MOSCOW - Two weeks ago, without fanfare, the United States government decided
it would not allow General Motors (GM), in which the government owns a
controlling 60% stake, to sell its European automobile division to a Russian
combination of the state savings bank Sberbank, Oleg Deripaska's GAZ auto
plant, and Deripaska's Canadian partner, Frank Stronach's Magna.
Compared with the US refusal to grant Deripaska a visa to enter the United
States, this was a more powerful, definitive, and public message.
Deripaska conceded this week in an interview with a Moscow newspaper that his
attempt to go international with the acquisition of Opel of Germany (as well as
the Britain's Vauxhall and Sweden's Saab units) had failed, because of the US
government's veto. Asked if the "attitude towards Russian business abroad is
still ambiguous", Deripaska replied: "Unfortunately, yes. But in
the Opel case, the US Department of State's prejudices are also a problem."
Deripaska is the only Russian businessman of oligarch size who has been vetoed
by the US. Roman Abramovich, Alexander Abramov, Vladimir Lisin, Alexei
Mordashov and Dmitry Pumpyansky have all bought American steel, pipemaking, and
coalmining enterprises; Igor Zyuzin's Mechel is listed on the New York Stock
Exchange; Victor Vekselberg had a New York home, car, and for a time, a green
card; Vladimir Potanin, a palladium mine in Montana; Dmitry Rybolovlev, the
most expensive private residence in Florida; Vagit Alekperov, petrol stations
and other oil port and fuel distribution networks.
In 2007, when Abramovich and Abramov bought a pair of steelmills in Oregon and
Colorado - one of which produced special steel for US Army tanks - the
transaction was analyzed by the Committee on Foreign Investment in the US and
the State Department, and was cleared by the White House without demur.
That it may be Deripaska himself, not Russian business, that is vetoed is a
possibility Deripaska himself admitted, awkwardly, in a BBC interview in July.
Then he accused the Americans, and specifically the State Department, of
putting pressure on him to betray Russia. "They try to push me in a corner,"
Deripaska said, "maybe believing I would cooperate with them [with
information]." He had resisted, Deripaska claimed: "There is a Russian interest
I would never go through."
Deripaska's public hostility to the State Department is odd, not least because
the black-ball against the Russian deal with GM was cast by the US Treasury
Department's Automobile Task Force (ATF), a high-level government committee, in
which Secretary of State Hillary Clinton's department sat on only one of the
chairs.
Three months before the ATF voted him down, though, documents of Deripaska's
lobbying agents filed with the US Department of Justice in Washington revealed
that he was hoping personal links to Clinton might work to persuade the US to
back the GM transaction, as well as to issue his visa. Deripaska, the filing
says, was paying US$40,000 per month for this effort.
The Endeavor Group is run by Adam Waldman and includes among its staff,
advisors, consultants a number of veterans of the Bill Clinton administration
and the Hillary Clinton presidential campaign. On May 6, Waldman signed the
legally required foreign agent's filing. This confirms that his group had been
engaged by Deripaska (personally) to assist him "in the preparation of a US
visa application and advocates [sic] for US approval of such application.
Endeavor Group also advises on and assists in the execution of commercial
transactions." Waldman's filing elaborates on what these are: one, to "interact
with the United States Trade Representative Office to encourage US
participation in the intra [sic]-governmental global aluminum discussions"; and
second, to "engage with the Department of Treasury's Auto Task Force regarding
the prospective acquisition of General Motor's [sic] European operations". [1]
Waldman declined to respond to questions asking whom he and his staff had
contacted on Deripaska's behalf on the visa, aluminum, and GM issues. Waldman
also did not explain why, in his Justice Department filing, he had claimed that
Deripaska was not receiving foreign government financing, although it is well
known that a loan of $4.5 billion had been given to Rusal last November by the
Russian state bank, VEB, chaired by Prime Minister Vladimir Putin, to save
default and forfeit by Rusal of its shareholding in another Russian metals
company, Norilsk Nickel. The VEB loan to Rusal is the biggest bail-out granted
by the Russian government to any Russian company.
In Moscow this week, Deripaska was asked to say why he thinks the US lobbying
campaign failed. The spokesman for Basic Element, Deripaska's holding company,
said that questions about autos go to the auto division of the holding, Russian
Machines. From there, spokesman Yekaterina Pankova said her group doesn't
comment on the Opel-Magna transaction.
US media reporting of the board vote acknowledges that the US Treasury
Department's ATF was responsible for the recommendation that directed the GM
decision.
While no US or GM official has amplified the reasons in public, the
implications for Deripaska's future are serious. If he cannot secure the
endorsement of the US government, or GM, to conduct auto business, then it is
increasingly doubtful that he will be able to achieve an international share
listing for United Company Rusal, a Jersey-listed vehicle for his international
bauxite, alumina, and aluminum businesses. Before last year's crash, these
added up to be the third-largest producer of aluminum in the world, with a
value Deripaska and his associates put on the company of more than $50 billion.
Deripaska is now the biggest debtor in Russia, and Rusal the most indebted
company. Deripaska acknowledged this week that altogether, counting Rusal's $16
billion trading obligations and other debts owed by Basic Element, his total
indebtedness is "slightly" under $20 billion.
Deripaska at present owns 53.8% of the still privately incorporated Rusal, and
he is the company's chief executive. In 2007, he attempted to arrange a London
Stock Exchange listing for the company, but notwithstanding the backing of
Goldman Sachs, Morgan Stanley, and JP Morgan - the US banks engaged - he
failed.
A banker who led the listing effort said at the time that the US visa problem
was just one of the negative sentiments towards the listing on the part of
institutional investors and the UK listing regulator, the Financial Services
Authority (FSA). The source, who asked for anonymity, said the US banks offered
to secure the visa. Deripaska also promised to deliver a commitment letter from
the Russian government, securing the foreign shareholders against
nationalization in future. Neither piece of paper materialized, and the listing
campaign was abandoned.
Rusal collapsed into effective insolvency last autumn, as the price of aluminum
plummeted on global markets, cutting its revenues at the moment when Deripaska
desperately needed the cashflow to repay the heavy borrowings he had
contracted.
As of this summer, 144 domestic money claims against Rusal were before the
Russian Arbitrazh Court system; roughly 1.1 cases against Rusal are being ruled
on in the courts each day. The average court filing against Rusal amounts to
2.4 million roubles (US$74,000); the smallest Rusal has not paid is the
equivalent of $124; the largest, the equivalent of $2.1 million for electricity
supply in Krasnoyarsk region and $4.2 million for construction works. The court
records show that orders to pay are being appealed, and payments delayed.
After VEB handed over $4.5 billion, so that Rusal could repay its foreign bank
lenders for the ill-fated Norilsk Nickel transaction, the prime minister
ordered special security service investigators and state auditors from the
Accounting Chamber into Rusal. They spent at least two months there. Accounting
Chamber sources confirm what they did, and the report and recommendations they
sent to the government in January. The report has ever since been classified
secret.
A former senior lawyer for Rusal says that prolonging the Arbitrazh court cases
is one way, legal under the Russian bankruptcy code, of staving off an
insolvency ruling, and the transfer of the company's administration to
independent, court-supervised administrators.
On July 31, Rusal and Deripaska suffered another major blow. This was the
unanimous ruling of three senior judges of the UK Court of Appeal, dismissing
Deripaska's appeal against the order of a year earlier, July 3, 2008, that he
should face trial in the UK High Court. Deripaska is being sued by his former
patron and founding shareholder, Michael Cherney (Mikhail Chernoy), for
enforcement of their trust agreement and contract of March 2001. The value of
the claim amounts to at least $5 billion, or more than 13% of Rusal's
shareholding.
In 2008, Justice Christopher Clarke had ruled in favor of Cherney, judging: "I
am satisfied that Mr Cherney has a reasonable prospect of success in respect of
his claim." Further, Clarke had ruled against Deripaska: "I am persuaded that
the risks inherent in a trial in Russia [assassination, arrest on trumped up
charges and lack of a fair trial] are sufficient to make England the forum in
which the case can most suitably be tried in the interests of both parties and
the ends of justice and, accordingly, the proper place for the determination of
this claim."
After two days of hearings this past July, and hundreds of pages of argument
and evidence, the Appeal Court ruled against Deripaska for the second time: "I
am satisfied," noted Justice Sir Martin Moore-Bick, "that the judge [Clarke]
was right to have regard to matters that might prevent Mr Cherney obtaining
justice in Russia when deciding whether, viewed overall, England was the
appropriate forum for the trial of the action ... The judge held that there was
no evidence that Mr Cherney had been involved in criminal activities and Mr
Malek [Deripaska's advocate] did not seek to challenge that finding. It
follows, therefore, that there is a real possibility that any charges brought
against him would not be well-founded."
Deripaska's lawyers have two rights to take their appeal to the final UK court.
Formerly known as the court of the House of Lords it has been renamed the
Supreme Court, taking effect on October 1. The first of Deripaska's
applications for leave to appeal was rejected on August 19. The second, to be
filed on September 17, is a near-certainty for dismissal, according to UK legal
and constitutional experts.
The Cherney case has been interpreted by Deripaska as a judgement of the
Russian legal system. In fact, as the trial judge and the three appeal judges
have been at pains to point out, it is their view that it is Deripaska's
perceived power that sways Russian courts, and prejudices the outcome of their
proceedings.
A trial for Deripaska in London, before Justice Clarke, is likely to be ordered
to start within the next six months. A win would make Cherney the largest
individual, and most secured of Deripaska's creditors, with de facto veto over
Rusal's future share listing. But even before the trial, its inevitability,
along with the judge's ruling that Cherney's claim has "a reasonable prospect
of success", obligates Rusal's auditors to show a provision for a litigation
loss of up to $5 billion on the company books. This in turn threatens all of
the debt arrangements Deripaska is trying to arrange.
The credit and risk committees of more than 70 foreign creditor banks are now
obliged to ask their lawyers whether, with a trial of Deripaska's signature
about to start in the High Court, the court rulings make it legally impossible
for the banks to accept Deripaska's signature on any paper whatever. Other
signatures by Deripaska, including those the European Bank for Reconstruction
and Development and the World Bank's IFC division required from him as a
condition for a $150 million loan, are also subject to the material change
condition triggered by the London rulings.
Cherney's priority also threatens the minority shareholders of Rusal - Mikhail
Prokhorov with 18.5%, Victor Vekselberg and Len Blavatnik with 18%, and
Glencore with 9.7% - who are holding similar undertakings signed by Deripaska,
which Cherney is seeking to enforce now. These oblige Deripaska to achieve an
international share listing for Rusal, and hence a guarantee of international
value for the company's shares, within deadline. Failing that, Deripaska has
agreed he must pay the stakeholders in cash at an agreed valuation. As the
deadlines run out between now and next spring, Deripaska faces another $14
billion to $25 billion in claims, depending on the Rusal value formula that
applies.
The only way Deripaska can pay is for Rusal to recover its market value in an
LSE listing. But this looks to be impossible if Deripaska remains the
controlling shareholder and chief executive. Deripaska himself has acknowledged
ambiguously that he is looking to sell shares. This week he said: "We are going
to involve new capital by means of partners. Such partners can essentially
improve the position of [our] companies in the markets ... That we are looking
for such partners, we declared one year ago. One of these transactions we can
announce by the end of the year. What exactly, I will not tell yet."
For powerful Russian shareholders like Prokhorov and Vekselberg, there are
alternatives to Deripaska. Already there is evidence that Prokhorov's Russian
banking advisers have been considering options for their man to replace him.
Prokhorov's disadvantage is that he lacks the confidence of senior Russian
government figures, who hold the key to deciding whether Deripaska stays or
goes; and if the latter, when. Plans for the Russian government to restructure
the company without Deripaska's liabilities have also been tabled with Deputy
Prime Minister Igor Sechin and others. A decision by the government is unlikely
until the domestic economy shows signs of stable recovery.
Naturally, Deripaska is sensitive to what may be happening behind his back. In
a Moscow newspaper interview this week he called for the state to get out of
his business. "As to the anti-recessionary policy of the state," he said, "then
it is necessary to speak, not about its efficiency, but that the initiative for
changes should now pass to business. Until now the priority was at the state
level - it was the initiator of all processes. The role of business, which has
been strongly belittled, should now increase. And it seems to me the country's
leaders understand this. However, by inertia, some officials continue scaring
business."
Deripaska also sought this week to correct the impression that, on June 5, as
the national television cameras rolled, that Prime Minister Putin had tossed a
pen at him and told him to sign an agreement to revive the chain of cement
production on which the small Leningrad region town of Pikalyevo depends. "The
problem was," Deripaska said, "that the reality of the meeting event and the
picture, which was transmitted by the television channels, did not coincide.
This was a simple case of editing. Actually, everything went in another way.
What happened at the meeting was very productive; the decisions taken to revive
manufacture have been implemented."
Asked whether the entire problem could have been settled "without the
intervention of Prime Minister Vladimir Putin", Deripaska replied; "I think,
yes." He was the victim of a conspiracy, he intimated. "Someone with personal
interests wished to manipulate the situation. Who? - I do not know." Putin's
intervention was, he added, "a dangerous precedent".
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