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By John Helmer in Moscow

The torch that Oleg Deripaska, controlling shareholder of United Company Rusal, is trying to pass to Alexander Bulygin, Rusal’s chief executive, is proving to be a hot potato.

The Wall Street Journal reported this week that in its strategy for listing Rusal shares later this year on the London Stock Exchange, Bulygin has been designated to draw attention away from Deripaska in public, and is now identified by a company spokesman as “a key strategic decision maker for the company”. Watch that indefinite article.

The Journal also reported that Bulygin is having difficulty dealing with two gaffes which Deripaska made in an interview with the Financial Times early in July, when he claimed that Michael Cherney “had no relation to my business”; and that “if the state says we need to give it [Rusal] up, we’ll give it up.” Deripaska was responding to the two risks which industry analysts and financial advisors to Rusal have flagged as the principal obstacles to a successful LSE listing of the company — Cherney’s claim, currently in litigation in the UK High Court, that he owns 20% of Deripaska’s stake in the company; and the possibility that the Kremlin may have its own claim on Rusal.

Bulygin, 38, has been Deripaska’s subordinate in the transition from Siberian Aluminium’s (Sibal) modest collection of Russian smelters, to the formation of Russian Aluminium (Rusal), first as a vertically integrated bauxite to finished aluminium producer, and then as a primary aluminium specialist. Bulygin’s latest statements suggest he hopes to acquire non-aluminium mining and metal assets, if Rusal’s initial public offering (IPO) generates a high enough share price and swap value.

Along the way, however, Bulygin has provided considerable evidence of his own direct ties to Cherney (Mikhail Chernoy). Sources with access to the documents claim that Bulygin has held a power of attorney signed by Cherney, and signed financial reports on Rusal’s cashflows and financial performance to him. Bulygin’s role in the alleged cover-up of Cherney’s stake in the Rusal group appears to extend to the negotiations he led with Alcoa of the US for the sale of two aluminium rolling plants Rusal then owned. The plants — Samara Metallurgical Plant in Samara region and Belaya Kalitva Metallurgical Plant — were offered to Alcoa at the start of 2004, but Russian government approval stalled the sale for almost a year, before it went through. No price was confirmed publicly, but market sources estimated it at $200-$250 million.

Samara Metallurgical is one of the world’s largest producers of aluminium semi-fabricates, sheet products, forgings and castings, with a design capacity of 800,000 tonnes per annum. In 1998 it was producing at just 10% of that capacity. Output was raised to 199,404 tonnes in 2002, but in 2003, in the year before Bulygin started negotiating with Alain Belda of Alcoa, Rusal admitted that production fell by 13% to just under 174,000 tonnes. That was just 22% of capacity. The Belaya Kalitva Metallurgical Plant is much smaller, with design capacity for 250,000 tons of rolled products. Production in 2003 was just 41,430 tons; that was up 8% on the 2002 result, but just 17% of capacity.

According to a website posting by Bulygin at the time of the Alcoa deal, “this transaction arises from Rusal’s strategy to focus on its strengths upstream, as a leading producer of primary aluminum and alloys.”

In an 8-page claim which Cherney filed in the High Court on November 24, 2006, Cherney alleges that “it was an implied term of the agreement that Mr Deripaska would not remove, or permit or procure the removal of, assets from SibAl or RusAl for no (or no adequate) consideration, or otherwise take steps calculated to reduce the value of Mr Cherney’s entitlements under the Agreement.” The sale to Alcoa is identified in the claim. “Further, to the extent that Mr Deripaska has procured…that the corporate and/or asset-holding structure of RusAl (further or alternatively SibAl) be re-arranged so as to remove substantial assets for inadequate consideration into the ownership, directly or indirectl, of Mr Deripaska and thereby diminisdh the value of the entitlements of Mr Cherney (including at least two metallurgy plants which were apparently transferred by Mr Deripaska out of the ownership of Rusal before being sold to a US purchaser) Mr Deripaska holds all such assets and/or the proceeds thereof subject to a trust and/or lien in favour of Cherney.”

In his negotiations with Alcoa, and in the warranties and undertakings that were required by Alcoa’s lawyers for clean title to the two rolling mills, Bulygin confirmed a position which has now come under legal challenge by Cherney. The New York-based Alcoa, the world’s largest producer of aluminium, thus holds documents which may become the target of the London litigation. They are also relevant to the undertakings which Bulygin and Deripaska have given to US Government investigators relating to the history of their business, and their ongoing obligations. The Wall Street Journal has reported that Deripaska lost his US entry visa last year over the veracity of statements he made to the Federal Bureau of Investigation.

Bulygin still holds his US visa, and he used it to appear at presentations Rusal arranged for fund managers in Boston and New York in June. Bulygin’s veracity has been challenged in a UK High Court ruling of November 2003, when Rusal’s Guinean bauxite mining subsidiary was sued by Tekron, a company belonging to three Guinean advisors. In his ruling in favour of Tekron, Justice Jack revealed that Bulygin had written a letter to the Guinean President asking for his help, and intimating corruption on the part of those then suing Rusal. “It is apparent from these matters,” wrote the judge, “that under the threat of litigation in London, Rusal have done what they can to blacken the names of Tekron and its principals in Guinea. On the evidence before me, they have not only failed, but have secured indirect evidence that the government considers that Tekron have behaved properly in its relations with the government.”

In unrelated High Court proceedings in London last year, which dealt with allegations of corruption in the takeover of the Tajikistan Aluminium Plant, Bulygin was also accused of improper conduct. Mineweb has reported that part of that case was settled out of court early this year. A fresh complaint, making similar allegations, was filed in the British Virgin Islands by the Tajik plant last month.

Cherney’s High Court filing details a series of meetings between Cherney and Deripaska from the date of their initial signing in 2001 to a meeting in Kiev in late 2005, and then more recent contacts. During this time, the claim form alleges, “Mr Deripaska assured Mr Cherney repeatedly that it was only a matter of time before he fulfilled his obligations in respect of the second stage [of the March 10, 2001, Agreement], and that he was examining the best means of doing so.” Cherney’s legal brief then alleges that in April of 2006 Deripaska “repudiated his obligations under the Agreement. Specifically….[he] publicly announced that…there were no outstanding liabilities to Mr Cherney…[and] that Mr Deripaska was the only beneficial shareholder in RusAl.”

The document does not set a value on the total of the claims, leaving to the High Court to rule on Cherney’s ownership of a 20% stake in Deripaska’s shareholding in Rusal; plus “what has happened to any dividends or other monies or benefits taken from RusAl by Mr Deripaska (directly or indirectly)…[including] such dividends, other monies or benefits…”

To date, Rusal has not revealed enough financial information to show what taxes the company has paid each year; what net income it received; and what dividends were paid to Deripaska. The only financial report ever produced on Rusal by a Moscow investment institution — written by Vladimir Titkov for Renaissance Capital, before Titkov joined Rusal — estimated pre-tax profit of $900 million on revenues of $4.2 billion in 2001; $800 million on $4.3 billion in 2002. Assuming that a single-digit level of tax has been maintained since then — this was disclosed as 2% of sales revenues in a tax agency report to the Prime Ministry in September 2004 — Rusal’s tax payments may have been running at about $20 million for every billion dollars of revenues. If Titkov — now a director on the new Rusal board — estimated correctly, Rusal’s pre-tax profits have been running at about 20% of revenues, or about $200 million per revenue billion. Subtract the estimated tax from this figure, and Deripaska as sole shareholder of the private company may have considered himself entitled to 100% of an estimated $180 million per revenue billion per year.

If Cherney’s claim is upheld by the High Court, then his 20% entitlement to Rusal divdends may be calculated at $36 million per revenue billion per year since 2001. Again, lack of public accounting by Rusal to date hampers estimation. But a rough figure suggests that Cherney’s dividend claim amounts to more than $1.1 billion through the end of last year. Adding to his claim a share of the mill sale to Alcoa would generate another $40 million. Cherney’s equity claim depends, of course, on the market valuation which Rusal achieves at IPO: if Rusal achieves its $30 billion target, then Cherney’s claim on Deripaska’s 66% stake would be worth $3.96 billion. Bankers advising Rusal have told Mineweb that calculating Rusal’s value will require a discount for asset risk — that covers both Cherney’s claim, and the Kremlin’s. However, there are no published estimates to date of what Rusal may owe to Cherney in past-due dividends.

The Particulars of Claim document, filed by Cherney, also reveals some untold history of Deripaska’s business dealings with Roman Abramovich and Boris Berezovsky. According to Cherney’s account, Berezovsky and Abramovich shared a 50% stake in Rusal, which was formed in 2001, while Deripaska held the other 50%. Deripaska has since bought out the 50%, but Berezovsky has publicly accused Abramovich of cutting him out of their deal. Ïn 2002 and 2003, according to Cherney’s court filing, “the aluminium company Sual had offered to pay US$3 billion for 50% of the shares in RusAl.” According to Cherney, he “was contemplating selling his interest and exiting the aluminium business”.

The implication is that, between 2001 and 2004, Deripaska was in serious danger of losing control of his aluminium business, which, in turn, was generating the cash for his holding, Basic Element, to build up its portfolio of energy, construction and automotive assets. Had Cherney sold out his 20% stake, and Berezovsky prevailed over Abramovich, Deripaska might have been left holding the bag — a minority stake of not more than 30% in a Russian company controlled by men not famous for protecting minority shareholder rights. At this point, there is only Cherney’s court claims, and Deripaska’s denial, of what happened. But for the first time, the High Court recital suggests the reason why Deripaska needed Cherney for so long; and why, according to the court documents, he strung him along until 2006, when Deripaska felt confident, at last, that he had disposed of all potential challengers to his control of Rusal.

This alleged history is telling in another way. Whether or not Cherney’s claim goes to trial before the IPO takes place, the banks and institutions invited to buy a minority stake as Deripaska’s partner will want to read what the history of Deripaska’s partnerships reveals about the value of the promises he makes, when he is vulnerable; and their value when he is on top. Berezovsky is a talkative man, who is readily believed in London. He too may have something to add on this score before long.

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