Easing Its Debt Allows Rusal To Focus Down the Euro Road

Oleg Deripaska spent the best part of his Moscow working days in 2009 in what he called a "war room," dealing with Russia's biggest-ever corporate-debt restructuring.

Three years on, and aluminum and energy producer United Co. Rusal PLC still has a war room, but the work being carried out there is significantly different.

"That first war room was about what we could achieve in nine months; now it's about what we can achieve in three years," Mr. Deripaska, Rusal's chief executive, says.

At the end of 2009, when it completed its restructuring, Rusal, which produces aluminum, a metal used in transportation, packaging and construction, had debts of $16.8 billion. By the end of September 2011, this had been cut to $10.9 billion through repayments and tough cost-cutting programs throughout its network. In 2011, months of negotiations with more than 70 international and Russian banks resulted in the successful refinancing of this sum with 13 international banks. Right now, Rusal has a 12-month holiday from its debt covenants.

Rusal's debt mountain was the result of the twin evils of a collapse in commodity prices during the economic downturn in 2008-9 and the company's voracious appetite for borrowing to finance expansion. Aluminum prices more than halved, causing producers around the world to slash output.

But Mr. Deripaska says the company is now in a much better position to take on the new deterioration in market conditions seen as a result of the euro-zone crisis.

"It's not just doom and gloom. Last year we decided that we had to have even harder targets to stay competitive," he says. "We believe the aluminum market will be better in the second part of this year."

Mr. Deripaska is one of Russia's best-known entrepreneurs, but his desire for privacy means little is known of his personal life. In person, he seems almost the exact opposite of the ruthless businessman the media often make him out to be; rather he comes across as a softly spoken professional with a dry sense of humor and strong sense of his roots in the Krasnodar region of southern Russia, close to the Black Sea.

If the war room is less active these days on the restructuring front, it might still be required for the company's battle with fellow Russian miner, OAO Norilsk Nickel. Rusal, which has a 25% stake in Norilsk, is embroiled in a fight with Interros Holding, controlled by billionaire Vladimir Potanin, for control over the nickel miner. Interros has a 30% stake in Norilsk which, with a market cap of about $36.5 billion, is the world's biggest producer of nickel and palladium—producing 20% and 45% of total global out put of these metals respectively, and a sizeable producer of platinum and copper.

Mr. Deripaska says the existing Norilsk management uses the firm as a "cash cow" which they milk without having a clear development plan, dividend policy or proper corporate governance structures.

He is also scathing of Norilsk's decision to sell an 8% stake in the company in the form of treasury stock to commodities trader Trafigura. Neither Trafigura nor Norilsk have disclosed the exact terms of the deal, which was announced in December 2010. Rusal has taken Interros to court in several different jurisdictions over this matter.

"Trafigura has never bought this 8% in Norilsk. It easy to calculate that a party who bought it has realized a profit of about $1.5 billion on subsequent sales back to Norilsk, but no corresponding profit can be found on Trafigura accounts," Mr. Deripaska says. "We hope that people and organizations involved will rectify this wrongdoing before they fall under criminal investigation," he adds. Trafigura declined to comment on the matter. Norilsk and Interros dismissed Mr. Deripaska's comments as baseless.

But Mr Deripaska still believes Norilsk is "an opportunity" for Rusal, though he rules out merging the two companies to create a national champion.

"At the moment we [Rusal and Norilsk] clearly have different views, but we're very patient," Mr Deripaska says. "We believe there are synergies for our two companies, especially in Siberian development, and the investment community recognizes this and also expects changes in Norilsk."

Corporate governance is a bugbear for Mr. Deripaska, largely because he thinks the lack of it makes Russia appear to lack credibility in the international markets. "We just need to change corporate practice because the rules of the 1990s are not acceptable any more," he says.

But he believes Russia "will be different" after the presidential elections in March. "It's not just a simple desire to develop Moscow as an international center. Russia needs to stop capital flight, needs to realize its unique opportunity," he says. "We have low public debt to gross domestic product, less than 12%—total debt of less than 27%—a profitable budget and a stable monetary policy. Russia's macroeconomic points are positive."

If Mr. Deripaska is steadfast in his praise of Russia, the same can't be said of his opinions on Europe. His criticism of Europe's past and present policy makers and their apparent unwillingness to risk their popularity to address the region's key problems—sovereign debt, weak banks, low growth—is relentless.

"We need to find a politician on top who wants to deal with this issue," he says. "At the moment, there's no European politician willing to spend 1% of his or her popularity, because the party political competition is so narrow. The most important issue is how do you really put this on top of the agenda, how can you win public support, and how quickly will the public accept that not just one, not two, but three generations will not have the happy lives of the 1990s and the last decade."

Rusal listed on the Hong Kong and Paris stock exchanges two years ago, a change that Mr. Deripaska says brought adjustments to corporate practices, including increased transparency and more dealings with shareholders. It didn't go for a London listing and found a U.S. listing too cumbersome.

"The issue is that regulation should fit with the market situation. If you scare people to death, like in New York, and you establish so many formal rules, which in reality just help management to do nothing, it's not very productive," Mr. Deripaska says. "London is sort of in the middle."

He doesn't rule out a London listing in the future—"let's see what happens over the next three years"—and says that where the large number of Indian companies that are planning to list eventually float will be an indicator of the location for future IPO growth.

Aluminum is where Mr. Deripaska started. After graduating in physics from Moscow State University and then economics from the Plekhanov Academy of Economics, he set up the Military Investment and Trade Company, a small metals-trading operation, using its profits to buy a stake in the Sayanogorsk Aluminum Smelter in Eastern Siberia, eventually becoming its director-general in 1994.

Rusal is majority-owned by Mr Deripaska's EN+ Group, a Russia-based diversified mining, metals and energy group which includes one of the world's largest hydro-electric generation companies and the country's biggest independent power producer, EuroSibEnergo PLC. The group is in turn owned by Basic Element, a conglomerate spanning activities in energy, manufacturing, aviation, construction and financial services.

Mr. Deripaska says his businesses have a "unique reputation" in Russia, with no door closed. "We lower the Russia risk for our partners and investors. I'm very open to approaches for joint-venture projects, and if other companies need something, they ask for it," he adds.

But where does he see Rusal in a decade?

The company will be like a "laboratory, producing new solutions for new prod- ucts... for the Asian market," Mr. Deripaska says, noting that Asia already accounts for a third of the aluminum producer's business. "Rusal in a decade will be a different size, just based on the size of Asia in the world economy, and Asia could definitely double."