Putin urges US help for oligarchs
By John Helmer

MOSCOW - Prime Minister Vladimir Putin, who also chairs the Russian bailout bank Vnesheconombank (VEB), has asked the United States government to signal its support for at least two oligarch-owned Russian companies in the US.

The remark, which took US State Department officials by surprise, mentioned Norilsk Nickel and steelmaker Severstal, whose controlling shareholders are Vladimir Potanin and Alexei Mordashov respectively. But Putin is believed to be thinking also of two other, heavily indebted oligarch groups with American interests and US bank obligations - steelmaker Evraz, controlled by Roman Abramovich, and Oleg Deripaska, owner of United Company Rusal and the Basic Element automobile group.

According to the prime minister's website transcript, Putin said publicly after meeting US Secretary of State Hillary Clinton on March 19:
As to our economic cooperation, our large companies are, of course, interested and expect support from both parties. General Electric, Boeing, and the US oil companies have been working in Russia for a long time and have been doing that successfully. And, of course, they require support both from sides, the authorities of the United States of America, and from the government of Russia, and the same is true for our companies. Our Norilsk Nickel, one of the world’s largest companies in this sphere, and our other large companies are already investing in the United States and working there. Severstal, for example. They certainly require support. They need signals showing them they are welcome both in the Russian and US economy.
In 2003, Potanin was the first Russian oligarch to be allowed by Putin to export earnings from his shareholding in Norilsk Nickel, the world's largest producer of nickel and Russia's largest mining company, and invest them in a US corporation. After a protracted review by the White House, and lobbying from the Kremlin, Norilsk Nickel bought a 55% controlling stake in the Montana-based palladium miner, Stillwater Mining. Since then, Stillwater has been a loss-maker every year except for 2004 and 2006.

Even counting the net losses over seven years of US$438 million, Potanin spent just a fraction of the amounts Mordashov and Abramovich have paid out and lost for their US assets. According to Norilsk Nickel records, the control stake of Stillwater cost a total of $133 million in cash, plus 877,000 ounces of palladium. The precious metal was assigned a value of $157 million in the transaction, but was at the time unsellable in the market.

By contrast, in 2008 alone - as the US and global steel markets headed for the crash - Mordashov paid out $2.2 billion for three US steelmills. They made Mordashov one of the largest steelmakers in the US - and also one of the most profligate. In 2007, Severstal North America reported losses (gross figure) of $43 million; $522 million in 2008; and $674 million in 2009. That grand total of $1.2 billion, added to his $2.2 billion buying spree in 2008, makes Mordashov the second-biggest Russian loser in American history.
First prize in that class goes to Abramovich, along with his Evraz co-stakeholder, Alexander Abramov: they paid $5.1 billion to buy steel, pipemaking and scrap assets in the US and Canada over 2007 and 2008. Evraz does not break down its profit and loss account to make its US mill performance visible. The group accounts also present the revenue, earnings and profit-and-loss figures so that it is impossible to judge how much profit earned in Evraz's Russian steel operations offsets losses in the US and elsewhere.

The last financial report issued by Evraz is for the six months ending June 30, 2009. At that stage, Evraz was running a consolidated group loss (gross) of $1.3 billion. The total debt, accumulated in large measure to pay for the North American asset purchases, was $10 billion at the end of 2008; $8.5 billion at June 30, 2009.

Buying offshore haven assets at premium prices is a well-known tactic of the Russian oligarchs to protect their global fortunes and their Russian concessions from Kremlin penalties or reassignment. Russian steelworker unions have observed also that they have lost jobs and wage gains to the oligarchs, in order for the relative profitability of the Russian mills to subsidize the loss-making in the US haven operations. US steelworkers have charged that profits have been stripped from the North American mills to show higher losses on the US balance sheets, where tax rates are higher.

Not a word of criticism of these business practices has escaped from the Russian government, the Russian parliament or the state auditor, the Accounting Chamber. In last week's recommendation to Clinton for "support signals" from the US government, Putin appeared to be asking for more than benevolent silence from Washington.

During a hostile takeover attempt in 2007 and 2008 by oligarchs Deripaska and Mikhail Prokhorov against Norilsk Nickel, Putin protected Potanin and warded off Deripaska. When Deripaska's Rusal then toppled into insolvency in November 2008, Putin arranged for VEB to protect Rusal's 25% stake in Norilsk Nickel from forfeit to a consortium of banks, led by Bank of America Merrill Lynch; they had loaned $4.5 billion to Rusal for the purchase of Norilsk Nickel shares from Prokhorov, and Deripaska couldn't pay back the loan.

Bank of America Merrill Lynch has gone on to become the biggest US financial institution promoting Deripaska, acting as lead bookrunner in Rusal's Hong Kong Stock Exchange listing in January. No other US bank has done so much. Neither Morgan Stanley nor Goldman Sachs, which advised Rusal in its abortive London Stock Exchange listing in 2007, agreed to try again. JP Morgan sources say they want nothing to do with Rusal's share promotion. A recent Merrill Lynch report on Rusal urged investors to buy Rusal shares because "Rusal presents good value vs aluminum peers" and "is the 'best of a challenged bunch'." In the small print, the report also warns that Merrill Lynch "may have a conflict of interest that could affect the objectivity of this report".

With friends like Mother Merrill on the bandwagon, what more does Putin want from Washington? The prime minister's press office was asked: what support from the US government was the prime minister referring to in his remark to Clinton? For example, does Mr Putin believe the US government should bail out Severstal's debts on loss-making steelmills Mr Mordashov purchased in the US - debts and losses which Severstal's Russian steel operations currently subsidize? And does Mr Putin intend or imply that he believes the US government should do more to support Oleg Deripaska in the US, including the lifting of his visa ban, and permission to buy into the US auto industry?" There has been no reply.

Norilsk Nickel and Severstal also declined to answer what support or signal they would like from the US government. "We do not comment on actions or utterances by state officials," a Norilsk Nickel spokesman said.

Last month, Admiral Dennis Blair, Director of National Intelligence in Washington, said in testimony to the US Congress that "criminally linked oligarchs will enhance the ability of state or state-allied actors to undermine competition in gas, oil, aluminum and precious metal markets". Without naming Russian individuals or companies, Blair referred to the problem of "a growing nexus in Russian and Eurasian states among governments, organized crime, intelligence services and big business figures".

Blair hinted that the US government should intervene to deal with the Russian oligarch "nexus" and its threats of "bribery, fraud, violence and corrupt alliances with state actors to gain the upper hand against legitimate businesses".

There has been speculation in Washington that US government shareholding control of General Motors (GM) could and should be applied to pressure the auto company into procuring Stillwater's palladium. Stillwater reported last August that it was in discussions with GM to do just that, after the latter terminated its Stillwater palladium purchasing contract, ostensibly as part of GM's July 2009 bankruptcy court procedures.

In a press release, Stillwater said that "the termination of the GM-Stillwater contract puts good paying American jobs at risk at the same time GM is receiving massive federal government funding of US taxpayer dollars with which GM emerged from bankruptcy." The outcome of the talks, added chief executive officer Frank McAllister, "did not yield any positive results for our company, its employees and other stakeholders or the communities in which we operate. At issue is the termination of the Stillwater contract while at the same time GM continues to purchase palladium from foreign suppliers in Russia and South Africa, funded with US taxpayers' dollars."

Since then, Stillwater has had little to say about GM and nothing about US government aid.

The GM contract cancelation was offset, according to financial data released by Stillwater on February 25, by rising palladium prices and improved demand: "Palladium realizations, which benefit from floor price provisions in the company's automotive supply agreements, averaged $374 per ounce in the fourth quarter, up from $360 per ounce in the third quarter and - despite the loss of the General Motors agreement in early July - above the $364 per ounce realized in this year's first and second quarters. In this environment, the company has had no difficulty receiving full market prices for the metal displaced by the GM contract cancelation."

Although CEO McAllister noted last month that a contract the mining company had with Ford was due to run out at the end of this year, he was generally upbeat on this year's production, price and profit prospects.

"Mine production for 2010 is projected at 515,000 PGM platinum group metals ounces, as we disclosed previously. This guidance is actually a little lower than the 529,900 ounces that we produced in 2009. Our management focus in 2010, however, will continue to center on strengthening our cost performance and improving mining efficiency, rather than on seeking to maximize mine production."

The US Embassy in Moscow was asked what it knew of the discussions between Putin, Clinton and other officials on US government aid for Russian oligarchs. A spokesman said the embassy had no comment on Putin's public remark. If he and Clinton discussed the subject privately, the embassy said it could not comment at all.

Former associates of Hillary Clinton and her husband and former US president, Bill, are linked with Endeavor Group, a lobbying company that has worked for Deripaska and which on May 8 last year filed the required foreign agent's registration form. This revealed that Deripaska was paying $40,000 per month for the group to work on persuading US government officials to lift a bar on his entry visa and to support Deripaska's bid to buy the Opel unit from GM.

John Helmer has been a Moscow-based correspondent since 1989, specializing in the coverage of Russian business

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