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Enquiry THURSDAY, 13 March 2008

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Russia's Artful Dodger


by Alyssa A. Lappen and Dr. Rachel Ehrenfeld

Alcoa Inc.'s shares may have fallen 30% since their July 2007 peak, but that only makes the world's second largest aluminum producer a more tempting takeover target. A few foreign companies have expressed interest, including United Company Rusal (UCR, registered "offshore" in Jersey), now the world's largest aluminum conglomerate.
Rusal's owner, a close personal friend of the Russian President, Oleg Deripaska has a net worth that has nearly doubled since 2006, to an estimated at $21 billion. If American law enforcement and securities officials are not already paying close attention to Russia's wealthiest man, they should.
On September 1, the German magazine Der Spiegel reported that Deripaska stands accused by the Stuttgart Prosecutor's Office of involvement with Russia's Izmailovo mob in laundering 8 million Euros in Germany and bribing judges -- and, most damningly, of contracting the murders of some competitors.
This investigation apparently blocked Deripaska's attempt to obtain control over the German construction conglomerate, Hochtief. Deripaska, who already holds 9.6 percent of the company, is challenging the decision in court, alleging anti-Russian politics rest behind the decision.
However, the Germans may be rightfully wary Deripaska's attempted acquisition. Directed by Putin, Russia's "Fagin," Deripaska happily plays the Artful Dodger, entrapping and tricking domestic and foreign businessmen and absconding with their assets, all in the name of nationalism.
The U.S. government has denied Deripaska's entry to the country for more than 10 years. In 2005, after paying $560,000 to former Senator Robert Dole and his law firm, Alston & Bird, Deripaska secured a multiple-entry visa and visited the U.S. several times. His visits ended abruptly in July2006, when the U.S. government revoked his visa.
Despite Deripaska's questionable profile, for $500,000 monthly he retains the advice of the risk management and investigative firm Dilligence LLC, whose advisory board is chaired by former CIA and FBI Director Judge William Webster.
Deripaska even has the fifth Baron Rothschild, Nathaniel. In his stable. Rothschild has a $15 million stake in Dilligence, and is also a partner in New York's $14 billion and growing Atticus Capital hedge fund, which owns 4% of the New York Stock Exchange.
The multi-billionaire Deripaska is currently embroiled in hot debate with his London investment bankers, including Goldman Sachs, J.P. Morgan, Deutsche Bank and Credit Suisse. At issue is Rusal's proposed initial public offering (IPO), which Deripaska hopes can raise at least $30 billion on the London Stock Exchange (LSE) and other European markets.
However, Rusal must first resolve the 20% ownership claim of Michael Cherney (Mikhail Chernoy), an Israeli industrialist who has sued Deripaska in London's High Court for payment of some $6 billion -- and presented substantial evidence, including two 2001 trust agreements, signed by Deripaska, promising to pay.
Meanwhile, Deripaska has secretly circulated in London, Frankfurt and Edinburgh, unregistered and unpublished offering statements for the IPO. All traces of a private meeting on Friday, June 30 at Trinity House in the City of London, for example, were "carefully wiped, except for two umbrellas left behind with the Trinity House porter," wrote John Helmer in Mineweb. on July 3, 2007.
Although the U.K. lacks laws comparable to the U.S. racketeers Influenced and Corrupt Organizations Act (RICO), Britain's Financial Services Authority has reportedly assigned a special unit to investigate Cherney's High Court evidence against UCRusal. The FSA has yet to provide a detailed response to our inquiry.
Rusal's investment bankers have refused to comment, either declining to answer or ignoring our questions all together. But they are reportedly sniping at one another over the terms of the increasingly problematic Rusal offering.
To succeed, Rusal apparently needs a statement from outgoing Russian president Vladimir Putin, assuring investors that Russia will not repatriate the aluminum giant after the offering. That is highly unlikely considering the Putin's nationalization campaign, which has already lassoed major operations of several international companies, most recently, BP's Kovytka natural gas production field, worth an estimated $20 billion.
However, the offering may be further complicated by Russia's new Prime Minister, Victor Zubkov, the former Federal Financial Monitoring Service deputy minister, who is expected to launch anti-corruption and tax fraud campaigns.
If he proceeds as expected, Rusal could be a target. A 2004 Tax Ministry report named Rusal, particularly, for paying lower tax rates than any other major Russian metals producer, via lenient legal interpretations of aluminum tolling contracts, and transfer pricing between its Russian smelters and its dozens of offshore trading companies.
Russian tax law allows tolling, by which an alumina supplier pay the smelter to process (i.e., electrolyzing and smelting the metal), and receives aluminum metal in exchange, which an exporter then sells internationally--but only if all the entities are legally independent. Those jointly owned (wholly or partly) by the same entity or shareholder, however, engage in illegal transfer pricing, to minimize taxable Russian smelter revenue and maximize profits from alumina outside Russian jurisdiction.
U.S. banks transferred some $390 million allegedly tolled by one of Rusal's recent acquisitions, Siberian Ural Aluminum (SUAL). Evidently, from 1998 and 2002, SUAL contracted one of its largest smelters, Volgograd Aluminum Plant (VGAZ), to remove funds from their trading chain, by paying them less than half the London Metals Exchange price for aluminum, and transferring the difference in cash through U.S. banks to controlling SUAL shareholders via various corporate fronts.
In North America, Rusal America Corp. (RAC), registered as a Delaware Corporation, has already grabbed some prize properties. In August 2007, Deripaksa won approval for his purchase of Magna International Inc., the Canadian car parts conglomerate. In 2006, in its Austrian plant Magna built more than 200,000 cars for General Motors, Chrysler and Mercedes Benz.
Shortly after Magna's Board approval, many shareholders, including Ontario Teachers' Pension Plan, opposed Deripaska's purchase alleging that they were cheated. But the majority endorsed the deal, and on August 28, the European Union also consented.
When the deal closes on September 20, for a measly $1.54 billion, Deripaska will own 42 percent of Magna's new holding company, giving Rusal effective control of the Canadian auto parts giant. In anticipation, on August 7 Deripaska also announced his purchase of nearly 5 percent of the U.S. auto giant, General Motors.
U.S. investors and U.S. strategic assets in Alcoa may be affected. The $257 million Rusal sale in January 2005 of the Samara and Belaya Kalitva metallurgical aluminum plants in Russia to Alcoa -- is contested subject in Britain's High Court. The claim may have merit, since Deripaska's ownership of other aluminum plants is -- or was -- also contested by many others, including Tajik Aluminum (TadAZ) and Ralco.
Given the significance of the imminent Magna deal, in an attempt to close the barn doors as the horses escape, Canadian law enforcement officials are now reportedly investigating Deripaska's alleged criminal ties.
U.S. law enforcement and market regulators should be concerned with Deripaska's domestic and international dealings, too. When asked "if he would transfer Rusal back to the [Russian] state at any moment," Deripaska told the Financial Times on July 12, 2007, "If the state says we need to give it up, we'll give it up..."

Alyssa A. Lappen, a former editor for Forbes, Corporate Finance, Working Woman and Institutional Investor, writes for many print and online journals, including Human Events, Revue Politique, Midstream, FrontPageMagazine and American Thinker.

Dr. Rachel Ehrenfeld, author of Funding Evil; How Terrorism is Financed and How to Stop It, is director of American Center for Democracy and
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