Russia needs clean end to Norilsk battle

The most surprising aspect of the all-in wrestling match between Russia’s Vladimir Potanin and Oleg Deripaska for control of the world’s biggest nickel producer is that the Kremlin has not stepped in to sort it out. With its tangle of lawsuits, disputed share buybacks and opaque sales of shares to third parties, the fight for Norilsk Nickel is hardly the advertisement for Russian corporate governance that Moscow needs.

This is, moreover, not just two oligarchs slugging it out. A related feud between Mr Deripaska and a third tycoon, Viktor Vekselberg, burst into the open this month.

Mr Vekselberg resigned as chairman of Rusal, the aluminium group of which Mr Deripaska is chief executive and 47 per cent owner, accusing management of running the company into a “deep crisis”.

The usually soft-spoken Mr Vekselberg, who with business partner Len Blavatnik owns 16 per cent of Rusal, would have preferred the aluminium group to sell its Norilsk stake when the nickel producer offered to buy most of it last year. Another Rusal investor, Mikhail Prokhorov – the New Jersey Nets owner who came third in Russia’s presidential election this month – would prefer it to sell too.

This is no minor skirmish: with a combined wealth of $60bn, these five are among the biggest beasts in the Russian corporate jungle. Adding further spice is a belief that the Kremlin favours further domestic metals and mining consolidation to create a Russian BHP Billiton. Perhaps that’s why it has let the fight run.

To recap how we got here, Mr Potanin and Mr Prokhorov gained control of Norilsk in Russia’s 1995 loans-for-shares privatisations. When they went through a business “divorce” in 2007, Mr Prokhorov sold his 25 per cent Norilsk stake to Rusal in a partial share swap. Rusal called it a step towards a full tie-up to create “Russia’s first global diversified metals and mining company”.

Mr Potanin’s group, which has 30 per cent of Norilsk, and management support, resisted that idea at every turn. The result has been a four-year war of attrition.

But neither side gains from the stand-off, making it urgent to find a way out. A week after Mr Vekselberg quit, Rusal wrote down its Norilsk stake by $1.4bn, saying big share buybacks by Norilsk’s management had eroded its value.

Associates say Mr Deripaska, who views the Norilsk stake as genuinely strategic, will not back down. His passion is understandable. This mining complex carved out of permafrost in the Arctic Circle is arguably the world’s finest nickel asset. The Rusal boss may also genuinely believe his pitch that with his experience in aluminium, where cost-control is key, he could run Norilsk, and market its products, better. Betting against a Russian oligarch, moreover, is often ill-advised. Many are by nature empire-builders, risk-takers, challengers of rules and conventional wisdom.

The Kremlin might also like the idea of a national “champion” with deep enough pockets to develop resources across Siberia – vital to maintaining Russian growth.

But merging Rusal with Norilsk neither creates a Siberian BHP Billiton nor a Rio Tinto. It would be a multi-commodity player, but would lack the global groups’ geographical diversity. So long as foreign counterparts continue to fear that Russians hold their assets only at the Kremlin’s pleasure, moreover, a merged Rusal-Norilsk might be no easier to combine with another international player.

Combining the two also has limited operational synergies. There is little overlap between Norilsk’s main customers – stainless steel makers – and the consumers of Rusal’s aluminium.

All this makes Mr Deripaska’s determination to keep the stake a costly exercise in stubbornness. Clearly, he does not want to lose face, or cash, having paid $14bn at the top of the market, much more than its latest market value of $8.6bn.

But it is tying up resources and management time, and keeping Rusal’s debt at $11bn, or a hefty 4.4 times earnings before interest, tax, depreciation and amortisation, excluding its share of Norilsk’s profits. Selling the stake could pretty much wipe out the debt, freeing Rusal to pay dividends and develop new aluminium assets in Siberia and Guinea.

The Deripaska camp this week floated the idea that his holding could buy the Norilsk shares from Rusal for $9bn in cash and assumed debt. That could free Rusal, although it would be difficult to finance.

A clean sale, however, would be better for Mr Deripaska and Rusal shareholders. Ending the battle would improve perceptions of Russian governance and risk. That ultimately could make it easier for both Rusal and Norilsk – with Moscow’s blessing – to find international partners to take them into the global metals superleague.