Abramovich’s luck hasn’t run out yet

by Simon Pirani in Moscow

Roman Abramovich, owner of half of Russian Aluminium, has been under fire.

First, he faced a barrage of often-hostile British press coverage after gaining control of Chelsea Village, the company that controls Chelsea football club.

Then, as if the sharp glare of publicity wasn’t painful enough for Russia’s shyest billionaire, his legitimate decision to invest in Chelsea was then publicly criticised by a senior state official.

Sergei Stepashin, head of the Russian parliament’s audit chamber, thundered at a conference in St Petersburg on 7 June that “money made from our oil companies should go on drilling new wells and developing the Russian economy, not on buying football teams”.

Most Russians would strongly agree, or at least expect the football teams to be domestic ones.

Privately, though, Abramovich – by nature a private man – might well have savoured the irony behind former prime minister Stepashin’s outburst: that Russian politics smiles more benignly on Abramovich than on other oligarchs (politically influential businessmen). That despite president Vladimir Putin’s announcement that he would keep all the oligarchs “equally distant”, Abramovich seems to be more equal than others. That Abramovich has benefited from the twists and turns of government policy in ways that others haven’t.

On the very day of Stepashin’s speech, a Russian newspaper reported that attempts by government officials to scrap tolling rules, of which Rusal is by far the largest beneficiary, have been scrapped for the fourth year in a row.

Although Rusal’s chief financial officer, Vladislav Soloviev, told Metal Bulletin that tolling does not result in tax savings (see below), public opinion in Russia and in the metals industry perceives it as part of a complex of tax-efficient measures that keeps millions of dollars made from metals production offshore. Observers of Russian politics attribute the repeated failure of proposals to junk the scheme as a tribute to Rusal’s tremendous lobbying power.

And when it comes to tax, Rusal is not the only Abramovich company that knows how to save on it. Sibneft, the oil company he controlled, has under Putin paid substantially lower rates of tax than its peers, according to analysts’ calculations. Sibneft, which two months ago agreed to merge with Yukos in Russia’s largest-ever corporate marriage, was until last year served well by tax reduction schemes using trading companies based in Russia’s own Channel-Islands-type favourable tax zones. The schemes were being phased out last year.

It is this type of thing – and, perhaps, the considerable secrecy that surrounds Abramovich’s affairs – that leads Russian public opinion to believe that he is “probably the most influential” oligarch of all, as the king of Russian privatisation, former deputy prime minister Anatoly Chubais, once put it.

Just contrast the treatment of Abramovich – a public telling-off by a prime ministerial has-been – to that of Mikhail Khodorkovsky, owner of Yukos. This month the security services made a crude and concerted move against senior figures in his company, which observers took to be a warning that Khodorkovsky should keep out of politics.

Platon Lebedev, a co-owner of Yukos, was arrested; Khodorkovsky and others were questioned by prosecutors; and a search warrant issued for a Yukos executive, Aleksei Pichugin, in connection with a murder investigation.

It is widely assumed that Khodorkovsky “got his collar felt” because of his public declaration that he was contributing to the Union of Right Forces and the liberal Yabloko party, opposition groups that could undermine the pro-Putin Unity party’s hopes of a majority in the parliamentary elections in December.

And he’s not the first. Two other oligarchs who Putin considered too politically active – former TV magnate Vladimir Gusinsky and Boris Berezovsky, power behind the throne in the Yelstin years and Abramovich’s mentor – live in exile, and face arrest and probable imprisonment in Russia.

The message seems to be that oligarchs who buy English football clubs are OK. Those who meddle in politics are not.

Abramovich’s acquisition of Chelsea has led to speculation that he may be taking his money out of Russia. He has also sold his 26% stake in Aeroflot, Russia’s national airline, and is reportedly shedding a $175 million share in Rospromavto, a car business. But Millhouse, the London-based holding company that manages his assets, still controls assets that account for 3-4% of GDP, including power stations, car and bus plants, paper factories, banks and insurance companies. He hasn’t quite left yet.

Another theory says that Abramovich bought Chelsea to make himself known in the western markets, and run through the publicity hoops now, in preparation for an IPO by Rusal at a later stage. This makes a bit more sense, although there are no signs that an IPO is imminent.

A spokesman for Millhouse declined to comment on future plans. Rusal cfo Soloviev says: “Of course we want to be a world-class company, and that doesn’t sit well with being privately owned. So it seems likely that Rusal will eventually go public. But we don’t want to put any time scale on it.

“There are advantages and disadvantages to being private, or public; when the advantages of going public outweigh the other considerations, I expect it will happen. Of course it’s the shareholders’ decision ultimately. As a management we are bringing our financial reporting and all other aspects of our work up to standard, so that if and when an IPO comes, we are ready.”

That preparation has certainly impressed industry observers. Vasili Nikolaev, metals analyst at Troika investment company, said: “We have been impressed by recent meetings with Rusal. The company has a good management and a sound financial strategy. An IPO is not an immediate prospect, but it’s moving in the right direction for one in the future.”

Another school of thought holds that, as long as Rusal can benefit from the tolling regime and Russia’s bargain-basement electricity prices, there is no need to rush to the markets with an IPO.

And indeed during last year’s elections for the governership of Krasnoyarsk, where Rusal’s second-largest smelter is based, a Rusal executive gave an outline indication of the sort of savings tolling involves.

Anatoly Reshetnikov said in a letter to Vedomosti newspaper that the Krasnoyarsk smelter’s 2001 turnover was $397 million – about $461 a tonne in a year, about one third of the world price. That is a processing charge paid to Kraz by an offshore Rusal entity, and no tax is paid in Krasnoyarsk on the other two-thirds of the aluminium sale price.

But Soloviev insists that, while the company favours retaining the tolling scheme, it is not for tax reasons. “If we went from tolling to an import-export arrangement, we would have have to pay VAT and have it refunded after the production cycle. From the Russian side’s point of view, costs would grow, turnover would grow, but profit would not grow. The two principle taxes are VAT and profit tax, and they would both remain unchanged.”

Soloviev, who worked as an auditor and as adviser to the tax ministry before joining Rusal in 2001, adds that the offshore entities certainly make profit, on alumina sales and other items – but that this would be retained even if tolling is scrapped. “The abolition of tolling would affect us adversely because of the complications of VAT refund procedures, and because our debt contracts refer to the current arrangements. It might affect our cost of financing.”

Rusal-watchers need to ask whether this means that Abramovich’s mythical Kremlin-lobbying powers – which have supposedly kept the tolling system in place – are less important than has been previously assumed. Or whether they are actually greater than has been thought – so great that they can help guarantee that, even if the tolling scheme is abolished, Rusal continues to get lenient treatment from the tax man.

On past form, it’s safe to predict that in any case Abramovich will keep getting lucky.

Abramovich’s parents died when he was a child, and was brought up by an uncle who worked in the oil industry. In the early 1990s, he made his first big money as an oil trader, and in 1995, bought a controlling stake in Sibneft at a state privatisation auction for $110 million, a fraction of its current worth.

Abramovich became friends with Berezovsky, and with Tatyana Dachenko, daughter of the then president Boris Yeltsin. From there stemmed the legend that Abramovich was one of the “family” of fixers behind Yeltsin, although he denies having ever met him.

After Russia’s 1998 meltdown, Sibneft was raided by Moscow tax police, who found nothing, while Swiss prosecutors investigating possible Russian government misuse of IMF funds raided Runicom’s offices in Montreux, and found nothing. There was a bitter legal spat between Sibneft and the European Bank for Reconstruction and Development.

Towards the end of Yeltsin’s rule, in 1999, Abramovich became a parliamentary deputy for the distant Arctic province of Chukhotka, whose poverty-stricken human population has shrunk by half to 72,000 in the last decade and is outnumbered by reindeer. He was elected governor of the province last year, on a promise to improve living standards, and has kept to his word.

Then in February 2001 came the extraordinary deal that put the Russian aluminium industry’s criminal past behind it and brought Rusal into being. Abramovich bought out the local entrepreneurs who had acquired control of Bratsk and Krasnoyarsk smelters from Trans World Group and its allies, and teamed up with Sayansk boss Oleg Deripaska, whose interests in auto, paper and pulp and other industries have made him an oligarch in his own right. Abramovich and Deripaska control 50% each of Rusal.

The reason Abramovich himself gave for his decision to buy Chelsea seems as plausible as any: that rich young Russians “don’t want to live for ever, so we earn it and spend it; and I have realised a dream”.

Even if he doesn’t want to live for ever, this rich young Russian is likely to matter to the metals industry for a while yet.

A version of this article was published by Metal Bulletin, 15 July 2003.
Posted July 2003; © 2003 Simon Pirani

Comments are closed.

%d bloggers like this: