Russians has turned into an unprecedented problem this week for the Hong Kong Exchange (HKEx) listing division, headed by Mark Dickens; and the Hong Kong government market regulator, the Securities and Futures Commission (SFC), headed by Martin Wheatley. Dickens, an Australian with three decades of Australian and Hong Kong market experience, has had no investigative involvement with Russian companies. Wheatley, an Englishman, was with the London Stock Exchange until 2005, before the Russians started to list there.

Until now, no Russian company has been listed to trade its shares on the Hong Kong Exchange. Last September, according to the Chinese mainland and Hong Kong reporters who were taken on a Rusal tour, Deripaska tried to test Chinese investor interest. But the effort was abandoned when the aluminium price crashed from more than $3,300 per tonne to less than $1,500. Today, it is struggling to hold between $1,700 and $1,800.

The capacity of the two Hong Kong stock market organizations, one commercial and one state, to investigate Rusal, which is currently in a standstill debt default position with 74 international lenders, is limited, although more than $8 billion in foreign bank debts, and about $5 billion in Russian bank debts are known to be outstanding. There is also the possibility of serious conflicts of interest. As a Hong Kong securities lawyer points out, the HKEx and SFC have limited investigative resources, and are likely to rely on the financial institutions supporting a Rusal application. These include Credit Suisse, Goldman Sachs, and BNP Paribas.

A source at Credit Suisse points out that BNP and Credit Suisse are also holding substantial amounts of debt, which Rusal admits it cannot repay. The Credit Suisse source explained that instead of calling a default, and applying for bankruptcy administration of the company, the banks have agreed on a “standstill”, which has been extended several times, the latest until October 31. This means the creditors have agreed not to go after Rusal’s assets in bankruptcy action while the company negotiates a restructuring and repayment scheme. However, by advising a HKEx listing and writing a prospectus to advertise the shares for sale to investors in Hong Kong, Credit Suisse and BNP are in effect trying to persuade share-buyers to give Rusal cash, which will then be used to repay the banks.

Deripaska currently owns between 49% and 54% of Rusal’s privately incorporated shares; Prokhorov between 18% and 23%; Vekselberg and his associates, 19%. The exact figures are uncertain, because Deripaska has been swapping small blocs of his shares to his associates, in exchange for reducing or clearing his cash debts to them. Cherney holds a contract with Deripaska for the equivalent of 13% of Rusal shares, or at least $4 billion in value. Rusal’s website indicates a shareholding lineup that isn’t the same as the website posting of Prokhorov’s holding, Onexim. The shareholding contract between Cherney and Deripaska is in the High Court in London, and in testimony before the Court of Appeal last July.

Unable to get a major financial institution to underwrite a listing of Rusal shares in London in 2007, in Shanghai and Hong Kong in 2008, or on another European or North American exchange, and without cash to pay out the minorities, Rusal has reportedly mandated Credit Suisse and Goldman Sachs to draft an application to the Hong Kong Exchange. A Hong Kong securities market expert says the minimum share issue for the Rusal IPO would be 20%.

In 2007, when business was booming and spot aluminium between $2,700 and $3,000, Rusal said its target value was $30 billion. At peak last year, before the crash, it was aiming at $50 billion. Given the collapse of the aluminium price and revenues, Rusal’s debts, and the set-aside for Cherney’s case, noone can confidently say what Rusal’s market value would be now. Buying into the company is also a wager on the Kremlin not nationalizing it to reclaim what Deripaska owes the state banks — a contingency that also preyed on the calculations of institutional investors in London two years ago.

A spokesman for the HKEx declares that the exchange “does not usually comment on individual situations, media reports, rumors or speculation.” Regarding recent London reports of the Rusal plan to sell shares in Hong Kong, the spokesman adds the exchange will not “comment on whether a company has applied for listing.” But asked whether the listing division will approve an application, if one is lodged, the spokesman said there is “a dual filing regime, the Exchange passes copies of materials submitted by listing applicants to the SFC. The SFC may object to a listing if the disclosure in the listing materials appears to the SFC to contain false or misleading information.”

Both agencies are governed by Hong Kong’s Securities and Futures Ordinance. This sets out the qualifications for applying companies and their executives; as well as the criteria for disqualification. Referring to rulings by international courts involving Deripaska and Rusal’s business practices, as well as recent Swiss government rulings on Vekselberg, who is chairman of the Rusal board, the HKEx spokesman said: “where a judgement by a competent court is relevant to the listing of a security/ company in Hong Kong, HKEx normally takes into account such information, as it does with respect to other relevant and useful information, in its decision-making process.”

The SFC’s Wheatley is keeping mum on the process. In a hint the London reports of the listing may be a balloon, Wheatley’s spokesman adds there will be no “specific confirmation about any alleged application with the SFC”. Asked how he responds to media reports that Hong Kong will be softer touch for Deripaska than London, he refused to comment. Two Credit Suisse executives have been identified as supervising the Rusal paperwork – Jan Przewozniak, head of risk in London, and Vikram Malhotra, head of new equity issues in Hong Kong. They also declined to answer questions.

Lawyers in London say that because the UK High Court Justice Christopher Clarke has ruled that Cherney’s pending claim to Rusal shares has “a reasonable prospect of success” — a ruling recently endorsed by the UK Court of Appeal — a substantial stake in the company must be reserved, and cannot be sold or diluted, until the trial is concluded. If Rusal is allowed to make its initial public offering, a Hong Kong securities lawyer said, then this is likely to take the form of an issue of new shares, which may dilute the value of the existing stakes. He believes the banks preparing the Rusal prospectus have “an affirmative duty” to disclose the Cherney claim.

According to one London securities lawyer, “the Hong Kong Exchange is in no better position to violate the law on fraud than the London Stock Exchange.”

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