Rusal: A lingering heat

 

A year ago, even his closest associate was advising Russia’s one-time richest man to hand over his empire to the state. Yet Mr Deripaska, 42, battled a host of western and Russian banks to restructure $16.8bn (€11.9bn, ?10.4bn) in debts and eventually won.

 

But his battle to take his company public has also emerged as a cautionary tale in the risks of doing business in Russia – where dealings from the country’s turbulent 1990s can still haunt the present day. Through the sale of a 10.8 per cent stake, Mr Deripaska has raised $2.2bn on the Hong Kong stock exchange to pay down Rusal’s debts.

 

The fine print of the share prospectus, however, highlighted disclosures over controversial former associates whose claims could yet threaten his empire. Two of those, only just coming out of the shadows, have given interviews to the Financial Times that illuminate his remarkable journey. 

 

For Mr Deripaska, taking Rusal public has been fraught with difficulty. He is among the last of Russia’s oligarchs to seek market approval for an asset won out of the collapse of the Soviet Union. More than any other sector, Russia’s aluminium industry was scarred with bloody wars for control in the 1990s, making the battle for consolidation long and tainted.

 

Two earlier attempts to list – one in London, the other in Hong Kong – were abandoned. The latest effort was dogged by delays. But the oligarch persisted not just because he needed the funds to pay down debt, associates say. “Once you’ve IPOed, a lot of the issues to do with the past go away,” says one person close to the process.

 

Yet the flotation, highlighting how much Mr Deripaska’s survival has depended on state support, has raised questions over whether he could yet be vulnerable should the Kremlin decide to call in billions of dollars in loans. Moreover, with a debt level so high that the HKSE all but barred retail investors from the offering, Rusal is restricted from making acquisitions or dividend payments for four years while it pays down borrowings. In the end, institutions signed up in big enough numbers, betting on rising aluminium prices and Rusal’s low costs and proximity to China, the world’s biggest aluminium consumer.

 

In many ways the IPO has been emblematic of Russia’s strategy for meeting the financial crisis, a strategy that is blurring the line between the Kremlin and big business. After share and commodity prices collapsed last year, many of Russia’s biggest businessmen survived largely thanks to state bail-outs. Mr Deripaska’s ability to emerge from the crisis depended to some extent on the patronage of Vladimir Putin, prime minister, who as chairman of VEB, a state-owned bank, decided to prolong a $4.5bn loan to Rusal and agreed for the bank to spend state funds to buy nearly one-third of the IPO shares.

 

Such actions have prompted questions about who is really in control. “The reality is all these guys [oligarchs] are hired hands. They are supported as long as they are acting in the interests of the state. But if the state decides to make things difficult for them, it will,” says one person involved in the IPO process. 

 

More than any other oligarch, Mr Deripaska wedded his fortunes to those of Russia’s ruling class – literally so when in 2001 he married Polina Yumasheva, daughter of a senior aide to Boris Yeltsin, president until the previous year. Through the remarriage of her father, Ms Yumasheva soon thereafter became Yeltsin’s own step-granddaughter.

 

Mr Deripaska has said he derived no political or business benefit from his marriage, but it coincided with the beginning of his move to consolidate his control of the aluminium industry, shedding former associates along the way. He went on to court Mr Putin, who as successor to Mr Yeltsin was embarking on his own drive to consolidate power in the Kremlin. 

 

But even with Kremlin support, ghosts from Mr Deripaska’s past will not go away. The emergence of controversial former partners as part of a multi-billion dollar lawsuit due to be heard in London’s High Court this year over a disputed stake in Rusal could still pose liquidity risks for the company, according to the group’s share prospectus.

 

If Michael Cherney, Mr Deripaska’s former associate, wins the suit, Mr Deripaska could be forced to sell shares to pay off the claim, potentially triggering “adverse consequences” for Rusal including early repayments on its $14.9bn debt, the prospectus says. Mr Justice Christopher Clarke, the judge who ruled to grant Mr Cherney UK jurisdiction, has said Mr Cherney – who claims he owns 13 per cent of Rusal – has a “good arguable case”. But the judge also stressed he was not ruling on the merits. 

 

Describing the case as “crap” and “blackmail”, Mr Deripaska says: “Let’s imagine for example you have a car which stands outside. If you try to open the car and another guy says, ‘look, it’s my car’, is there any theoretical risk that you may be wrong if it’s not after a Christmas party? We didn’t have business relations.”

 

Rusal is not a party to the case. But towards the end of its 1,141-page prospectus are the names of two other former associates – Sergei Popov and Andrei Malevsky – who in interviews with the FT claim to have held stakes in a trust set up at the end of the 1990s to own Mr Deripaska’s aluminium empire. Their claims are referred to in the ruling by Mr Justice Clarke. Of the two, only Mr Popov now says he is considering filing a suit. 

 

It all began in the early 1990s when Mr Cherney and his brother Lev teamed up to hold stakes in Transworld, a London metals trader, to amass control over Russia’s collapsing aluminium sector. 

 

Mr Deripaska, then an ambitious independent metals trader, won the backing of Mr Cherney and Transworld to become general manager of Sayansk aluminium plant in Siberia, the country’s only facility then outside Transworld control. Mr Cherney says they owned the business jointly; Mr Deripaska says he bought his stake separately with his own funds.

 

Mr Cherney claims that with the help of extensive connections in the Yeltsin administration he helped build a metals empire while promoting Mr Deripaska as its young director. Mr Deripaska tells a different story and in witness testimony says he was forced into a relationship with Mr Cherney and another man, Anton Malevsky, Andrei’s brother and the reputed head of the Izmailovsky organised crime group. Together, he says, the two ran a protection racket and extorted money out of him.

 

At the time, he argues, plant managers and businessmen had little choice but to accept the protection provided by men such as those, because Russia’s law enforcement system was so enfeebled. (Mr Cherney denies any ties with organised crime. Anton Malevsky died in 2001 in a parachute accident in South Africa.) “The industry was in collapse. The regions and the cities were incapable of handling a lot of problems and we helped them to do it. There is a very straight track record of what happened before we came and what happened after we came in terms of salaries, taxes and even criminal activity – it dropped exponentially in towns where we were taking control of enterprises in the 1990s,” says Mr Deripaska. 

 

But some documents referred to in the High Court conflict with his version of events. Mr Cherney has filed papers that he claims show Mr Deripaska approved an arrangement for shares in the Sibal aluminium business he then ran to be held by a Liechtenstein foundation called Radom. According to the documents and a summary of Mr Cherney’s case made by Mr Justice Clarke, Mr Cherney held 40 per cent and Mr Deripaska another 40 per cent, while 10 per cent was held on behalf of Anton Malevsky by his brother Andrei. The remaining 10 per cent was held by Mr Popov. But Mr Deripaska said in his witness statement that Radom was “one of Mr Cherney’s vehicles through which he received ‘protection’ payments”.

 

Basic Element, Mr Deripaska’s holding company, declined to comment beyond saying: “We have no intention of giving a running commentary on the court case or issues already dealt with in the IPO prospectus. The Russian aluminium industry was indeed targeted by organised crime groups in the 1990s and as someone heavily involved in the industry, Mr Deripaska was a victim of them, but is proud to say he overcame their influence. We look forward to presenting our case in the English court and are confident we will receive a favourable judgment.”

 

In court, Mr Deripaska’s lawyers have provided expert witness testimony from Louise Shelley, director for terrorism at George Mason University in the US, who named Mr Popov as a leader of the Podolsk organised crime group, suspected of arms and drugs trafficking and running prostitution rings.

 

Mr Popov, who usually avoids publicity, says in his first interview with a western news organisation that until Prof Shelley’s testimony he considered himself and Mr Deripaska good friends. He and associates say he is godfather to Mr Deripaska’s daughter. Denying any contacts with organised crime, he says he and Mr Deripaska were introduced to each other in 1994 by Mr Cherney and the business relationship flowered. Mr Popov, who headed Soyuzkontrakt, the biggest food distributor in Moscow in the 1990s, says he and Mr Deripaska shared offices for a time and Mr Cherney and Mr Deripaska also helped to finance his business.

 

“I liked Oleg because he was an interesting and clever guy. And he liked being with me. There were times when he could not eat without me. He would call and say, ‘where are you, what are you doing, let’s go and have supper’. I would say I was busy but he would say he was feeling very badly: he had such problems. So in the end I would agree.”

 

Mr Cherney and Mr Popov say their connections to the Yeltsin administration may have been a key to Mr Deripaska’s success. Mr Popov says he was close to a senior aide to Valentin Yumashev, Yeltsin’s chief of staff and the man who was to become Mr Deripaska’s father-in-law. “If there hadn’t been this resource then there would have been a totally different history. Connections decided everything,” he says. “Now Deripaska is trying to say we forced him to become the richest man in Russia!”

 

Mr Deripaska declined to comment on Mr Popov’s role but in earlier interviews with the FT said Mr Cherney’s only role had been to take profits from the business while residing in Israel, while he had built the company in Russia from the ground up. Mr Popov says he also played a key role in smoothing things over for Mr Deripaska with rivals such as Anatoly Bykov, the former owner of Kraz, now Rusal’s biggest smelter. Rusal bought Mr Bykov’s shares while he was jailed for allegedly ordering a hit on a local crime lord. 

 

As for the late Malevsky, Mr Deripaska once told a Swiss court he knew of him only “from the newspapers”. But Malevsky relatives as well as court filings by Mr Deripaska appear to contradict that. Mr Justice Clarke noted in his ruling that he “appears to have sought to hide any connection with [Anton] Malevsky from a Swiss investigating magistrate”.

 

Mr Deripaska claims a 2001 agreement to hold 20 per cent of Rusal in trust for Mr Cherney – a document that lies at the heart of Mr Cherney’s claim – was in fact a proposal drafted for Anton Malevsky, not for Mr Cherney. While stressing he was not determining who was right on this matter, Mr Justice Clarke has said Mr Deripaska’s assertion is “somewhat curious” when there is no mention of Anton Malevsky in the agreement. “One side or other is plainly telling lies on a grand scale,” he wrote. 

 

According to Andrei Malevsky, his brother and Mr Deripaska were very close. He says Anton stayed at Mr Deripaska’s home in the late 1990s after being kicked out of Israel, also for suspected ties with organised crime. “Anton was always speaking good words about Oleg Deripaska,” he says. “They had very businesslike relations.”

 

As Rusal stresses in its share prospectus, the Cherney case is far from resolved: it is not even clear whether the trust agreement is governable by English law. The claim Mr Cherney is making is based on little more than an agreement typed on a few pieces of paper with no mention of lawyers, currencies or jurisdiction. 

 

So a saga that has its origins in the bleakness of a Siberian smelter, but went on to command agonised attention both beneath the ornate turrets of the Kremlin and in the triple glass towers of Hong Kong’s Exchange Square, may reach a London denouement in the oak-panelled Royal Courts of Justice. It is there that Mr Deripaska’s survivor status will either be confirmed or threatened anew.