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By John Helmer in Moscow

The UK High Court has opened for the first time documents showing how Deripaska created his empire.

It was the 19th century poet Robert Browning, who claimed: “A man’s reach should exceed his grasp, or what’s a heaven for?” If Oleg Deripaska is a romantic overreacher like that, the UK High Court may shortly acquaint him with the tougher, older admonition that it is easier for a camel to pass through the eye of a needle, than for a rich man to enter the kingdom of heaven.

Deripaska’s new problem is that, for the first time ever, documentary evidence has been submitted to an international court suggesting how Deripaska, on what purports to be his own signature and instruction, moved cash out of his aluminium smelters in Russia into an international shareholding scheme of trusts, holding companies, cutouts, trading units, and production assets. Consolidating and controlling these, as he went along, Deripaska created a series of super-holdings; these have now evolved into Basic Element, Deripaska’s Moscow holding.

The evidence is part of an amended complaint filed in the London court by lawyers for Michael Cherney (Mikhail Chernoy). He is charging Deripaska with violating the terms of their partnership agreement; diverting money and assets out of the aluminium business Cherney had created; emptying Cherney’s stake in the Radom super-holding of its value; and ultimately depriving Cherney of his buyout share, first signed by the two men in March 2001, and tied to a larger set of agreements for enforcement in London.

In the process of substantiating how Deripaska took control of Russian Aluminium (Rusal), the High Court evidence indicates, also for the first time in the public record, a pattern of English language communications and resort to UK jurisdiction for the interpretation and enforcement of the contracts on which the Cherney-Deripaska asset holding was based; and of which Rusal was, and still is, a part. Also, for Cherney, the documents appear to substantiate the way in which his 50% stake in the first super-holding called the Radom Fund was attacked by Deripaska, who tried to close Radom down at the end of 2004. Frustrated by the resistance, Deripaska then moved to concentrate all assets and 100% of the shareholding in the Basic Element holding. The High Court has been asked to rule on whether this exposes all of Deripaska’s assets in the holding to the validity of Cherney’s and Deripaska’s agreements, and the multi-billion dollar division of value they require.

The offshore evidence has long proved to be beyond the reach of the Russian tax authorities, and of those Kremlin factions, who have tried from time to time to challenge the tax optimization practices of Rusal and Basic Element. But just how the Kremlin’s will may be changing has been signalled by a tax claim against Basic Element, filed last July, by the Federal Tax Service in Moscow. This charged that the holding had underpaid taxes for 2003 and 2004. The claim is for just Rb100 million ($4 million). The tax service won the first round, and the ruling has gone on appeal to the Moscow Arbitration Court, which has been in hearings on the case for the past two weeks.

It’s the tax scheme, rather than the amount of the claim, that is significant as the issue moves up the Russian court hierarchy. For according to court documents reported by the Russian press, Basic Element used a complex promissory-note scheme with the aid of fly-by-night companies to understate and shield its profit. It is also alleged that similar cutouts were used to receive payments for purposes the tax inspectorate believes were fabricated. Basic Element denies wrongdoing.

Industry and political analysts in Moscow believe the claim may be a test case, initiated by Deripaska’s foes in the Kremlin, who want to challenge much bigger transactions he is attempting at the moment – a proposed initial public offering and international share listing for United Company Rusal with a target of $30 billion to $60 billion in market cap; the $6 million takeover of oilfield assets belonging to Russneft, whose owner, Mikhail Gusteriyev, has fled to London for asylum; and the $4.4 billion purchase of a stake in Norilsk Nickel held by one of its feuding owners: http://www.mineweb.com/mineweb/view/mineweb/en/page67?oid=42218&sn=Detail

Cherney’s latest London filing was made on December 2. The immediate purpose is to vault the antiquated writ rules of the court, and obtain judicial permission to serve the lawsuit on Deripaska on his UK lawyers; or on him personally on any territory, where the documents show he operates his companies.

English language notes, signed by Deripaska, and dating from 1998, show him consulting his lawyers, and considering the establishment of holding companies in Lichtenstein, Switzerland, Luxembourg, Sweden, Ireland, and the Netherlands. The first priority at that stage was, in Deripaska’s language, to discuss “taxation in Lichtenstein of holding companies with a non-resident parent company and non-resident subsidiaries.” On December 14, 1998, Deripaska is recorded as being the sole and exclusive signatory for payments out of the controlling Radom Foundation.

There is evidence that Radom was set up at least a year earlier, and there is a declaration signed by Cherney and Deripaska, dated October 31, 1997, confirming “the attached structure of our group as valid until further notice”. Radom was 50% owned by Cole, a Deripaska vehicle; and 50% by Cherney, the text of the declaration in English says.

Another document shows that, in parallel, Deripaska – with permission from Radom’s directors and shareholders, including Cherney – created Bazovy Element (Russian for “Basic Element”), but as a limited company registered in Nicosia, Cyprus. This first appears on October 17, 1998, headed by nominee Cypriots. Registration documents reveal that Bazovy Element Ltd (Cyprus) originally was known as Eboli Holdings, and then NFM Holding. After the name change from NFM to Bazovy Element Ltd., the latter became the owner of the Russian company of the same name. The documentary evidence suggests that, since NFM was owned by Radom, the two Basic Element companies, Cyprus and Russia, were also owned by Radom.

A document dated April 1999, shows Cherney and Deripaska at the top of the corporate structure through separate holding units, which combine to give Radom overall control of the aluminium empire. Radom thus supervises the trading operations through Benet Invest and Trade Corporation, a British Virgin Islands registration. Another document shows that Benet ran “tolling offshores (profit centres)”.

A separately registered Luxembourg company, Almetaltrade Holding SA, is diagrammed in charge of “trading companies UK, Germany, USA, China, Cyprus”. It in turn reports to another Luxembourg unit, Alincor SA, titled “parent company (profit center)”. This was wholly owned by Radom. The link between the Sibal smelters and alumina refineries in Russia is shown as a straight line, marked “payroll of top managers” to Burndale Management Limited Cyprus. This is then tied to Benet Invest by what is noted as an “agency agreement”.

There is thus no direct link between Sibal’s production plants, the trading chain, and the tolling chain. Specific plant products, such as ingots and foil, are shown as moving through specially designated trading units. All of the cash profit, however, is channeled through the Luxembourg holdings, and from there to Alincor, and from there to Radom. Over Deripaska’s signature, there is a note in which he takes special care of the flow of “dividends” (read profit): “We would also like to have Benet Invest & Trade Corp. to be audited quarterly (every three months) for the purpose to dividends distribution first to Altechnology Invest Holding SA and then to ALINCOR SA, the parent company in Luxembourg (which is under incorporation presently). Let me know what needs to be completed on our side for this end.”

There is little doubt from this evidence that Cherney and Deripaska were equal partners in designing, managing, and profiting from the entire network. Some documents indicate that Deripaska used his mother, Valentina Petrovna Deripaska, as a cutout for some of the cashflow intended for himself, or for shares in some of the subsidiary companies.

On March 15, 2000, Deripaska and Roman Abramovich signed – “in the name of other shareholders”, as it is said in the contract – an agreement to merge the aluminium assets of the Sibal and Sibneft groups into a single company, Rusal. It has often been reported that this was a deal between two sole proprietors. In fact, the other shareholders who were party to this agreement, but were not revealed in the UK courts until now, were Cherney, as Deripaska’s shareholding partner, and Boris Berezovsky as Abramovich’s partner.

The text of the purchase and sale agreement – revealed for the first time – states: “This agreement shall be governed and executed in accordance with the English law.” In the event of disputes between Deripaska and his partners (“party 2” in the contract) and Abramovich and his partners (“party 1”), they agreed that “a dispute or disagreement should be submitted for arbitration by one of the parties. Such arbitration shall be conducted in accordance with the rules of London court of arbitration, England.” Although neither Deripaska nor Abramovich spoke English fluently at the time, the contract was first drawn up in English, then partially translated into Russian, with sections remaining in English. The contract explicitly says that “the language of the arbitration shall be English”.

The text of this deal also shows that Deripaska accepted a valuation on his Sibal assets of $400 million, while agreeing that the Abramovich assets – principally, the Krasnoyarsk and Bratsk smelters, the two largest in Russia – were worth $975 million. It was agreed that Deripaska would owe Abramovich the difference of $575 million. He undertook to pay this in four $50 million instalments in March, April, August, and October of 2000, with the balance payable quarterly over two more years.

Signing the package of agreements effecting this sale-purchase transaction for “party 1” and “party 2” were Deripaska, Abramovich, Cherney, and Berezovsky. Since the main agreement stipulated UK jurisdiction, Berezovsky has launched his own High Court suit against Abramovich, charging the latter with violating the terms of their agreement in the deal. It was reported in the UK press on February 6 that Abramovich’s lawyers have written to Berezovsky’s lawyers conceding that “our client [Abramovich] will not object to the jurisdiction of the English court.”

As for Cherney and Deripaska, the High Court has already received the text of their agreement, signed in London on March 10, 2001, stipulating that Cherney owned 20% of the newly merged company RusAl, and that he agreed to entrust that share for Deripaska’s management with the undertaking that Deripaska would have a five-year term in which to pay for the stake at market price, and pay the value owed to Cherney. Later in the same year, Cherney signed another agreement with Deripaska, making a substantial loan to Basic Element. The loan contract also stipulated UK jurisdiction.

The two continued to meet in the four years that followed. But in 2005, at a meeting in Kiev, Cherney suspected Deripaska intended to renege on the deal. By that time, Deripaska had tried persuading Cherney to amend their 2001 deal. Two sets of draft amendments were sent by Deripaska’s lawyers, and in each set, Deripaska’s lawyers stipulated UK jurisdiction.

Taken altogether, the High Court evidence buttresses the legal case that, as an equal stockholder in Radom, Cherney had an equal and comparable stake in all of Basic Element’s assets, paid for out of Sibal-Rusal cash and dividends, and spent on aviation, auto and truck manufacturing, heavy machinery, construction, mines, electricity generation and others.

Deripaska insists that everything belongs to him, and nothing to Cherney.

During loan due diligence in 2004 by the European Bank for Reconstruction and Development (EBRD), the EBRD bankers agreed with Deripaska to accept a signed undertaking from him that he had no business relationship or obligation to Cherney. The EBRD failed to find the documents that are now less than 20 minutes’ walk from the EBRD’s offices. The loan covenant has been broken, but EBRD has done nothing so far to call Deripaska or Rusal for explanation.

By December last, when the documents appeared in the High Court, Rusal’s bid to persuade JP Morgan, Morgan Stanley, Goldman Sachs, and several other banks that nothing like the Radom scheme had existed, or might be continuing, had failed, forcing Rusal into abandoning the IPO it had been planning all year. Despite the help proffered by Goldman Sachs and well-known Washington lobbyists, Deripaska was unable to persuade the US government to renew an entry visa, which had been revoked on the evidence US investigators had unearthed of Deripaska’s business practices.

Deripaska himself insists: “This person [Cherney] has nothing to with my business.” A spokesman reiterated last month: “[Deripaska] does not owe Mr Cherney any money and Mr Cherney does not have and is not entitled to a share in Rusal.”

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