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Deripaska’s cashflow chart

By John Helmer in Moscow

Clark’s Nutcracker is the name of a bird, a member of the crow family, and one of the most famous in the world for a feat of intelligence few human beings, even certified public accountants, can match.

Ornithologists have observed that this fellow can remember hundreds of locations where he has stashed away food. A relative, the American Scrub-jay, is on record as being able to steal from the caches of other birds, and re-hide its own, once it suspects they have been spotted by other birds. If only the problem of tracking down the money of United Company Rusal, and its controlling shareholder Oleg Deripaska, was ornithological, then locating it for repayment to creditors would require no more than banding the wrists or ankles of Deripaska, and a handful of his lawyers and accountants.

So far, however, Deripaska has managed to do a Clark, and give his creditors the bird.

This presents an urgent problem for at least 70 international banks, and several Russian ones, which are owed large sums of money by Rusal, and which neither the company, nor Deripaska’s personal holding Basic Element, acknowledges it can repay – at least, not any time soon. Deripaska holds 56.8% of Rusal, and 100% of Basic Element. Depending on how the sums are calculated, and whether they include interest, penalties, and lawsuit contingency provisions, as well as loan principal, Deripaska and his companies currently owe between $20 and $30 billion. That’s the biggest debt stash in Russia. And in the world, perhaps only Bernard Madoff is charged with owing more. According to an official statement this week from Olga Zinovyeva, first deputy general director of Basic Element, Rusal owes $16.8 billion, while the Basic Element holding is obligated for about $3 billion in non-aluminium business debts.

The foreign bankers to Rusal are currently owed principal of $7.4 billion; the main lenders, who have formed a committee to negotiate terms with Deripaska, and have delayed foreclosure for a few more weeks, include BNP Paribas, Societe Generale, ING Bank, Calyon, Unicredit Group, Natixis, Royal Bank of Scotland, and Credit Suisse. The deadline for the banks’ extension of time, or standstill arrangement, is reported to be May 11.

Vnesheconombank (VEB), the wholly state-owned bailout bank, is owed principal of $4.5 billion, and holds a 25% shareholding in Norilsk Nickel, plus stakes in at least two of Rusal’s Russian aluminium smelters, Bratsk and Krasnoyarsk, for security against a further default. Another $2.1 billion is estimated to be owed to the state-controlled houses, Sberbank and VTB, and the indirectly state-owned Gazprombank. Unconfirmed Russian press reports indicate that Rusal’s Sayansk smelter, the place where Deripaska’s fortune commenced, is partially pledged to Alfa Bank as security for loans the bank’s owner, Mikhail Fridman, is calling in.

There are also two individual claims pending against Deripaska, now the chief executive of Rusal. One by Mikhail Prokhorov, Deripaska’s current shareholding partner in Rusal, amounts to between $700 million and $800 million in cash. It is the remainder of a debt of almost $3 billion, owed since Prokhorov sold his Norilsk Nickel stake to Rusal a year ago. Prokhorov has agreed to reschedule the cash, and restructure the remainder of the debt, accepting an additional 4% stake in Rusal to add to his 14% shareholding.

The second individual is Michael Cherney (Mikhail Chernoy), potentially the largest single creditor to whom Deripaska is in hock. Cherney, Deripaska’s former shareholding partner, is making his claim for an original 20% stake in the founding company Siberian Aluminium and then Russian Aluminium (which became US Rusal in 2007). Collecting depends on a High Court verdict, and before that a trial, which was ordered last July. Deripaska’s appeal against the ruling will be heard in London this July. If he loses his appeal, the High Court will then proceed to trial of how Deripaska came by his aluminium business in the first place, and how much he owes still to Cherney. Because the High Court judge, who ruled in Cherney’s favour last year, has also determined that Cherney’s claim has a reasonable prospect of success, Rusal’s accounts should be showing a legal contingency provision for about $6 billion.

A High Court award of that much against Deripaska is likely to assign Cherney a priority in collecting in many jurisdictions; almost certainly ahead of the unsecured bank lenders to Rusal, and of Rusal’s minority shareholders (Victor Vekselberg, Len Blavatnik, and the Glencore company), and Prokhorov.

Which brings us back to the billion-dollar Clark Nutcracker question – where has Deripaska stashed the money he drew from Rusal’s aluminium profits, and from sales of assets that were once part of the founding Russian Aluminium company? Notwithstanding the fact that Rusal publishes no audited financial reports, it is possible to calculate Deripaska’s takings from gross revenue figures issued by Rusal; estimates of earnings before income tax, depreciation and amortization (Ebitda) provided by Vladimir Titkov, a Deripaska subordinate who currently sits on one of Deripaska’s subsidiary boards; the corporate tax rate disclosed by a Russian government tax report of 2004; and the price Deripaska paid Roman Abramovich for buying out his half-share in Rusal, according to those who were close to Abramovich’s side of the deal.


From these data, and allowing for the greater likelihood of under-counting than over-counting, Deripaska appears to have netted at least $10 billion in personal proceeds out of Rusal since 2001.

How the cash was drawn out of the operations of Rusal, and into safe haven in Liechtenstein and elsewhere, has been mapped for the High Court as part of the evidence in the Cherney case. One of these maps illustrates this story.

Reliable lists of Deripaska’s personal assets are scarce, though the record of Cherney’s litigation includes Judge Sir Gordon Langley’s conclusion — on the basis of affidavit evidence presented by Deripaska’s advisor Paul Hauser — that he owns a house at 5 Belgrave Square, London; a country house in England; three substantial houses in France; several properties in Russia; and properties in other countries as well; plus at least one aeroplane to carry him from one to another. A large motorized yacht has also been confirmed, because it’s the one on which the London press discovered that Deripaska has entertained Lord Peter Mandelson, assorted Rothschilds, and members of the British Conservative Party.

According to an uncorroborated report from a US investigator, Deripaska owns, and has borrowed against, at least one substantial office building in downtown Manhattan. A banking source from a well-known Indian business family, with whom Deripaska has negotiated deals, claims he owns beach-front property on the Indian Ocean near Mumbai.

The search for Deripaska’s assets and Rusal’s money has been under way for some time in Nigeria; that is because pending lawsuits in the Nigerian and US courts accuse Rusal of corruptly manipulating the Nigerian government’s privatization of the local aluminium plant company; under-bidding to fix an unfairly low price for the asset; and then failing to pay, or meet other terms of the asset transfer agreement with the government. The claim in Nigeria is that there is no sign of the money Deripaska and Rusal were obliged to have invested there.

The Rusal-owned asset is known as the Aluminium Smelter Company of Nigeria (ALSCON). Pursuing Rusal in a federal US court, and then by that court’s order, in the federal Nigerian law courts, is a California-based Nigerian-American group called Bancorp Financial Investment Group (BFIG), headed by Reuben Jaja.

Rusal has repeatedly denied BFIG’s charges, and has reported victory in a US appeals court ruling, rejecting BFIG’s claim for US jurisdiction. The text of the US ruling, however, bears re-reading, because it makes the dismissal of BFIG’s suit temporary and conditional – so long as Rusal agrees to having the Nigerian federal court adjudicate the case. That condition was reaffirmed by the US appeals court last November. Rusal had earlier signed its consent on April 25, 2007.

Rusal Consent

BFIG v Rusal

In Nigeria, the arrival in April 2007 of the new presidential administration of Umuru Musa Yar’Adua, led to reviews of details of privatization agreements signed by the former government, headed by President Olusegun Obasanjo. The US Embassy in Nigeria also told the Yar’Adua government that it was backing Jaja and the BFIG litigation to overturn Rusal’s takeover.

The core of BFIG’s case, Jaja has told Asia Times, is that Rusal conditioned its takeover bid with a series of demands that were illegal under Nigeria’s privatization law, but were granted to enable Rusal to take over the plant without making the required payments to the government; relieved Rusal of the obligation to pay ALSCON’s debts, mostly for electricity; required the government to pay for dredging the river used to ship raw materials and products in and out of the plant; fixed the supply of gas to the plant at a concessional price; and allowed Rusal to export the metal free of tariffs.

Altogether, it has been estimated that the value of these concessions turned out to be greater than the amount the government had agreed to accept from Rusal for the takeover. It is also unclear, according to BFIG, what money Rusal has actually paid.

Jaja has added that the dredging of the Imo River and Opobo Estuary has still not commenced despite three years of takeover, and so no meaningful production is going on at the smelter, since raw materials and finished goods can only be brought in or exported via the Imo River- Opobo Estuary. Transportation by road to the nearest port facility is almost impossible, due to poor road condition and the operations of the Niger Delta militants who have taken Rusal employees for ransom.

On the company website, Rusal acknowledges that “the terms of the [privatization and acquisition] deal include the dredging of the Imo River necessary to create the transport infrastructure. Rusal plans to allocate more than USD 150 million over three years to refurbish ALSCON and turn it into a state-of-the art facility.” Rusal production data, last released in October 2008, do not disclose output from ALSCON. The previous May, the company reported that the smelter had produced its thousandth tonne of aluminium, after commencing operation three months earlier, in February of 2008. At the time, Rusal was saying it “plans to completely modernise the smelter so it can reach its full capacity of 193,000 tonnes per annum in 2010.”

Jaja told Asia Times this week that the Nigerian authorities have decided to accelerate their review of what Rusal has done and spent, or allegedly failed to do and spend, at ALSCON. A new committee of enquiry has been appointed by the government, according to Jaja, “building on the 2008 congressional report issued by the [Nigerian] House of Representatives Committee on Privatization and Commercialization demanding the cancellation of the transaction. The Committee’s terms of reference focuses on RUSAL’s inability to dredge the Imo River/Opobo Estuary, for which the former [Nigerian] President [Obasanjo]single-handedly and without any expert consultation granted them $120 million credit toward the purchase of ALSCON. To look at RUSAL’s inability to maintain power at the plant, despite the discounted gas price which the former President single handedly mandated… for a term of 20 years. The Committee report is due by the next Presidential Executive Council meeting, which is scheduled for the end of this month, or first week of May 2009.”

By May 7, Jaja also says, the Nigerian Supreme Court will decide whether to grant BFIG’s motion to expedite its ruling on the lawsuit claims. “We are very optimistic,” Jaja says, “because the world has now come to know that we were not shouting in vain about the conduct of UC Rusal with corrupt elites in Africa.”

To the northwest of Nigeria, in the republic of Guinea, Rusal is also facing new enquiries from a new government. This is headed by the junior military officer, Moussa Camara, who took power in a military coup last December, following the death of the long-serving Guinean President, Lansana Conte. According to a public statement by Camara, broadcast by the Guinean media on April 11, “Guinea has to exercise its rights by getting back this factory, which belongs to it. ” The allegation against Rusal is that the Friguia bauxite and alumina mining and refining complex was under-valued by the Conte administration, and that Rusal underpaid for its takeover in 2006. Camara claims that Rusal paid $19 million for the assets, while he claims that experts value it at $257 million. Camara is also alleging that the deal was authorized by the wrong government official, and remains unratified by the Guinean parliament.

Rusal declined to respond to direct questions from Asia Times. “A commission on the privatization of Friguia … will thoroughly study the situation and give its final conclusion,” a Rusal spokeswoman has been reported as telling Bloomberg. Rusal acquired management rights at Friguia in 2002, and then bought the assets in March 2006. “We … welcome this decision because RusAl privatized Friguia legitimately and in full compliance with the legislation,” the spokeswoman said.

The Rusal website reports that Friguia has current capacity to turn out almost 2 million tonnes of bauxite, and 640,000 tonnes of alumina per annum. Rusal also says it is planning a costly expansion of production capacity at Friguia to 1 million tonnes of alumina per annum. Friguia is the second of Rusal’s bauxite mining concessions in Guinea; the first is known as Kindia. Rusal doesn’t separate the two in its consolidated production results of last October.

A leading African analyst in Moscow, Vadim Zaytsev of the Rosafroexpertiza consultancy, thinks Camara is bluffing. “I seriously doubt they [the military government] will dare to change the terms of the original agreement, which was signed and ratified, as this will have serious influence on the investment climate there. Besides, they are not stupid, and know that Rusal has no money to pay. I think this that all has been done to get to a dialogue, and pressure Rusal into more investments for the ecology, water treatment facilities, and the like. Again, I doubt they will go that far [revocation of Rusal’s title], and change the agreement. There are other companies working in Guinea, too.”

If the Guinean junta is bluffing, at least one Rusal employee isn’t so sanguine about the outcome.

Anatoly Panchenko, head of Rusal’s Guinean operation, has been reported by local radio as having sought the protection of the Russian Embassy compound in Conakry, the Guinean capital.

The Russian consul at the Embassy, Anatoly Malishev, told Asia Times that Panchenko came to the Embassy on April 8, and is still there. He sought to play down the political implications. According to Malishev, Panchenko is suffering from malaria and complications, and is the medical care of the Embassy doctor.

Senator Mikhail Margelov, who heads the Foreign Affairs Committee of the Federation Council, the upper chamber of the Russian parliament, told Asia Times there is no Russian state interest at stake in Deripaska’s predicament in west Africa. Margelov, who was appointed the Kremlin’s roving troubleshooter for Africa in December, said this week that the government reviews of Rusal’s assets in Nigeria and Guinea are “a commercial matter”. Distancing himself and the Russian government and parliament from Deripaska, Margelov told Asia Times he is “not surprised” that conflicts and scandals would arise “for young Russian entrepreneurs who picked up their habits of privatization in Russia [in the 1990s].”

“We want to have friendly relations with the African countries,” Margelov added. “The Russian national interest is to settle the scandal.”

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