By Andy Home
LONDON Dec 7 The Economist Intelligence Unit
(EIU) has just issued a report on doing business in Russia.
"Nothing ventured, nothing gained: Changing international
perceptions of Russian business" is based on a survey of 195
senior executives from outside Russia, with particular focus on
those who have been or are considering joint venturing with
"Non-Russian executives have decidedly mixed views of their
Russian partners," the report notes, explaining: "Access to
energy and financial resources, and technical know-how, are the
big pluses (...) poor language skills, inefficient management
and corporate governance are the big minuses."
Third on the EIU's recommended list of nine ways for Russian
companies to break free of outsiders' "stereotypes" is to "avoid
'insider' practices and back-room deals".
Oh, and one other thing. The study was commissioned by
Russian aluminium giant UC RUSAL and is available for
download from the company's website (www.rusal.com).
The irony is delicious since RUSAL's oligarch owner Oleg
Deripaska just seems to have participated in one of the biggest
back-room deals imaginable.
At stake is the ownership of Russian metals giant Norilsk
Nickel, one of the world's leading suppliers of
nickel, copper, palladium and platinum.
Deripaska, second-largest shareholder, and Vladimir Potanin,
the largest shareholder in Norilsk, have been taking potshots at
each other ever since RUSAL picked up a 25-percent stake in
Norilsk at the height of the financial crisis in 2008.
Deripaska has flung repeated allegations of poor corporate
governance, questionable share buy-backs and just about
everything else bar the kitchen sink at his rival oligarch.
All vigorously denied by Potanin, who has repeatedly offered
to buy Deripaska out.
The battle has raged through numerous Russian courts and was
due to go before a London arbitration court before a compromise
deal was announced earlier this week.
Enter stage left a third oligarch, Roman Abramovich,
co-owner of FTSE-100-listed steel giant Evraz but more
popularly known for being the owner of English football club
AND THEN THERE WERE THREE?
Abramovich's investment vehicle Millhouse Capital will buy a
7.3-percent stake in Norilsk, valued at $2 billion, and then
transfer it into an escrow account.
The other two feuding oligarchs will each transfer
equivalent stakes into the same account, with the resulting
22-percent stake to be voted on by Millhouse.
Abramovich becomes de facto controller of the board in a
deal, to quote RUSAL's press release, aimed at "integrating the
efforts of all parties to maximize profitability and
shareholders' value, as well as delivering improvements to the
existing corporate governance structures."
It's a very Russian solution.
Non-Russians labouring under what the EIU report calls
"stereotypes" about Russian business practices might be forgiven
for wondering how a third Russian oligarch is going to help make
Unless, that is, Abramovich really represents Norilsk's
longest-standing "invisible" shareholder, namely the Russian
As I argued in a column in September 2010 ("Norilsk Nickel:
who's the boss?"), the history of Norilsk is inextricably
entwined with the Kremlin.
Norilsk Correctional Labour Camp (acronym Norilsk ITL, but
generally referred to as Norillag) was established in 1933 by
the NKVD, the Soviet Union's political police and the precursor
to the KGB.
It remained a centrally-controlled strategic city right
through the Soviet era and the umbilical link to Moscow remains
although control of the company passed to Potanin's Interros
Group during the 1990s.
Russian President Vladimir Putin has repeatedly cajoled
Potanin and Deripaska to end the feud, even calling both
oligarchs to a meeting with him and Norilsk management on Sept.
In August this year he expressed "hope all their
disagreements will be resolved in the interests of (Norilsk
Nickel) operations and the people who work at its plants".
He didn't give any particular reason for that optimistic
assessment but his comments were widely interpreted as a sign
that the Kremlin was going to up the back-room pressure somehow.
Quite how is now starting to become clear.
Does any of this amount to anything more than a typically
Russian piece of corporate theatre?
At stake are the fortunes of two of the largest Russian
corporate entities and two of the largest players in the global
The final deal, still being hammered out behind closed
doors, will determine both companies' fortunes for a long time.
At the heart of this dispute is the level of dividend
payable by Norilsk to its shareholders, first and foremost
RUSAL is burdened with massive net debt of $10.7 billion
with operating profitability dragged down by its almost total
focus on aluminium, the price of which is languishing at
the top end of the cost curve.
The Norilsk dividend is an important financial offset, which
is why Deripaska has repeatedly called for it to be raised.
Raise it too far, however, and Norilsk becomes even more of
a cash cow for its shareholders, undermining its ability to
invest in its own core business.
The size of the dividend going forward is going to mean a
lot for each company.
There is also the not-so-little matter of how Norilsk
markets its metal, another long-standing focus of criticism by
The RUSAL press release on the proposed deal with Millhouse
cites the potential for "large-scale adjustments of (Norilsk
Nickel's) strategy, sales policy and dividends policy."
Given that Norilsk is one of the world's largest nickel
producers, changes to its current sales policy could have
far-reaching market impact, particularly if Deripaska is
proposing the same sort of strategic alliance with Glencore
International that exists with RUSAL.
A seven-year deal between the two companies commits RUSAL to
supplying a total 14.5 million tonnes of aluminium to the Swiss
KREMLIN 1: TRANSPARENCY 0
All of which is being discussed by the three oligarchs in
the sort of back-room deal lamented in the EIU's report.
Nor will the outcome, whatever shape it eventually takes,
help dispel one of the most commonly-held "stereotypes" about
Russian business practices, namely lack of transparency.
"Indeed, Russian companies score worst on transparency of
any attribute covered in the survey (4.3 out of 10)," the EIU
Still, at least we're a little bit wiser as to who the real
owner of Norilsk is.