10MOSCOW251, NOT QUITE A WHOLE NEW ERA FOR RUSAL

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Reference ID	Created	Released	Classification	Origin
10MOSCOW251	2010-02-03 10:48	2011-08-30 01:44	CONFIDENTIAL	Embassy Moscow

VZCZCXRO5007
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSL RUEHSR
DE RUEHMO #0251/01 0341048
ZNY CCCCC ZZH
P 031048Z FEB 10
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 6143
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RUEHRY/AMEMBASSY CONAKRY PRIORITY 0001
RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000251 
 
SIPDIS 
 
DEPT FOR EUR/RUS 
 
E.O. 12958: DECL: 02/02/2019 
TAGS: EMIN ECON PREL RS CH
SUBJECT: NOT QUITE A WHOLE NEW ERA FOR RUSAL 
 
REF: HONGKONG 113 
 
Classified By: EconMinCouns Matthias J. Mitman, Reasons 1.4 (b,d) 
 
------- 
SUMMARY 
------- 
 
¶1. (C) After restructuring billions in debt, Rusal raised USD 
2.2 billion through its January IPO in Hong Kong.  Rusal 
executives see the restructuring and listing as key steps in 
the company's transition into a modern, public company. 
Despite its achievements, Rusal will have to cope with 
restrictions on its operations stemming from the 
restructuring as well as the potential loss of one of its 
facilities in Guinea.  Rusal CEO Oleg Deripaska also faces a 
court case in the UK over a 13 percent stake in the company. 
Recent press reports alleging Rusal involvement in hacker 
attacks on a Russian newspaper and surveillance of a 
free-lance journalist have further tarnished the company's 
image.  However, analysts downplayed the degree of difficulty 
Rusal would have dealing with these issues as well as their 
influence on investors' decisions.  They do not foresee 
significant changes in company management.  Based on Rusal's 
experience as an example of the Russian approach to corporate 
debt and inefficiency, genuine reform and improvements in 
corporate governance are less likely if market conditions 
reduce financial incentives to make those changes.  End 
Summary. 
 
--------------------------------- 
RUSAL EMERGES AS A PUBLIC COMPANY 
--------------------------------- 
 
¶2. (U) At the end of 2009, Rusal, the world's largest 
producer of aluminum and alumina, concluded restructuring 
agreements for USD 14.9 billion in debt, linking repayment to 
the company's ability to generate excess cash flow.  The 
agreements extended the maturity of Rusal's obligations to 
foreign lenders until 2013, with an option to refinance for 
an additional three years.  Mikhail Prokhorov's Onexim group 
agreed to convert USD 1.8 billion in debt into equity for an 
additional six percent stake in the company.  Arrangements 
for the remaining USD 880 million in Onexim debt and Rusal's 
debts to other Russian and Kazakh lenders largely mirror the 
repayment and pricing terms of the international debt.  In 
addition, Rusal received a one-year extension on USD 4.5 
billion in debt owed to state-owned VneshEconomBank (VEB) and 
an unconditional commitment from state-owned Sberbank to 
assume all obligations under the loan and extend its maturity 
to the end of 2013, upon the company's request. 
 
¶3. (U) On January 27, Rusal completed its initial public 
offering (IPO) of 10.6 percent of the company's shares on the 
Hong Kong Stock Exchange (reftel).  With a final stock price 
of HK 10.80 (USD 1.39), Rusal raised USD 2.2 billion through 
the IPO.  Despite a hefty minimum subscription of HK 1 
million (USD 129,000), employees of the banks organizing the 
IPO told Russian business daily "Vedomosti" that Rusal had 
attracted over 300 new shareholders.  VEB made the largest 
purchase, investing USD 663 million for a 3.15 percent stake 
in the company.  Other major investors included Nathaniel 
Rothschild, John Paulson, Robert Kuok, and the Libyan 
Investment Authority.  Although Sberbank had expressed 
interest in the IPO, it did not participate.  Rusal will use 
funds from the IPO solely to repay its debts (USD 115 million 
will go to Onexim, and the rest to Western banks).  The 
company's stock fell approximately nine percent during the 
initial trading period after the IPO, but analysts attributed 
the drop to the general fall in metal company stock prices, 
which had declined similarly since Rusal's price was set on 
January 22. 
 
¶4. (C) During a meeting on January 15, Sergey Chestnoy and 
Andrey Arseniev of Rusal's Department of International 
Cooperation told us they were happy to see Rusal become a 
public company and leave behind the "Ministry of Aluminum" 
style of doing business.  While he did not expect significant 
management changes as a result of the IPO (and the decrease 
in CEO Oleg Deripaska's share to 47 percent), Chestnoy stated 
that he had started to see improvements as the company began 
to implement the conditions of the restructuring.  He also 
noted that bad managers had become easier to identify during 
the financial crisis than during the preceding boom. 
 
MOSCOW 00000251  002 OF 003 
 
 
Chestnoy would like to see Rusal attract even more 
shareholders in the future.  In addition, he emphasized the 
company's improving environmental performance, underscoring 
Rusal's target of 99.5 percent clean emissions from its 
Russian facilities. 
 
--------------------------------------------- ---- 
DEBTS, LEGAL PROCEEDINGS, AND RUMORS CLOUD FUTURE 
--------------------------------------------- ---- 
 
¶5. (U) According to Rusal's IPO prospectus, its debt 
restructuring agreements w
ill limit its operational and 
financial freedom during the repayment period.  The company 
will be unable to incur any development capital expenditure, 
except with respect to the Boguchanskaya hydropower plant or 
to comply with environmental law.  The agreements also 
restrict dividends.  In addition, Rusal will have to repay 
debt using the proceeds of its equity sales.  Small changes 
in the cost of inputs, price of aluminum, or RUR/USD exchange 
rate could result in the company's inability to comply with 
one or more of the financial covenants and debt reduction 
targets (Note: The GOR plans to liberalize electricity 
prices, a major cost factor in the aluminum production 
process, in January 2011.  End Note). 
 
¶6. (C) Rusal is currently involved in a dispute with the 
government of Guinea (GOG) over the legitimacy of the 
purchase of a bauxite mine and an alumina refinery.  Rusal 
operates three bauxite mining and alumina refining facilities 
in Guinea, which holds two-thirds of the world's bauxite 
deposits.  A Guinean court ruled that the 2006 sale to Rusal 
of an alumina refinery formerly controlled by a Guinean state 
corporation was illegal on the grounds that Rusal paid 
significantly less than the plant's true value.  Rusal claims 
its acquisition was in full compliance with the law at the 
time of purchase.  In September 2009, the GOG banned Rusal 
from exporting for almost a week over the dispute.  The GOG 
is already seeking to sell the plant to new owners. 
According to press reports, the GOG is also demanding up to 
USD 860 million of Rusal's earnings from its IPO to cover 
damages owed.  In January, Rusal stakeholder Victor 
Vekselberg told the press that the company was in discussions 
with the GOG and expected a settlement reasonably soon. 
However, Chestnoy told us that Rusal was limited in its 
ability to negotiate with the GOG because the current 
government is "not legitimate."  He said that Rusal was 
waiting for a resolution of the political situation in the 
country before concluding an agreement over the facility. 
 
¶7. (SBU) Rusal CEO Oleg Deripaska also faces a court case in 
the UK over a 13 percent stake in the company.  In November 
2006, Michael Cherney (Mikhail Chernoy) filed a claim against 
Deripaska in a London court over the alleged breach or 
repudiation by Deripaska of alleged contractual commitments 
to sell for Cherney's benefit 20 percent of Rusal Limited, 
now a wholly owned direct subsidiary of UC Rusal.  Cherney is 
seeking an order that Deripaska sell the shares he is owed 
and account to Cherney for the proceeds of the sale. 
Deripaska will have to serve a defense to Cherney's claim 
early in 2010.  Press reports quote Deripaska describing the 
case as "crap" and "blackmail."  The judge overseeing the 
case has indicated that Cherney has a reasonable prospect of 
success. 
 
¶8. (C) Recent press reports have alluded to possible 
connections between Rusal and attacks on Vedomosti and an 
Australian-American journalist residing in Moscow.  In 
December, hackers conducted denial of service attacks on the 
Vedomosti website and interfered with some journalists' cell 
phones.  Press reports alleged that the attacks were 
connected to an October article in Vedomosti on Rusal's 
financial losses and attempts to "hide" profits.  Vedomosti 
Editor Elizaveta Osetinskaya claimed Rusal lawyers threatened 
legal action against the paper for revealing "commercial 
secrets."  Also in December, authorities detained three armed 
men outside the home of Australian journalist John Helmer a 
week after the Australian government had warned him that it 
had confidential information he was in danger.  Helmer 
claimed that he was targeted because of his aggressive 
reporting on Rusal CEO Deripaska and said that Russian police 
told him the men arrested claimed to work for a private 
security company acting on behalf of Rusal.  A Rusal 
representative told the press that Helmer's claims were 
unfounded, and Rusal's Chestnoy told us "what Helmer needs is 
 
MOSCOW 00000251  003 OF 003 
 
 
a psychiatrist." 
 
--------------------------------------------- ----------- 
EXPERTS DOWNPLAY OBSTACLES BUT DO NOT EXPECT NEW COMPANY 
--------------------------------------------- ----------- 
 
¶9. (C) Assuming commodity prices continue to strengthen, 
analysts do not anticipate that Rusal's financial and legal 
issues will present major barriers to the company's growth. 
During a meeting on January 27, Stewart Lawson, HSBC Russia 
CEO and a former employee of Deripaska's Basic Element 
holding company (please protect), dismissed Rusal's current 
debt situation, particularly with regard to Russian state 
banks, noting that the chairman of VEB is not far from 
Deripaska's interests, and thus the VEB loan will never come 
due.  He was also clear that Rusal had been able to negotiate 
deals with its foreign lenders because its debts were so 
large, and if they chose not to restructure, the foreign 
lenders would have lost even more.  Regarding the Cherney 
case, Deutsche Bank analyst Olga Okuneva told us on January 
14 that investors think the Cherney case is old news and do 
not factor it into their decisions.  Lawson was also 
convinced that Cherney was firmly in Rusal's past, declaring 
"Cherney is a thug, they're (Cherney and Deripaska) both 
thugs, you don't end up running the Russian aluminum business 
without being a thug.  But, Deripaska is one of the smartest 
guys in business I have met.  He (Deripaska) will have to pay 
a couple hundred million or do a deal to resolve the Cherney 
case, but Deripaska loves London and wants to go there, so he 
will." 
 
¶10. (C) Lawson doubted Rusal would undergo an evolution into 
a transparent, modern corporation as a result of its 
restructuring or the IPO.  He discounted the influence of new 
shareholders over the company, claiming that, "minority 
shareholders don't get squat in Russia."  In addition, Lawson 
said that Deripaska did not have a "big dictionary" of 
corporate governance.  In Lawson's view, Deripaska would 
enact reforms only to the extent he thought he could 
personally benefit from them. 
 
------- 
COMMENT 
------- 
 
¶11. (C) Lawson's observation that Deripaska (and other 
powerful Russian oligarchs) only act in their own short-term, 
monetary interests -- as opposed to the long-term 
maximization of shareholder value -- highlights the need to 
convince these leaders that integration into the global 
economy and the resultant corporate governance reforms will 
be in their long-term self-interest.  Unfortunately, Rusal 
serves as a good illustration of the GOR's and major Russian 
corporations' current approach to surviving in a globalized 
economy.  Instead of sincere attempts to modernize and reform 
companies into efficient, transparent corporations, the goal 
is to restructure and extend debt, buying time until 
commodity prices rise and inefficiencies become less 
important.  The GOR has also managed to increase its
 stake in 
key companies and sectors by swapping state-owned banks' debt 
for equity.  As recent economic indicators point to a rebound 
in the Russian manufacturing sector, we expect major 
companies to face even less pressure for restructuring or 
reforming their operations.  End Comment. 
Beyrle

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