By ERIC REGULY
Wednesday, April 11, 2018
ROME -- Only six months ago, Russian billionaire Oleg Deripaska, said to be President Vladimir Putin's favourite oligarch, was on top of the world. He had just pulled off a remarkable feat: the listing of his hydropower and aluminum holdings company EN+ Group on the London Stock Exchange, the first Russian company to do so since Russia's invasion of Crimea in 2014.
Today, he is fighting to save his empire from destruction. On Friday, he and eight of his industrial companies were hit with punishing U.S. sanctions that could last years. While Mr. Deripaska was only one of seven Russian oligarchs to land on the sanctions list, he has the most to lose, given the vast scale of his Russian holdings. The drop in the value of his biggest stock exchange companies, EN+ and Hong Kong-listed United Company Rusal, the top maker of aluminum outside of China, was swift and brutal.
The shares of both companies fell by more than half of their value on Monday and Tuesday. In total, Mr. Deripaska's listed companies lost about US$6-billion in value, and the losses could rise as the sanctions, which essentially prevent his companies from dealing in U.S. dollars and with U.S. banks, bite.
As the ruble plunged against the dollar, the impact of the sanctions was being felt across the world. One victim was Glencore, the world's biggest commodities trader, owner of 8.75 per cent of Rusal's equity and buyer of billions of dollars of its aluminum under long-term contracts.
In an effort to distance himself from the sanctions, Glencore CEO Ivan Glasenberg stepped down from the Rusal board on Tuesday and cancelled plans to swap Glencore's Rusal stake for a stake in EN+. The day before, Glencore's exposure to Rusal sent its own shares down by 5 per cent.
Rusal, which is the second biggest supplier of aluminum to the United States after Canada's Rio Tinto Alcan, was quick to warn that it was in trouble. In a filing to the Hong Kong exchange, it stated that the sanctions are "highly likely" to have a material impact on its business and warned that a loan default is not out of the question. "Shareholders and potential investors are advised to exercise extreme caution when dealing in the securities of the company," Rusal said.
The question is whether the Kremlin, having rescued Mr. Deripaska's empire once - in the 2008 financial crisis - will do so again.
Executives who are close to Mr. Derispaska, none of whom wanted to be identified by name, think a bailout is inevitable.
"Oleg has the state behind him and it was the state which got him into this mess in the first place, so the Kremlin is obligated to do something," said an ally of Mr. Deripaska said.
The rescue, if it comes, might see the state buy some of the Rusal shares owned by Mr. Derispaska and another oligarch on the sanctions list, Viktor Vekselberg, the founder of the diversified industrial Renova Group, who is also close to Mr. Putin. If their combined Rusal holdings were to fall below 50 per cent, the U.S. Treasury Department might be convinced to remove the company from its blacklist, even if the two oligarchs would remain on the list, said an investor who knows Mr. Deripaska well.
A request for comment from Basic Element of Moscow, Mr. Deripaska's main holding company, met with no response.
Already, the Kremlin is hinting strongly that it will provide financial assistance to any company damaged by the sanctions. "Support for these companies will be provided on a continuous basis," deputy prime minister Arkady Dvorkovich was quoted as saying on Monday by the state-controlled RIA Novosti news agency.
"We pay a lot of attention to our leading companies. These are thousands of employees, important jobs for our country."
Mr. Deripaska is often described as Mr. Putin's favourite oligarch, partly because he concentrated most of his industrial activities in Russia instead of spending his spoils on overseas companies and playthings, such as soccer teams. While he owns a 73-metre yacht, the Queen K, and several private residences outside of Russia, he considers himself a stay-at-home industrialist who builds companies, not merely invests in them.
In a 2011 interview with The Globe and Mail at his residence just outside Moscow, he said, "We are not investors. We run businesses. I am living here, of course, and I care. I know we have a unique opportunity for my [country] to be developed."
He took a swipe at the industrialists who "did not fulfill their promises" to reinvest their fortunes back into Russia. Many of them became oligarchs in the "loans-for-shares" schemes in the wild days of the 1990s after the Soviet Union's collapse, when the cash-strapped Russian government traded equity in state-owned enterprise, from telecommunications to energy, for loans.
Mr. Deripaska, 50, was born in Krasnodar, in the far south of Russia - Cossack country - and studied nuclear physics at Moscow State University. He became a metals broker and emerged as the big winner of the so-called aluminum wars of the 1990s, which were often deadly (Mr. Deripaska denies he instigated any of the violence). The Siberian aluminum smelters would form Rusal and the single biggest source of Mr. Deripaska's wealth.
In 2007, Mr. Deripaska seemed invulnerable. Forbes put his wealth at US$28-billion, making him one of the richest oligarchs, perhaps the richest. (On Monday, Forbes said he's now worth a mere US$3.7-billion.) The 2008 crisis crippled his manufacturing, real estate and auto businesses. A margin call deprived him of his US$1.5-billion stake in Canadian auto parts company Magna International. When aluminum prices collapsed that year, Rusal breached its loan covenants. On the verge of losing Rusal to foreign banks, the Kremlin-controlled VEB bank handed Rusal a US$4.5-billion bailout loan, allowing the company to restructure its foreign debt.
Mr. Deripaska and most of his empire came back to life within a few years. Rusal eventually emerged in good shape, after having reduced its debt substantially, boosting its cash flow and entering new markets.
If the sanctions were to disappear within, say, a few months, the company probably would not suffer a lot of damage. But the sanctions will probably endure, shutting Rusal out of the crucial U.S. market and preventing it from making sales in U.S. dollars.
An executive close to Mr. Deripaska said that Rusal's best bet is to boost sales in China, receiving payments in either rubles or renminbi. But as desperate seller, Chinese buyers might demand big discounts.
Mr. Deripaska has been in tough situations before and survived. A bailout of some sort seems likely. His friendship with Mr. Putin and the Kremlin is about to get its most severe test.