Political connections saves Rusal

Business life and political relationships are inextricably linked in Russia. None of Russia’s oligarchs would have got where they are without political connections, and much as they project the image of international corporate businessmen, none of them would survive today without the continuing support – or at least tolerance – of the Kremlin. So it was refreshing and a little surprising to hear Oleg Deripaska, head of Rusal, being quite so frank about the state of Russia.

Rusal, and by extension Mr. Deripaska, were saved by the Kremlin on at least one, probably two, occasions in the recent past. The Kremlin leaned on Russian banks to extend critical loans to the firm in 2009 in the wake of the global financial collapse, and again recently they brokered a settlement between Mr. Deripaska and Vladimir Potanin, head of Interros and a co-investor in Norilsk Nickel. A bitter rival between the two resulted in Mr. Potanin blocking dividend payments from Norilsk, cutting off the only source of funding available to Rusal to continue interest payments on its massive $10.8 billion debt mountain – much of it made from buying a 25% stake in Norilsk during 2008. We are less interested in the machinations of Russian oligarchs than we are in the position of the world’s second-largest aluminum producer.

Rusal’s debt is still potentially crippling; the firm is due to refinance some US$6.7 billion of debt by 2016 and yet its underlying aluminum business made a loss of $55 million in 2012 with little prospect of an upturn in metal prices this year. According to the FT, having received an extension of its covenant holiday last autumn, the company must make payments of $465 million to Russian lenders this year and $1.5 billion to domestic and international lenders in 2014. Fortunately, Norilisk’s new agreed dividends will amount to $557 million this year, rising to $835 million in 2014 and 2016, buying Rusal valuable time but not offering a way to pay down the bulk of the debt mountain.