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By John Helmer in Moscow

And the winner of the Slumdog Millionaire award goes to….Oleg Deripaska, Moscow oligarch, London mansion owner, and controlling shareholder of United Company Rusal, for announcing in Moscow over the weekend that he does not need any financial support from the state. Rusal, in which Deripaska holds a control stake of 56.8%, and which he currently runs as chief executive, is Russia’s monopoly producer of primary aluminium, bauxite, and alumina; in the global market for primary aluminium production, Rusal comes second after Rio Tinto.

The collapse of the aluminium price – the current London Metals Exchange cash price of $1,264 was last seen in 2002 – the full payout of Rusal’s cash dividends, and the liquidation of $200 million in cash, reported by the company in mid-2007, leaves Rusal in dire financial condition. As an unlisted private company, it issues no financial reports, and its spokesman Vera Kurochkina has repeatedly refused to answer questions.

Total debt requiring repayment was recently estimated by Victor Vekselberg, an 18.9% shareholder in Rusal, at $16.3 billion, of which $7 billion is reportedly owed to foreign banks, and $6.5 billion to Russian banks.

On the list of more than 70 foreign banks currently owed money by Rusal, the two largest are reported to be ABN Amro with exposure of $2.3 billion; and Natixis, owed $2.2 billion. ABN Amro’s obligations are now closely supervised by the UK and Netherlands governments; Natixis is indirectly controlled by the French government through its stakes in Natixis’s principal shareholders, Caisse d’Epargne and Banque Populaire.

While it is speculated – without independent corroboration or comment from the banks – that Rusal has been in technical default of loan agreements and loan covenants, the political and commercial implications of a formal default are international in scope. They are particularly problematic for Deripaska, who owns residences in England and France, but who is reportedly lacking the visas to enter these countries to negotiate on Rusal’s behalf.

A government to government negotiation over Rusal’s reorganization is complicated by several sensitive factors, the most important of which are Swiss federal court and UK High court rulings of 2008, which put public financial aid for Deripaska’s companies under legal scrutiny.

Accordingly, the international banks and Deripaska have been seeking an unprecedented document of legal indemnification and financial guarantee from the Russian government.

The Russian state bailout bank, Vnesheconombank (VEB), provided a short-term loan of $4.5 billion to Rusal last November, in order to prevent default to a group of foreign lenders , and the forfeit of Rusal’s 25% stake in Norilsk Nickel, Russia’s largest mining company. That loan, personally supervised by VEB chairman, Prime Minister Vladimir Putin, has triggered a faction fight between Putin, his deputy prime minister in charge of mining houses, Igor Sechin, and President Dmitri Medvedev, over allegations of favouritism and feather-bedding for Deripaska.

Rival mining oligarchs, Vladimir Potanin of Norilsk Nickel and Mikhail Prokhorov with a 14% stake in Rusal, have disclosed schemes to eliminate Deripaska’s stake entirely, and replace him with a combination of state shareholdings and themselves. Since the three – Deripaska, Potanin, and Prokhorov – have an insurmountable distrust of each other, bordering on personal loathing, they have each applied to Putin and Medvedev to decide the terms for Rusal’s reorganization. But as a source close to Potanin reports, “there is no government there.”

What he means is that Putin and Sechin are leading one faction of officials in one direction, and Medvedev and deputy prime minister Igor Shuvalov are taking their faction in another. Yet other public figures are now warning that both factions will be condemned, if they bail out oligarchs like Deripaska. Popular independent Yury Luzhkov, the Mayor of Moscow and senator in the upper house of the Russian parliament, warned on February 13 against those “captains [of industry]” who gambled the proceeds of their enterprises on stock markets, and invested “not in expansion of production, but in gaming, in the purchase of soccer teams, the purchase of yachts, the purchase of non-core shareholdings, and in the purchase of real estate.”

Sources confirm that Sechin has received detailed plans for a state takeover of Deripaska’s shareholding, and for reorganization of the company without him. One of the options considered involves substantial back-tax claims, but no concrete action in any direction has been signaled by the Russian government.

Sechin has publicly chided Deripaska and Rusal last week, saying: “I would like to point out that there is such a thing as the responsibility of shareholders – let them display their nous, inventiveness and energy…The company [Rusal] has not yet exhausted all the ways of solving its problem.”

Prokhorov’s advisors have also drafted plans for him to apply the pressure of the cash and shareholding obligations owed to him by Deripaska, and convert them into a takeover of Rusal. This is one of the shareholder schemes tabled for Sechin, and Putin, to decide.

On January 20, Deripaska’s spokesman has confirmed, he applied to Medvedev for a rescue that would have converted Rusal’s indebtedness to state banks into state preference shares. A leak into the Russian press of the contents of this letter was intended to undermine the deal, and the government financing Deripaska asked for failed to materialize. Instead, he has asked Medvedev for a public show of personal support, accompanied by a secret state undertaking to be drafted for the international banks.

Medvedev appeared to be going along with the first part, when he was reported as responding to a speech by Deripaska last week in Irkutsk: “I fully agree with what Oleg Vladimirovich [Deripaska] said about situations when the crisis leads to settling scores… There should be no situations when different structures’ rivalry can lead to the collapse of an entire group of companies…Such actions should get adequate reaction from the state. For that purpose we have one serious institution, the government of the Russian Federation … There are situations when power must be used.”

Can Medvedev risk his power overruling Putin, in order to authorize a state guarantee to protect Rusal from bankruptcy, as well as Deripaska from the loss of his personal shareholding control? The domino effect of bankruptcy for Rusal has become international in scope, but the strategic importance of Deripaska – estimated to have drawn at least $10 billion in personal dividends from Rusal since 2001 – is less certain.

According to a report by the Financial Times, which has been close to Deripaska in the past, the Kremlin indemnity and guarantee letter is the precondition for the international banks to accept a “standstill agreement”, which would stave off default action, postpone loan repayments, and allow more time for Deripaska to control the restructuring of Rusal.

Deripaska has applied for such a letter of Kremlin guarantee once before, and was refused. The letter was revealed by one of the bankers advising Rusal on its attempt to list its shares on the London Stock Exchange in the first half of 2007. At the time, the banker said, the letter was requested as a government pledge not to nationalize Rusal assets, thereby securing foreign investors and minority shareholders against the possibility of tax or other claims. In essence, the letter was an attempt by Deripaska to indemnify himself and Rusal from prosecution by the Russian authorities in future.

The Kremlin, then led by President Vladimir Putin, did not issue the letter, according to the bank source

At the same time, according to a source close to the UK Financial Service Authority (FSA), a UK government review of Deripaska’s business activities was conducted, and a substantial file prepared by the FSA to decide whether Rusal would be authorized to list its shares on the London Stock Exchange (LSE). The existence of the FSA file is confirmed. Whether the FSA decided against approval, or Rusal decided not to lodge a formal application before a listing decision was reached, is not clear. The outcome is certain. There was no LSE listing for Rusal.

A year later, on July 3, 2008, Justice Christopher Clark ruled that Michael Cherney (Mikhail Chernoy), had “a reasonable prospect of success” in substantiating his claim that Deripaska had violated his contract and trusteeship obligations for at least 20% of the original Rusal shareholding Deripaska had told the market he owned himself. Deripaska is appealing against the ruling in the UK Court of Appeal. He also denies the evidence presented in the High Court means what Cherney says it means – and what Justice Clark ruled it might.

Cherney’s evidence, and Clark’s ruling, cast a long shadow. They require Rusal to show a multi-billion dollar set-aside in its balance-sheets for the contingency that the High Court may order Deripaska to repay Cherney.

Cherney’s evidence and Clark’s ruling also oblige the European governments, now inextricably involved in the banking decisions on a Rusal bailout, to consider whether they can lawfully extend public money or financial guarantees to cover the refinancing of bank loans that are secured by Rusal assets, which Deripaska administers as chief executive, and control of which Deripaska has told the High Court he is entitled to exercise. Even if a letter from the Kremlin is issued, it may prove, legally speaking and outside Russian jurisdiction, to be no more than a fig-leaf.

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