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By John Helmer in Moscow

It is commonplace for foxes to take chickens where they find them. It is rare for the fox to stay on, and appoint himself chief executive of the hen-house. It is unprecedented for the fox to sell the bird carcasses for a premium to the poulterer.

From inside the coop, blood and feathers are now flying at one of the world’s largest miners of bauxite, and producers of alumina and aluminium — United Company Rusal. After failing in the autumn to persuade Chinese investors to rescue the company, Oleg Deripaska, the controlling shareholder, is close to handing over his control stake to the Kremlin on highly lucrative terms — for himself.

Unexpectedly on Sunday, Rusal announced on its website that Deripaska has replaced Alexander Bulygin, his veteran administrator and loyal friend, as the chief executive of UC Rusal. Bulygin has been demoted into a non-executive role, supervising the board of one of Deripaska’s many sub-holdings, En+.

The company announcement cites Deripaska as saying: “Alexander Bulygin has headed RUSAL for more than five years. Under his management the company, which was the largest Russian aluminium producer, became the leader of the world’s aluminium industry, a truly global company with diversified and one of the most competitive operations in the global metal and mining sector. I am confident that Alexander’s experience in consolidating assets and executing large deals will be applied in full in his new role.”

The website also claimed that Deripaska “was already the CEO of RUSAL for a three year period after the company was established in 2000. In the following years he took an active part in the company’s development as a member of the Board of Directors. Now his role as CEO will be focused on providing for the sustainable development of the company under the conditions of the global financial crisis and implementing a series of crisis management measures.”

In point of fact, Bulygin was operationally in charge of the company from before 2000, while Deripaska concentrated on asset consolidation by ousting Mikhail Chernoy (Michael Cherney), then a 20% owner of Deripaska’s stake in the company; preventing Chernoy selling his stake to rivals for control of the company, Victor Vekselberg, Roman Abramovich, and Boris Berezovsky; and then raising the cash to buy out Abramovich’s half-share of Rusal, before Abramovich did the same (or worse) to him.

For Deripaska to take operational control of Rusal away from Bulygin at this stage means either that the two have started fighting between themselves; or that Deripaska is desperate to keep cash out of Rusal himself to stave off shareholder and banker demands for payment. They may amount to the same thing. There is also the possibility that Bulygin has made independent contact with Chernoy and other shareholders. A source who was close to them both, inside Rusal in the past, says that Bulygin always tried to preserve an amicable relationship with Chernoy. Deripaska claims that he has had no friendly business relations with Chernoy at all.

A fight at the top of Rusal has occurred before, when Bulygin and Gulzhan Moldazhanova clashed; and the latter — the person Deripaska has trusted to supervise Rusal’s cashflow — was ousted at Bulygin’s insistence, and forced to take a position at Deripaska’s holding, Basic Element.

Less than a month ago, Deripaska also had a falling-out with Mikhail Prokhorov, the former controlling shareholder of Norilsk Nickel. Last April, Prokhorov agreed to become Deripaska’s partner for a hostile takeover of Norilsk Nickel. That scheme, designed to allow privately-owned Rusal to secure a Moscow and London listing by reversing into Norilsk Nickel, has been vetoed by the Kremlin.

On December 26, following the vote for the new Norilsk Nickel board, Prokhorov, whose candidacy was not endorsed by Rusal and failed to get elected, accused Deripaska of violating the terms of their shareholding agreement. Deripaska has also defaulted on a $700 million payment he owed Prokhorov in October, and is obliged to pay at least $350 million to him next month, plus another $2.7 billion, the cash remainder of the Norilsk Nickel acquisition of last year, in April, or thereabouts. Prokhorov holds 14% of Rusal.

The other minority shareholders, to whom Deripaska has also given much the same signed obligation he signed to Chernoy (international share listing or cash buyout), are Victor Vekselberg and Len Blavatnik (with 18.9% of Rusal), and Glencore (10.3%).

Chernoy was the first of Deripaska’s stakeholders to charge him with violating his obligations. That case is to go to trial in the UK High Court, if Deripaska’s appeal is rejected in mid-year.

The other shareholders are now negotiating with Russian government officials to conserve the value in their stake, if Rusal itself becomes insolvent, and seeks a state bank bailout in return for cover for debts now estimated to have jumped from $7.5 billion, disclosed by Rusal in London in mid-2007, to more than $14 billion now.

Deputy Prime Minister Victor Sechin is also considering several options which would liqudidate Deripaska’s 56.8% entirely, and oblige him to transfer his stake to a state-designated company. Deripaska and a spokesman admitted publicly less than a month ago that he is seeking to sell stakes in
“practically all” his companies, including Rusal.

Sechin holds considerable power over the terms of such a deal. According to a Russian government tax report of 2004, Rusal has been paying one of the lowest rates of tax of any major corporation in the country. This is based on interpretation of the legality of tolling contracts, which Rusal uses. If the government were to conclude these were violations of Russian transfer pricing law, Rusal may face claims of several billion dollars.

Kremlin officials have also been curious to know what has happened to Rusal’s profits during the aluminium boom. Although Rusal issues no audited financial reports, it is possible to calculate these from revenue figures issued by Rusal; estimates of earnings before income tax, depreciation and amortization (Ebitda) provided by Vladimir Titkov, an En+ board director; and the tax rate disclosed by the government tax report of 2004. Deripaska appears to have drawn at least $10 billion in personal proceeds out of Rusal since 2001.

Reports from Alfa Bank and UnicreditAton, two Moscow investment houses, estimate that Rusal’s debts now total between $17 billion and $18 billion. “While Rusal is not a public company, and we do not have access to information on its debt or finances,” Alfa Bank analyst Barry Ehrlich reported recently, “we speculate that its fair enterprise value [EV] may be near or even below the current consolidated debt level of the company and its owner.”

What has been one of the world’s largest miners of bauxite and producers of alumina and aluminium, has collapsed faster and further than the LME cash price of aluminium, which now stands at $1,445 per tonne; that marks a drop of 45% since October. Industry analysts believe the current cost of production at Rusal’s Russian smelters is certainly “not much less than the current aluminum price”, and possibly as high as $2,000 per tonne.

If Deripaska disagreed with Bulygin over what is to be done next, and Deripaska ousted him for not seeing eye to eye, there is going to a problem for the international banks to negotiate with Rusal. For Deripaska is barred from entering the two international markets, where Rusal’s creditors are based — New York and London. Bulygin, on the other hand, as chairman of En+, nominal holder of Deripaska’s 56.8% Rusal stake, holds the visas, but he appears to have lost Deripaska’s confidence.

According to Marat Gabitov, metals analyst of UnicreditAton in Moscow, Rusal is at or close to loss-making for the production of aluminium, and its debts have reduced EV to zero. This is the end-game for Deripaska. His only profitable way out is to persuade his friends in government to let him sell to them on terms that leave him with no debt; no obligations; equity in a new state consolidation; and the right to keep the cash he has already accumulated.

The generosity of these terms is now up to Sechin. Gabitov reckons the “government would be much more generous to Rusal’s shareholders. If the government takes the 25% stake in Norilsk for the whole of $7.5 billion in Rusal’s debt, it would be very positive for the company and its shareholders.”

If this is the outcome Deripaska is playing for, there may be just a fortnight to wait to see how the Kremlin reacts. That was the time assigned to Sechin at a Kremlin meeting last week to review the debt and equity reorganization options for Rusal, Norilsk Nickel, and the private conflomeration of iron-ore mines and steelmills, controlled by Alisher Usmanov, called Metalloinvest. President Dmitry Medvedev presided at the meeting on January 13.

Another meeting with Sechin has been called for January 20, when an even more grandiose scheme of swapping Russian corporate debt for state equity is reportedly to be tabled.

Spokesman for Deripaska, En+ and Rusal were asked ahead of publication to say if Bulygin’s removal from direct control over Rusal, and his replacement by Deripaska, reflect a difference of viewpoint on how to resolve Rusal’s financial problems. They were also asked to estimate Rusal’s current debt and cash position, and the cost of aluminium production at Rusal’s Russian smelters. Sergei Rybak, Deripaska’s spokesman at Basic Element, said these were questions for Rusal, not for the holding. Pyotr Litov at En+ acknowledged receiving the questions, but said they were for Rusal to answer. At Rusal Vera Kurochkina refused to answer a telephone-call, and insisted on the questions being submitted by email. She then did not respond.

All three also refused to confirm the UK and US reports indicating that Deripaska holds no current entry visa for the United States or the United Kingdom.

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