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RUSSIA

Determined Deripaska Casts a Long Shadow

A table laid out with platters of blini, beets and caviar and a bottle of 2001 Montrachet awaits Oleg Deripaska and his guests in a dining room at his Moscow headquarters. While others dig in, Deripaska sips only black tea and nibbles on toast.

The 40-year-old owner of Basic Element, the holding company for a rapidly expanding mining and manufacturing empire, exhibits little appetite for the trappings of corporate power. His focus is on fundamentals — restoring what he sees as the country's pre-perestroika industrial might.

"It's a big country," Deripaska said, speaking softly in English and wearing a navy blue blazer, dark-blue loafers and jeans. "This country needs everything: roads, hospitals, schools, airports, cars, trains, airplanes. There is huge demand, and supply is not coping."

Few people have the means to affect the country's economy like Deripaska. He's worth at least $30 billion, based on analyst estimates of his closely held aluminum interests and Bloomberg data on his stakes in publicly traded auto, construction and insurance companies. Basic Element employs more than 300,000 people.

Operating from a quiet side street a three-minute walk from the prime minister's office, Deripaska is on a tear. The ballet aficionado has choreographed a global buying spree in the past year, spending at least $3.5 billion on stakes in two West European construction companies and Magna International, North America's largest auto-parts supplier.

Now he's aiming for control of Norilsk Nickel, the world's biggest producer of the metal, and oil producer Russneft. On Thursday, United Company RusAl, which Deripaska controls, acquired 25 percent of Norilsk, the first step in a potential takeover. And he's negotiating investment and manufacturing partnerships with General Motors and jet maker Bombardier. Along the way, his construction holdings have propelled him into a major role in the remake of Sochi as it prepares to host the 2014 Winter Olympics.

Political change can wait, Deripaska said. The typical Russian is more concerned with bread-and-butter economic issues.

"More democracy, less democracy; more freedom of the press, less freedom of the press — just ask people in Nizhny Novgorod what they think," Deripaska said, referring to the home of his auto making business, GAZ.

'I Like Spartak'

Deripaska's focus on rebuilding the country's infrastructure dovetails with the drive by President Vladimir Putin to restore Russia as a global economic and political titan. The idea of an industrial renaissance is a passion of Deripaska's, his partners say.

"He does everything to give back to his country," Magna co-chief executive Siegfried Wolf said.

So far, Deripaska's aggressive deal making has suffered few failures. His stake in closely held RusAl, the world's biggest aluminum producer, is worth around $23 billion, Lehman Brothers analyst Vladimir Zhukov said. GAZ, which is 73 percent owned by Basic Element and trades on the RTS, has a market value of $4.1 billion. His 60 percent holding in insurance company Ingosstrakh, which also trades in Moscow, is worth around $1.3 billion.

Basic Element said in November that it planned to be ready to sell minority stakes in all of its companies within three years.

Two obstacles may yet slow Deripaska, however. Since 2006, he has been denied direct access to the world's largest economy because the U.S. State Department revoked his visa. Neither the agency nor Deripaska will explain why.

Closer to home, Deripaska's relationship with President-elect Dmitry Medvedev is a wild card. Medvedev, 42, and Deripaska clashed over a deal in 2001, said Stanislav Belkovsky, a political analyst and former Kremlin adviser.

The dispute was over assets controlled by Ilim Pulp, the country's largest pulp and paper company, in which Medvedev at one time held a 20 percent stake, according to corporate filings. Deripaska says the tug of war ended amicably.

"Deripaska stands out among other Russian businessmen in that he's the most aggressive, a man who wants to control the maximum of everything," Belkovsky said. "If the elite start to view him as too aggressive and fear his actions, he may be neutralized."

Deripaska's move this year to buy oil assets, an industry the government has increasingly taken control of, may be a concern inside the Kremlin, Belkovsky said.

"I think Medvedev is anxious about Deripaska and his influence," he said.

Deripaska shrugged off a question about whether the pulp plant duel meant relations with Medvedev would be chilly. "Like or dislike, what's the difference?" he said. "We are all here to work."

Putin and Medvedev aides declined to comment.

Deripaska isn't lowering his profile. He tours his factories at least twice a month and sometimes works 20-hour days, said adviser Georgy Oganov, who was a spokesman for the last Soviet Embassy in Washington.

Deripaska owns at least seven homes — in France, Italy, Russia and Britain — but spends most of his time in Moscow, though he says he deplores the capital's traffic. That's where his wife, Polina, 28, publisher of entertainment magazine Hello!, and young son and daughter live.

Deripaska has teamed up with local builder Mirax Group on the $10 billion Moskva-City residential and office development, and he's a trustee of and frequent visitor to the Bolshoi Theatre.

"I like 'Spartak,"' Deripaska said, referring in Russian to the Aram Khachaturian work "Spartacus."

"Russian ballet, after all, is a genuine piece of art."

Opening Doors

Beyond Moscow, Deripaska has cultivated relationships with such financiers as former World Bank president James Wolfensohn, a Magna director, and Nathaniel Rothschild, a member of the famous banking family and co-chairman of New York hedge fund firm Atticus Capital. Rothschild smoothed the way for Deripaska in London financial circles, a Moscow-based banker said.

Rothschild declined to comment, Atticus Capital spokesman Andy Merrill said.

Although he's not permitted inside the United States, Deripaska sits on the 52-member international advisory council of Harvard University's Belfer Center for Science and International Affairs, along with Rothschild and former Federal Reserve chairman Paul Volcker.

Basic Element has established a reputation with London banks of being "tough but fair," said a banker who has worked on loans to Deripaska's companies. In 2006, his Russian Aluminum, the predecessor to United Company RusAl, secured a $2 billion loan. At the time, it was the single biggest loan to a private Russian company outside the oil and gas industry.

"He's tough with a capital T, but Deripaska knows how to make sure people walk away feeling like they got a fair deal," the banker said.

That may be news to Czech private equity firm PPF Investments. In October, it acquired 38 percent of Ingosstrakh. Basic Element called a shareholder meeting and voted to quadruple the insurer's capital. PPF says it was not invited and that the aim was to dilute its stake. Basic Element says it sent invitations. They sued each other, and PPF won an initial round in a Moscow court. Basic Element plans an appeal.

The legal tussle involving Medvedev unfolded in December 2001, when a court ruling that favored a minority shareholder prompted Ilim to default on electricity payments to Irkutskenergo, a Deripaska-owned generator. Deripaska seized the mill as a creditor, sparking further court disputes.

Medvedev, at the time a Putin aide, provided behind-the-scenes guidance for Ilim, a company that gave him his first break in business as its head of legal affairs, political analyst Vladimir Pribylovsky said. Deripaska and Ilim settled the dispute with a 2004 asset swap, according to an Ilim statement.

Deripaska's relationship with Putin has been smoother, and family ties may have played a role. In a presidential decree after succeeding President Boris Yeltsin, Putin conferred "legal and social guarantees" upon Yeltsin and his family.

The following year, Deripaska married Polina Yumasheva, the daughter of a Yeltsin aide. Eighteen months later, her father, the aide, married Tatyana Dyachenko, Yeltsin's daughter. The weddings made Deripaska the husband of Yeltsin's granddaughter by marriage, qualifying him for special protection, Belkovsky said.

Putin, 55, has met Deripaska several times a year while president and visited the tycoon's Swiss-style ski retreat in southern Siberia.

"Deripaska used that visit of Putin to the full," Pribylovsky said. "The president doesn't visit everyone."

During the 2007 presidential campaign, a United Russia billboard greeted visitors at Deripaska's Sayanogorsk smelter. But that kind of support doesn't open any doors, Deripaska said.

"He does not need our consultation," he said of Putin. "It's a wrong representation of Russia that everything is conducted through the Kremlin. We have a very liberal economy. You can do what you want."

Dynamic Manager

At Basic Element, Deripaska has turned as much to young outsiders as the Moscow elite. Three of Basic Element's seven main units are headed by foreigners. The holding company's CEO is Gulzhan Moldazhanova, a Kazakh woman who's a rarity: None of the country's 30 biggest listed companies is headed by a woman.

Moldazhanova, 41, studied physics and math at Moscow State University and was hired in 1995 as a personal assistant to Deripaska.

"I could manage to remember phone numbers and speak fairly fluent English," she said, recalling his first impression of her. Moldazhanova was named to Basic Element's top post in 2005. Deripaska sets strategy, and she manages day-to-day operations, she said.

Deripaska's roots lie in rural Russia, far from the Bolshoi. On his grandparents' farm near Krasnodar, at the edge of the Caucasus Mountains, he tended the horses before school. As a teen, he lived with his mother in nearby Ust-Labinsk.

"In Russia, there are three different cultures: Moscow culture, hunters and growers," Deripaska said over lunch with visiting Canadian journalists. "I'm from the south of Russia, and we're used to growing things."

Deripaska did well enough in school to win entry in 1985 to Moscow State University. He studied nuclear physics, earning his degree in 1993 and learning English along the way. The army interrupted his path in 1986; he served two years in the Strategic Missile Forces. In 1990, Deripaska enlisted as a financial director at a trading company that eventually focused on aluminum.

As a young trader, Deripaska had ideas and energy but lacked contacts, said Michael Cherney, a former associate who now lives in Israel and is claiming in a London court that half of Basic Element belongs to him. They met at a London metals conference in 1993, said Cherney, who was born Mikhail Chernoi.

"I was looking for a young, dynamic manager, and I thought he fit the bill," Cherney said.

'Not a Clean Business'

Private enterprise was forbidden in the Soviet era. Even under perestroika, only collectives that rented assets from the state to engage in primitive entrepreneurship were allowed. Emerging from communism, Russia lacked laws on ownership, property rights and taxation.

To promote the concept of private property, Yeltsin gave each citizen a voucher worth around $60 to buy shares in state enterprises. Workers were also given shares in their factories.

Because paychecks were often delayed, desperate workers would sell shares and vouchers at the factory gates. Cherney and Deripaska used this tactic to build a stake in a huge smelter four time zones east of Moscow in Sayanogorsk, Cherney said. The money came from millions of dollars Cherney had banked as a coal and metals trader.

Through the mid-1990s, several groups vied for control of the country's aluminum industry, and unsolved murders accompanied the scramble, spawning the label "aluminum wars."

"The deaths were probably in the scores, as many as 40 or so when you take into account all the lower-profile guys," said James Fenkner, a money manager at Red Star Asset Management, who worked in Moscow for U.S. commodities brokerage AIOC when its Russian metals chief was killed during the struggle for control of a smelter in Krasnoyarsk. "Certainly, it was not a clean business."

Cherney, his brother Lev and two other investors created a metals company, Trans World Group, which gained stakes in Kazakh and Ukrainian refineries that processed bauxite to supply the raw material alumina. When Cherney and TWG won control of the Sayanogorsk plant, Deripaska took over in 1994 as smelter manager. Cherney moved to Israel that year because, he said, he feared attacks by organized crime groups. Deripaska was one of several young TWG plant managers.

"They were all abrasive, committed, completely self-made men," said Yulia Latynina, an author and political commentator.

Anxious about leaving his plant unattended, Deripaska at times slept on the factory floor, and the proximity to smelter fumes led to dental problems, Latynina said. Cherney said he rewarded Deripaska and at least one other manager by making them equal partners in the enterprises in which Cherney held shares. Deripaska and Cherney formed Sibirsky Aluminum in 1998, and Cherney said he turned over management to Deripaska.

The young managers revolted against the Cherney brothers and TWG because they came to believe promises of ownership stakes were not being fulfilled, Belkovsky, Latynina and Pribylovsky said. Through power plays and legal maneuvers, they gained control, the analysts said.

"It was about who had the biggest balls, and it seems like Deripaska won," Latynina said.

A British court hearing on Cherney's claim to part of Basic Element is due to start Wednesday.

Basic Element's Growth

The lawsuit centers on the validity of several agreements, including one the two made on a napkin at a London hotel in 2001. A Deripaska aide said the two men settled all debts that year.

"We don't have any outstanding obligations to Mr. Cherney," the aide said. "Mr. Deripaska does not owe him any money. The rest of it can be sorted out in court."

Deripaska created Basic Element in 2001 amid a series of acquisitions. The tycoon merged his aluminum assets with those of billionaire Roman Abramovich in 2000 and then bought him out for $1.58 billion four years later.

Around the time of the Cherney split, Deripaska moved into the auto industry with his purchase of GAZ. He paid $1.54 billion last year for part of Magna, giving him access to assembly expertise, 42 percent of a new holding company that controls Magna and the right to nominate six of 14 Magna directors.

In 2007, Deripaska teamed up with two rivals to form United Company RusAl, swapping assets in exchange for shares. He holds 66 percent of the new company, former holders of SUAL own 22 percent and Swiss commodities trader Glencore has 12 percent.

RusAl said the public would be offered shares in London by early 2010.

Deripaska moved quickly on other fronts, including construction. While Magna co-CEO Wolf was still negotiating a deal with Basic Element in early 2007, he introduced Deripaska to Hans-Peter Haselsteiner, CEO of Austrian builder Strabag.

In April, Deripaska paid around 1.2 billion euros ($1.9 billion) for 30 percent of Strabag, which is bidding for a share of the Sochi Olympics' $12 billion in construction work. A week later, he bought a 3 percent stake for an undisclosed sum in Germany-based Hochtief, which is rebuilding Sheremetyevo Airport. He raised the stake to 9.9 percent in May.

The two investments, plus his 50 percent stake in Transstroi, the country's biggest road builder, guarantee Deripaska a central role in construction for the 2014 games.

Norilsk and Russneft

In July, Deripaska set his sights on oil when Basic Element filed for the right to buy Russneft, after billionaire owner Mikhail Gutseriyev fled the country amid a criminal investigation. Deripaska says he wants to use it as the basis for a petrochemical venture with an unspecified foreign partner. The Federal Anti-Monopoly Service has not approved the Russneft purchase.

"We're in no hurry," Deripaska said. "How often does an oil company get sold in our country?"

Soon after the Magna deal was announced, the Ontario-based company told shareholders that Deripaska had been barred from the United States pending the resolution of what Magna called "unspecified questions" raised by visa officials. Deripaska says he hopes the ban might be lifted with a new U.S. administration.

Deripaska met with Senator John McCain, the presumptive Republican presidential nominee, at the World Economic Forum in Davos, in January. A call and e-mail to McCain's press office were not returned.

U.S. Senate and House records show that Deripaska spent $260,000 in 2005 for help with "visa policies and procedures." His lobbyist was former Republican presidential candidate and Senator Robert Dole, said Mike Marshall, a spokesman for Dole.

Deripaska's most audacious move may be his bid for Norilsk, which produces nearly all of Russia's nickel, one-third of its copper and half of the world's palladium. Norilsk shareholder Vladimir Potanin, a former first deputy prime minister, tried to block Deripaska with help from iron ore producer Metalloinvest, which opened its own merger talks with Norilsk. Metalloinvest's primary owner is Alisher Usmanov, a manager of Gazprom, which Medvedev chaired for seven years.

In mid-April, Deripaska said he was undeterred. And on Thursday, RusAl said it had acquired the 25 percent stake in Norilsk, purchased from Onexim Group, controlled by billionaire Mikhail Prokhorov. He received 14 percent of RusAl and around $4.5 billion in cash through a syndicated loan the aluminum company took out last month.

Even if he stumbles in his bids for Russneft's oil and total control of Norilsk's ore, Deripaska's partners are confident that his position is secure.

"The current oligarchy will stay in power for at least 20 or 30 years," Strabag CEO Haselsteiner said. "It doesn't matter whether Mr. Putin will be president, prime minister or a fisherman in Alaska."

Pribylovsky wasn't sure. Deripaska's ambition may win over Medvedev or lead to the tycoon's undoing, he said. "Maybe he wants too much."

For his part, Deripaska says the path forward is clear: Russia needs to renew its transport, health and education infrastructure. As the country's biggest cement importer, Basic Element plans to spend at least $1 billion on six cement plants across the country by 2012.

"We're still trying to catch up with the Soviet Union," Deripaska said. "Only next year, for example, will cement consumption — which reflects construction volume — reach the Soviet Union level."

(The Moscow Times 28.iv.08)