Page 1 of 2 Oligarchs on opposite sides of cash crisis
By John Helmer
MOSCOW - The Bubble Metric Index (BMI) is a measure of the distance between the
fantasy of money and financial reality.
The index has been weighing unusually heavily in the past month on Russia's
oligarchs who own pieces of Norilsk Nickel, Russia's largest mining company and
the world's most important source of nickel, especially those whose obligations
have been secured by the value of commodities that have dropped in price and by
shares whose value has plummeted.
In the Russian macro-economy, the BMI can be expressed as the distance between
the market capitalization of the listed stocks, as recorded on the stock
exchanges, and the money supply as
reported by the Central Bank. Between 2000 and autumn 2005, the two measures
tracked together closely. You could say that the amount of cash available to
invest correlated with the cash value of the investment.
Then the market cap took off, hitting a peak of about US$1,600 billion in May
of this year. Money supply, however, grew at a snail's pace. When market cap
was at its May high, money supply was around $600 billion. The gap between the
two, lasting the 30 months from 2006 to mid-2008, is what is popularly known as
the bubble, or, on account of its duration and magnitude, the mega-bubble.
That bubble has now burst, but the bubonic plague it has released is
infectious. The only cure is cash. Without that, oligarchs get just as sick as
the rest of us, or worse.
Norilsk Nickel has followed the price of nickel and the Russian indexes
steadily downward since May 21, when the share price was $316.50. The descent
of nickel metal started earlier, in March. But the conflict between Vladimir
Potanin, the controlling shareholder, and the takeover faction of Oleg
Deripaska, owner of United Company Rusal, and Mikhail Prokhorov, Potanin's
former partner, has been driving sharp changes in the volume of shares traded.
Through Rusal, Deripaska controls all the Russian aluminum traded in the world.
Rusal, whose principal export markets are China, Japan and South Korea, is
currently testing whether Asian investors are ready to discount the value of
these questions and buy up an issue of Rusal shares. A roadshow introducing
Rusal is underway in several Asian cities. A year ago, a similar roadshow
failed to win support for a London Stock Exchange listing.
When Deripaska and Prokhorov, Russia's fifth-richest man, first announced their
deal for 25% of Norilsk Nickel a year ago, and Rusal followed with its public
bid to merge and take control from Potanin, the Bloomberg charts show the
heaviest one-day volumes in the stock's trading history over the past year.
While the trajectory of the share price has followed commodity and global index
trends, the steepness of the inter-day rises and declines stems from news from
the battlefront.
After Potanin demonstrated that he had Prime Minister Vladimir Putin's support
to block Deripaska, volumes jumped, and so did the share price. Following
Deputy Prime Minister Igor Sechin's confirmation that Deripaska's takeover
would not be approved by the government - on July 28 - Potanin applied his
strengthening grip to brake the downward pressure on the share price that was
driven by the bursting of the bubble. Deripaska then thought of selling Rusal
shares on the Hong Kong exchange - but that was before the bubble burst there
too.
On August 22, the Norilsk Nickel board announced the terms of a share buyback,
commencing September 29. Altogether, almost 8 million shares are to be bought
(4.2% of the total share issue) by the company treasury at an offer price of
6,167 rubles; in August that was equivalent to $254; it is now $241. The
calculation of the offer price, the company said, reflects "a volume weighted
average share price for the period from February 15, 2008 to August 15, 2008
according to data from the Moscow exchange MICEX. The period was selected to
reflect the medium-term movement of the Company's share prices and minimize the
effect of short-term developments."
The company announcement explained the buy-back was "to support the company's
securities, which went down in price significantly in the last several months.
This price drop was impacted mostly by factors that are irrelevant to the
company's fundamentals."
The immediate effect of the announcement was muted, sustaining shareholder and
sharebuyer expectations for the month ahead until Norilsk Nickel's buying
window opened. Then the share price started downward, along with everything
else. That much is understandable.
But then over the past few days, despite the premium on offer in the buy-back
and improvement in the nickel price, the charts for Moscow and London show an
unusual increase in the volume of shares sold. Market analysts claim the share
price trend had been upward until the volume of sales overwhelmed demand, and
pushed the price in the downward direction. The analysts believe someone was
selling a lot of Norilsk Nickel shares. The suspicion, reported in the
Financial Times, is that it was Deripaska. The reason rumored in the markets is
that the sharp decline of asset value and market cap in the marketplace have
triggered margin calls and liquidity problems throughout Deripaska's Basic
Element holding. The only cure for that is cash.
The last major borrowing undertaken by Deripaska through Rusal was in March,
when he raised $4.5 billion to pay the up-front cash demand from Prokhorov for
his Norilsk Nickel stake. The banks called it an "Amortising Secured
Acquisition Bridge Finance Facility". Note the term "secured", for that's the
rub now. The lenders were ABN Amro, BNP Paribas, Credit Suisse, Merrill Lynch,
Barclays Capital, Calyon, ING Bank, Natixis and Unicredit. The lead banks then
sold down their participations. According to the loan announcement from Credit
Suisse, "The number of banks that are eager to support UC Rusal is constantly
growing."
That was March 10. Today, at least three parts of the Deripaska asset holding
are reflecting stress, and it is far from certain that the bank support is
still there.
The first of the problems is the core financing unit, through which the cash
generated by Deripaska's cash cows, such as Rusal, is allocated among the
group's working capital needs and the proprietor's. Bank Soyuz is the holding's
bank. It is described by RusRating, a Moscow banking sector specialist, as 29th
in its table of Russian banks, with a B+ rating. By contrast, Rosbank, a
Potanin house recently sold to Societe Generale, is ranked third, with a BBB+
rating.
According to the RusRating report, "Soyuz is the key bank of the Bazovy
Element/RAINKO group, a major financial-industrial holding controlled by Oleg
Deripaska. Although much of its business involves serving affiliated companies,
Soyuz is also strong in investment banking and is actively expanding its
corporate and retail business ... Constraining factors include a higher than
usual concentration of liabilities, the large share of business done with
affiliated companies, and above-average sensitivity to market risks." In short,
Soyuz risk is magnified by Deripaska risk.
There has been market-wide appreciation of this in recent days, and this has
put pressure on the bank's deposits. Soyuz has responded by imposing new limits
on the maximum amount of cash available from its ATM dispensers (15,000 rubles)
and a three-day waiting period for withdrawals of 50,000 rubles or more.
Some bank analysts believe the measures were taken to cool panic among small
depositors. But Olga Kogut, spokesman for Soyuz, acknowledged to Asia Times
Online that the bank has been under other pressures. Last week, it announced
that it had fully repaid a $50 million loan from South Africa's Standard
Bank,
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