06MOSCOW12713, UNITED COMPANY RUSAL: MAKING OF A RUSSIAN NATIONAL

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Reference ID Created Released Classification Origin
06MOSCOW12713 2006-11-30 14:37 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO2734
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #2713/01 3341437
ZNY CCCCC ZZH
P 301437Z NOV 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 5556
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEAWJA/DEPT OF JUSTICE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 012713 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/RUS, EB/TPP/BTA 
NSC FOR TGRAHAM, TMCKIBBEN 
USDOC FOR 4231/IEP/EUR/JBROUGHER 
 
E.O. 12958: DECL: 11/02/2016 
TAGS: ETRD ECON RS
SUBJECT: UNITED COMPANY RUSAL: MAKING OF A RUSSIAN NATIONAL 
CHAMPION? 
 
Classified By: Econ M/C Quanrud by reason 1.4 (b) and (d). 
 
1. (C) SUMMARY.  The proposed merger this coming spring of 
Russian Aluminum (RUSAL), Siberian Ural Aluminum (SUAL 
Group), and Glencore International AG (Glencore) into "United 
Company RUSAL" will create the world's largest aluminum 
producer, unseating Alcoa.  Industry insiders cast the deal 
more in terms of global aluminum M&A trends than as part of 
the Kremlin's drive to create national champions, but both 
factors are at play.  Neither RUSAL nor SUAL were able to 
launch IPOs on their own, and a clear goal of the current 
exercise is an IPO as soon as market conditions are ripe 
sometime in the next 18 months.  President Putin has blessed 
the deal, but it still faces antimonopoly approvals in Russia 
and the European Union, and issues surrounding taxation, 
registration, and litigation could be difficult -- although 
RUSAL executives see these more as "technicalities" than real 
barriers.  Igor Artemyev, Chairman of the Russian Federal 
Antimonopoly Service (FAS) tells us that he plans to take a 
vigorous look at both the impact of the merger on domestic 
players as well as overall trends in the global aluminum 
business in making his decision, but we doubt he will stand 
in the way of this deal.  END SUMMARY. 
 
UNITED COMPANY RUSAL 
-------------------- 
 
2. (U) The transaction will bring the three groups under a 
new holding company, United Company RUSAL, with RUSAL owning 
66%, SUAL 22%, and Glencore 12%. The new company will be the 
world's largest aluminum and alumina producer, with an 
estimated worth of $25-30 billion.  It will employ more than 
110,000 people in 17 countries on five continents, with 
annual production volumes of roughly 4 million tons of 
aluminum and 11 million tons of alumina -- approximately 
12.5% of global aluminum production.  Profits are projected 
to reach $10 billion a year, much of this due to cheap 
electricity from hydropower in Siberia, which is said to be 
at the heart of the new company's business plan. 
 
3. (C) RUSAL representatives tell us that the decision of 
where to register the company has not yet been made, but 
London seems to be where the partners are leaning.  The 
Russian Government is likely to want to see the holding 
company registered in Russia, for both tax and prestige 
reasons.  In this light, a London registration would be a 
significant bow to pressing commercial considerations, and is 
something to watch carefully.  RUSAL reps say the new company 
has definite plans to launch an IPO -- "a key ingredient to 
the merger."  They say the timing of the IPO will be 
determined by market conditions, but for the partners, 
especially SUAL's Viktor Vekselberg, clearly the sooner the 
better. 
 
ANTIMONOPOLY APPROVALS 
AND OTHER GRITTY DETAILS 
------------------------ 
 
4. (C) The new company will need approval from at least three 
foreign antimonopoly agencies (the European Union, Bulgaria, 
and Ukraine) in addition to Russia's FAS.  Tolling schemes 
for the export of aluminum smelted in Russia will be 
carefully scrutinized.  Artemyev tells us he plans to analyze 
the effects of the merger on the world market, as well as 
Russian domestic companies, and will seek informal input from 
Alcoa (as an expert third party) in this regard.  He hinted 
any restrictions that might be placed on the merger could be 
formed by guidance from Alcoa. 
 
5. (C) The new company will need to contend with several 
litigation issues to ensure its commercial survival.  One 
case involves Mikhail Chernoy, who claims that Oleg Deripaska 
(RUSAL) has shorted him by about $3 billion on payment for a 
stake in Siberian Aluminum (Sibal).  Press reports put total 
liability (taking into account other outstanding litigation 
against RUSAL) at approximately $4 billion.  RUSAL reps tells 
us this figure is inflated, and refer to litigation issues as 
&a technicality.8  Simply put, no one from the firm seems 
very concerned that on-going or threatened litigation would 
affect the new company. 
 
ALCOA AND ALCAN: 
DEALS AND REACTIONS 
------------------- 
 
MOSCOW 00012713  002 OF 002 
 
 
 
6. (C)  Conversations with senior representatives of ALCOA 
indicate that SUAL was not Deripaska's first or only choice 
for this merger (which is one possible reason why it has 
taken more than five years for the two parties to come 
together).  Deripaska approached ALCOA in the first half of 
this year, but the talks broke down when the asset valuation 
gap could not be closed to Deripaska's satisfaction.  The 
announcement of the RUSAL/SUAL merger has shelved, probably 
indefinitely, a number of pending ALCOA plans with RUSAL in 
Russia, given the unlikelihood of FAS approvals going 
forward. 
 
7. (C
) According to contacts in both the aluminum industry 
and those close to SUAL, Vekselberg appears to have been 
equally reluctant to partner with RUSAL, but reconciled 
himself to the merger as a way to cash out of the business 
(through the eventual IPO) reportedly "on his own terms." 
Vekselberg has articulated a desire to IPO SUAL for some time 
now, but appears to have been unable to pull it off on his 
own.  A back of the envelope analysis of the proposed equity 
division between the partners suggests Vekselberg more or 
less held his own in this negotiation, and that he was 
neither dragged into the deal, nor is facing a loss of his 
investment, assuming the IPO is successful. 
 
8. (C) Meanwhile senior ALCAN representatives have 
volunteered to us their pleasure with the pending merger. 
The merger will force RUSAL and SUAL to play by generally 
accepted rules, which will have the effect of leveling the 
playing field.  If United Company RUSAL wants to be a global 
leader, the firm will have to leave behind bad past practices 
-- which would be inconsistent with global practice, and 
could cost the firm its commanding edge. The merger, they 
say, makes a good deal of sense in light of global 
consolidation trends, and was likely driven in large part by 
pure commercial considerations. 
 
COMMENT 
------- 
 
9. (C) The prospective merger was announced by Deripaska 
immediately following a meeting with Putin (at which 
Vekselberg was also present) which RUSAL contacts say signals 
the deal has Putin's blessing. Deripaska enjoys a favorable 
relationship with President Putin -- he is a more or less 
permanent fixture on Putin's trips abroad, and he is widely 
acknowledged by our contacts to be among the 2-3 oligarchs 
Putin turns to on a regular basis.  Viktor Vekselberg has 
arguably been at the sharp end of the stick more than once 
over the past year, between being bought out of his VMSPO 
titanium shares, and being caught in an uncomfortable squeeze 
play with his TNK partners.  The merger is both good business 
and potentially good politics for both of them, but there is 
a fine line emerging here.  The degree to which the partners 
are allowed to pursue their commercial instincts (registering 
the firm in London, with a probable IPO on the London Stock 
Exchange) will tell us how important the drive for national 
champions is to the Kremlin.  Our RUSAL contacts were visibly 
nervous on this point, and we understand why. END COMMENT 
BURNS

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