MOSCOW (Mineweb.com) -According to the Aesop fable, an ass and a dog happened to be travelling the same road together, when they found a sealed document on the ground. The ass picked it up; broke the seal; and read it out, as the dog listened. The text was all about hay, barley, and straw. The dog grew bored, and told the ass to skip to the part discussing meat and bones. But the ass could find nothing like that, and said so. The dog replied: “Throw the paper away. It’s completely useless.”
The moral of the tale is that we enjoy reading or reporting only what feeds our appetite – though Aesop thought this was too obvious to spell it out himself. It is, however, a little, but unlearned lesson which Oleg Deripaska and Victor Vekselberg – the Russian equivalents of a new fable – have been performing in recent days, with the newspaper talk they have inspired of a Kremlin-approved merger between their Russian bauxite mining, alumina refining, and aluminium assets, to be paid for, or supplemented by, Swiss metals trader, Glencore.
According to the current press leaks, the shareholding of the new post-merger company would be structured to give Deripaska 64.5% of the shares; Vekselberg 21.5% plus a blocking share; and Glencore 14%. The reports claim Brian Gilbertson, the SUAL chief executive, would be appointed chairman to give respectability to the enterprise; Alexander Bulygin, Rusal’s chief executive, would run the new company as he runs Rusai. Industry analyst Rob Edwards values the combined assets of the proposed company at $6.2 billion for SUAL; $18.7 billion for Rusal; and $4 billion for the Glencore alumina properties in Ireland, Jamaica, and Sardinia, if they are to be included. Altogether, $28.9 billion. If such a consolidation materializes, it would have rated alumina production of 11 million tons per annum, and 3.8 million tons of aluminium. The latter beats Alcoa of the US, currently world aluminium leader, by a trifle under 300,000 tons.
To be fair, Vekselberg is not promoting the mega-merger at all. Rusal experts have been seen inspecting and valuing smelters belonging to Siberian Ural Aluminium (SUAL), which Vekselberg owns, and which Gilbertson manages. Gilbertson has been talking up a big deal for SUAL in the not too distant future; although he’s been doing that ever since Vekselberg engaged him to achieve just that, two years ago. Vekselberg’s spokesman, Andrei Shtorkh, is emphatic for the record that “we are not commenting on rumours at all – that means the rumours and any of their variants.” Privately, however, the Vekselberg group has not concealed its concern that the Kremlin is contemplating a buy-out of the two Russian aluminium producers, and a consolidation of their assets into a single state-controlled enterprise. Shtorkh acknowledges that this is “really a matter of concern, not only for SUAL, but for any private business, for what this process is – deprivatization.” In short, Vekselberg is playing the dog of the fable. He doesn’t see in the reported merger the value he wants for his appetite or assets. He may be hinting that the reports of the merger are intended to pre¬empt, or dissuade, the Kremlin from making its own consolidation move. In Moscow, that’s not a political game anyone wants to admit to playing – unless he is certain of winning. Apparently Vekselberg is not.
That Vekselberg has been ready to sell the privately structured SUAL has been evident for some time. A year ago, he gave up to Deripaska half of his interest in the Komi aluminium project – the major new bauxite mine in Russia’s northwest, which SUAL was having difficulty developing in the face of resistance from the state electricity and gas monopolies. Gilbertson too has been unable to deliver on his assignment – the sale of SUAL to a major international company, or an initial public offering (IPO) of SUAL shares on an international exchange. Shtorkh has conceded that if the Russian government were to conclude that aluminium is little more than a solid form of electricity -bauxite refined into alumina is then electrolyzed into aluminium – then President Vladimir Putin might be persuaded to think that state-owned gas should not power state-owned electricity plants in order to supply power to alumina refineries and aluminium smelters at prices that subsidize the profits of the private aluminium companies trading their metal abroad.
Last October, it was clear that Deripaska faced the same problem. His way out was to beat the Kremlin to the punch by launching Rusal’s shares on the London Stock Exchange. But that move has been a failure. Rusal let it be known this year that it is no longer planning an IPO. It has never explained why. According to the latest press leaks, in three years’ time Deripaska would have the option to buy Glencore out of the proposed mega-company, and then issue an IPO. An IPO postponed for that far into the future isn’t an IPO at all.
Borrowing as much as Rusal does – with debt of about $2.7 billion at present, set off against annual revenues of almost $7 billion – is relatively simple to secure for bankers in the booming aluminium market. But selling shares in an asset structure, whose owners, or former owners, claim the assets were stolen from them; and whose cashflow is subject to the possibility of multi-billion dollar Russian tax claims, is difficult. Rusal has paid off in secret settlements many of the asset and contract claims that have reached the courts of the US, the UK, Switzerland, and elsewhere. Each claim was called groundless and extortionate by Rusal, when filed. But the settlements have been paid, nonetheless. And the claimants keep coming. Not the least of these is Mikhail Chernoy, who put Deripaska in business, and who continues to claim, with pending legal action in the UK, that partial payments by Deripaska for his stake in Rusal fall short by about $3 billion.
More sensitive even than Chernoy’s claims was the ruling last month by the UK High Court that it will take jurisdiction over Rusal for trial on charges that it, its chief executive Alexander Bulygin, and Deripaska himself seized control of the Tajikistan Aluminium Plant (TadAZ) at the end of 2004 by a combination of fraud and corruption. This case is important, because it is the first time an international court of repute has asserted the right to take Deripaska and his men to trial. The pressure has forced Deripaska himself to cut short his visits to England to a bare minimum, and to claim that the Belgrave Square residence and country house he bought there are not lived in by himself. How damaging a trial would be is already indicated by the ruling of a London arbitration tribunal, which reviewed much of the same evidence, ruling last November that the Deripaska-run TadAZ had violated trading contracts with the powerful Norwegian aluminium producer, Norsk Hydro. The tribunal awarded $145 million to Hydro, while TadAZ and Rusal have sought UK court protection to keep details of the arbitration case secret. Deripaska has to bet that a UK High Court judge would come to the same conclusions about the TadAZ takeover as the arbitrators.
The High Court judgement puts all of Rusal’s bankers on notice that the metal which secures their loans could be subject to activities that a London trial would find unlawful. This is not (yet) a reason to reopen the loan contracts, let alone call in the borrowings. But the growing evidence of a pattern of corruption in Tajikistan creates fresh problems for the two international banks – the European Bank for Reconstruction and Development and the International Finance Corporation of the World Bank – which have so far been endorsing Deripaska’s reputation, as well as that of his allies in Dushanbe, the Tajik capital, headed by President Emomali Rahmonov. The Deripaska pattern is also documented in other countries, according to a recent US court filing alleging similar misdeeds in the takeover of Nigeria’s aluminium smelter.
A direct sale of Rusal to the Kremlin – I mean the Russian state – would be more straightforward to accomplish than selling an IPO to foreign investors. For one thing, there are no international regulations, no disclosure requirements, no accounting rules, no transparency required. The state buyer is also in a position to agree relatively easily to the asking price, if international trader-lenders like Glencore are willing to put up the loan money for the buy-out, secured by a lengthy offtake agreement for future aluminium deliveries. Securing multi-billion dollar loans for a deal like this has already proved swift and uncomplicated for the banks when the state-owned oil company Rosneft took over Yukos; and when Gazprom bought Roman Abramovich and the Millhouse holding out of Sibneft. You might say that so long as Putin appears to be pledging the full value of the state’s credit, and aluminium prices can be expected to remain high enough for the payback period, then Glencore and its allied banks would be only too happy to open their ATMs,
But this is not what the leaked version of the merger suggests should happen. There is no telling what the President told Deripaska when they met on August 2. The Kremlin-issued “excerpts” report only a discussion of car-building, with Putin quizzing Deripaska on the difference between promise and performance at his GAZ group. Whether Deripaska was seeking permission, or receiving instructions, on the aluminium asset consolidation won’t be clear for a while. But it will be clear soon enough, and the value of the meeting may turn out to be no better for Deripaska than the session in May which Putin had with steelmaker Alexei Mordashov. That was just before Mordashov launched his hapless bid for a “merger” with Arcelor.
Like Vekselberg, Deripaska is exposed to the conclusion of the chief Russian policymaker that everyone would be better off if their aluminium assets were consolidated under control that was invulnerable to offshore supply manipulation, paid taxes, and complied with the law. For years Deripaska’s cashflow managers, led by Gulzhan Moldazhanova, have been encumbering the Russian assets with debt, passing Rusal’s cash through to the holding company for asset purchases in other sectors; and for securing profits abroad, in part by the creation of a parallel bauxite-to-metal production chain that could not be taken over in a crunch by the Kremlin.
Deripaska produces aluminium metal in Russian smelters, but as his former spokesman, Yevgenia Harrison once admitted, most of the value (read profit) in Rusal is earned offshore. “To a very large extent,” she said, “we are processors of imported raw materials. Thus, a relatively large portion of Rusal’s value added is created outside of the Russian Federation.”
This is done through what are known in the metals trade as tolling schemes. Tolling is a chain of contracts, according to which raw materials, such as alumina, are supplied to a smelter, which electrolyzes it into metal. This is then returned to the owner of the alumina and the trading chain. In Russia, this scheme eliminates 18% internal value-added tax and other taxes payable when the alumina enters the country, and the metal leaves it. But if the scheme is owned and secretly controlled by a single Russian owner, with the objective of avoiding tax, then, according to the letter of the law, it is illegal. The perpetrator of such a scheme could thus be vulnerable to back-tax claims, penalties, and interest.
Other tax minimization schemes known to have been used by Rusal, and investigated by Russian government agencies, include the registration of trading companies handling the metal in Russia in the Chukotka region, which offered tax relief in return for local investments that were never made.
The Kremlin may not want to put Deripaska on trial for tax evasion, as it did to Mikhail Khodorkovsky, owner of the Yukos oil company. But there is no reason to believe that Kremlin approval for merging Rusal and SUAL also means carte-blanche for Deripaska to run the new company on the same cashflow basis – or for Gilbertson working for a new master to do the same. Not a single publication of the rumoured Kremlin approval reveals that Deripaska (or his man Bulygin) has been approved as the new manager. As in Aesop’s fable, it is, of course, in the ass’s interest to pick up and put out only what suits his stomach.
In the current uncertain situation for Vekselberg and Deripaska, both have a keen interest in jacking up the price of a sale; declaring grand promises of investment to the future when they will have no obligation to pay; and reducing the amount of the buy-out price they would be obliged, according to Russian business practice, to share with others. Creating one variant of the mega-company at a value of $28.9 billion – with Glencore contributing alumina assets, not financing – could be a blocking move, making a Kremlin plan for consolidation too expensive to implement, as well as too slow.
Vekselberg is at a personal disadvantage with the Kremlin, compared to Deripaska; for example, Vekselberg’s wife is not related to the Yeltsin family as is Deripaska’s. Also, so far as is known, Vekselberg’s offer to exhibit his $100 million collection of Faberge eggs throughout Russia has been less appreciated than Deripaska’s hosting of Tatiana Dyachenko, Yeltsin’s daughter, and her husband, Valentin Yurnashev, at his $100 million collection of English real estate. However, Putin’s personal relations with Deripaska have been cool, and in the two meetings the Kremlin has confirmed as taking place -the recent one just mentioned, and one a year earlier – there is no sign that Deripaska has the approval he wants, and needs.
On the other hand, Vekselberg has the more lucrative oil and gas business -that, too, subject to US court trial on charges of grand larceny and fraud – than Deripaska, whose holding company is only starting to amass energy assets, and whose ambition to own oil and gold is not much more than that. Vekselberg can thus afford to exit from SUAL more easily than Deripaska from Rusal, because Rusal is the cashcow on which Deripaska’s foreign and domestic assets depend.
Those other Russian assets are also subject to domestic opposition and Kremlin counter-attack, alleging illegal takeover tactics in the paper and pulp sector; and price-rigging in the cement sector. In the latter case, a Moscow court recently upheld a price-rigging conviction of Euro Cement, a Deripaska-owned asset which is the dominant supplier to the Russian residential construction industry. Convictions of this kind by the timorous Federal Anti-Monopoly Service (FAS) are almost unprecedented; the order for a fine of Rb267 million ($10 million) unheard of. If Deripaska had the clout his promotional media claim, the FAS would have settled for a promise to curb cement price increases. Instead, the FAS accepted a reduction in the payback from Rb1.9 billion ($71.2 million), plus the promise of EuroCement to invest Rb10 billion ($375 million).
Two months ago, Oleg Deripaska summoned the New York Times to an interview, at which he proclaimed he was a new man, who had turned over a new leaf. More than that, he told the newspaper, he was “going global”, on his way to surpassing Alcoa, and becoming the world’s largest aluminium producer. Rarely has quite so much conviction of success served as camouflage for quite so much failure and uncertainty. In the language godfather Chernoy uses, that’s chutzpa. For the one question neither Deripaska’s promotion team, nor the anonymous Kremlin approvalists cited in the press to date have answered is why Putin would agree to allowing the largest tax evasion scheme in the Russian metals business to be expanded, under the same management.
by John Helmer - Thursday, August 31st, 2006
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