Page 2 of 2 Rusal's crossroads - Russia, Libya or China
By John Helmer
The Chinese approach has been to answer this question with another - why should
they not negotiate directly with the Guinean government and secure Chinese
bauxite and alumina requirements, without having to depend on Rusal or the
Russians? This in turn has led to recent negotiations between Chinese state
funds and the Guinean authorities, with the possibility that what Rusal may
lose there, on legal grounds, the Chinese may bid for and acquire for
themselves.
In the past, the Beijing government has been slow to grant Rusal
representational status in China. There have been historic problems of fixing
the terms of business between Chinese formulas and those Rusal prefers. The
Chinese are interested in cleaning up their small-scale aluminum smelters, and
the solution for the long term may require cheap Russian power - but not
necessarily an indirect shareholding interest in Russian smelters.
So recently, the Chinese have been slow to appreciate the value of buying an
equity stake in Deripaska's company when it has two other options. Guinean
bauxite is one; and a long-term purchase agreement for Rusal aluminum, at a
solid discount to market price, is another. Both options are secured by the
bird in the hand. Why risk the Deripaska bird in the shareholding bush?
The Wall Street Journal has managed to capture the Chinese view, according to a
dispatch of November 19:
The company [Rusal] has been trying to line up
Chinese and other Asian state companies and investment funds as core investors
in the issue, but hasn't gotten solid commitments, according to people involved
in the preparations. One Asian sovereign wealth fund looked at investing in the
Rusal IPO [in Hong Kong] but decided against it after concluding that the
company's production costs and debt levels were both too high, according to a
person familiar with the situation.
A Bloomberg report cited
Deripaska explaining to prospective Chinese sharebuyers that Rusal was
"committed" to Asia, and wanted to list shares in Hong Kong "to attract more
partners from this region who are interested in developing new projects with
us". Naturally, new projects mean new money - and Rusal is short of the old
stuff.
Accordingly, Deripaska has invited the Chinese to trust him to manage their
money. "A lot of people are jealous [of me] but I don't care," Bloomberg
reported Deripaska as saying in an interview on November 17. "I am not working
for money." Deripaska's record as a trustee is the very issue that faces trial
in the Royal Courts of Justice.
For Rusal to sell shares to China or Libya poses another problem for the
Russian government, and that problem suddenly became more serious in the past
few days. In part, that is because there were signs of reluctance on the
Chinese part to buy any shares at all. This has triggered the realization in
Sechin's and Putin's offices that if there is no IPO, then Rusal may lose what
foreign assets it requires to keep running, and the foreign bankers may claim a
chunk of assets now under the collateral protection of VEB and other state
banks.
The Hong Kong Exchange Listing Committee was to have met on November 19 to
review for approval Rusal's share sale prospectus but the hearing was postponed
to this week. Factors in the delay of such a large listing, possibly worth as
much as US$3 billion, may have included the change over the next few weeks of
the exchange's executive leadership.
The underwriters may also have noticed the rising Rusal risk discount, and the
plummeting value of the company's likely market capitalization, which the
Financial Times recorded in its report of November 19: "The company is seeking
to raise up to $2.5 billion, people familiar with the situation say. But
another said the company could face a valuation that would price the 10% stake
closer to $1 billion."
If Rusal is priced in the Hong Kong market at a total of just $10 billion,
according to the Financial Times, then its worth, net of debt, is negative. The
foreign bank syndicate must therefore judge whether to abandon the standstill
debt formula it has accepted for almost a year, and look to bankruptcy, an
asset grab, and the liquidation of Rusal.
Rusal's spokesman, Vera Kurochkina, did not respond to questions.
The threat of the sky falling in for Russia's aluminum monopoly is obvious to
state administrators. The VEB board, chaired by Putin, on November 19 discussed
how to protect the value of their loans to the company, and the asset
collateral they hold. They were considering an obvious question - for an outlay
of no more than $2 billion to $3 billion, would they take the chance of
conserving Rusal's value for later, and ward off a catastrophic bankruptcy
action by at least 70 of the world's banks; loss of assets on which the
production chain of Rusal's operations in Russia depend, and the employment of
thousands of Russian workers; and loss of value for the $4.5 billion in Rusal
collateral VEB is already holding? And the alternative - if the VEB board and
the prime minister don't commit the money now, do they want to risk Rusal's
future on Gaddafi, on the Guinean leadership, on BNP Paribas and Credit Suisse?
The new scheduling of Thursday, November 26, for the Hong Kong Exchange Listing
Committee to consider Rusal's IPO coincides with the deadline extension,
according to Rusal chairman Viktor Felixovich Vekselberg, when the foreign
banks should sign their agreement to Rusal's debt restructuring terms. Without
a share sale, the debt arrangement collapses. Without a debt arrangement, Rusal
faces liquidation all over the world.
The response from Sechin and Putin looks inevitable. They must bail out Rusal -
but as they did with the VEB loan of November 2008, they must do this for their
own, and the national interests, not Deripaska's. Bloomberg reports Deripaska
as saying that, since he isn't working for his own money, he is working for the
state interest. The implication is that he thinks they coincide, and maybe this
week, they do - "I have my interests and I try to realize what I can do, and
for now I am focused on Rusal because it is very important for Russia."
Just who decides what is important - Russia's or Deripaska's interests - has
yet to be decided, and it isn't likely to be Deripaska's call. The entire
Russian oligarch system, invented by president Boris Yeltsin, and refined by
Sechin and Putin, will be tested by the outcome.
In the meantime, the Russian taxpayer must contribute, through VEB, Sberbank
and other state holdings, whatever it takes to stave off the losses. The stock
exchange operations in Hong Kong and Paris are a sideshow, and also a
smokescreen, for what is really happening. The Financial Times reports one
anonymous assessment: "There is no way they are going to get this done without
some sort of state entity participating. It's a quasi-bailout."
And on the other hand, the report says, a deal with the creditor banks "would
be 'a strong signal that the company has the backing of the government and
should give people confidence about whether it is sponsored by the Kremlin.
People should relax about the normal Russian risks about whether it will have
its assets taken off it by the state'. The person said the deal could also
encourage other big institutions being courted by the company on mainland China
to participate in the offering with anchor orders."
But the anchor is the Kremlin - or more strictly, the Russian White House,
where Sechin and Putin have their offices. They have no choice but to
nationalize now. Thus, it turns out that the risk that helped kill the London
Stock Exchange listing when aluminum and Rusal were at their peak in 2007 has
now materialized. For the time being, the Russian government cannot make up its
mind on what is to be done about Deripaska until Rusal gets clean out of this
crisis.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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