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. Last Updated: 07/27/2016

Deripaska Holding's Tentacles Reach Farther

ReutersOleg Deripaska
On a recent evening at Moscow's upscale National Hotel, executives for leading oligarch Oleg Deripaska's sprawling business empire rolled out an ambitious vision for the future.

A slick promotional video outlined the vast swathe of interests encompassed by Deripaska's holding company, Basic Element. A management lineup dominated by Western executives, who manage Deripaska's assets in seven core sectors, completed the picture.

With its tentacles spread in some 80 companies across the globe -- spanning from aluminum to cars to construction -- the holding this week is set to expand further as it seeks to finalize its next acquisition, embattled oil company Russneft.

On top of that, the jewel in Deripaska's crown, aluminum giant United Company RusAl, appears close to sealing a deal with Norilsk Nickel that would create a de facto national metals champion.

With revenues in 2006 of $18 billion, and more than 240,000 employees, BasEl conservatively puts its worth at $23 billion. Its most valuable asset, a 66 percent stake in RusAl, could pass that figure alone, as analysts say the aluminum giant currently could be worth as much as $40 billion.

Within three years BasEl will have readied its main units for primary listings, chief executive Gulzhan Moldazhanova told the briefing. With a small smile, she suggested to reporters that they might be "surprised" at which company would be offered for sale first, the implication being that it might not be RusAl.

Speaking by telephone this week, BasEl's chief financial officer, Alexander Lukin, said the holding had the option to organize the public offerings along sector lines.

It is a far cry from BasEl's humbler beginnings 10 years ago, when its wealth centered on several metals assets.

As well as its RusAl assets, BasEl owns stakes in automaker GAZ; Transstroi, which builds roads, ports and railways; Bank Soyuz; insurer Ingosstrakh; and EvroSibEnergo, which manages the holding's power assets, among many others.

Internationally, BasEl has a 20 percent stake in Canadian car manufacturer Magna and stakes in European construction companies Strabag and Hochtief of 34 percent and 10 percent, respectively. BasEl's assets stretch as far afield as South America, Africa and Australia.

And now it is also trying to break into the strategic oil sector through the acquisition of Russneft, a deal that has yet to be cleared by the Federal Anti-Monopoly Service.

In a recent interview, Deripaska said he proposed to invest $3 billion per year in developing Russia's infrastructure, a theme that has emerged as a key tenet of President Vladimir Putin's presidency and likely for the successor administration that takes office next year.

"We have a very big interest in the infrastructure projects. It is one of our strategic areas of focus," said BasEl's Lukin. "BasEl will indeed be contributing its equity to these [public-private] partnerships."

Now vying for the top spot on Russia's rich list, Deripaska picked up his assets in the country's murky aluminum wars of the 1990s, a legacy that has dogged the oligarch in his efforts to expand his business globally. Last year, it emerged that Deripaska's U.S. visa had been revoked, and he is still fighting shareholder suits from former and current partners. He has repeatedly denied any wrongdoing.

Yet while Deripaska has much to do if he is to overcome Western suspicion and bring BasEl onto the international stage, the holding is today unrecognizable even from what it was two years ago.

Following pressure for greater transparency from the European Bank for Reconstruction and Development and the International Finance Corporation, BasEl has revolutionized its image. It now provides limited financial information for each of its business units and gives access to management, creating an atmosphere of openness where little existed before.

To date, BasEl's strategy has been largely dictated by RusAl, which was formed this year through a three-way merger of Russian Aluminum, SUAL and the alumina assets of Swiss trader Glencore.

RusAl was to have been one of the biggest initial public offerings in London this fall, but, citing hardening market conditions, management said the listing had been postponed "indefinitely." Under terms agreed with shareholders, though, it must come to the market by early 2010.

RusAl is now poised to enter a new phase of its development. After the markets closed Friday, Mikhail Prokhorov revealed that RusAl had struck a conditional deal to acquire his stake in Norilsk Nickel in exchange for an undisclosed cash sum and an 11 percent stake in RusAl.

An offer by Prokhorov two days earlier to sell his stake to business partner Vladimir Potanin for a premium price of $15.7 billion appeared to be merely a formality to clear the way for a tie-up with Deripaska.

In an interview with Vedomosti published Tuesday, Prokhorov said a merger with RusAl was likely to happen sooner or later.

"Norilsk Nickel's prospects in its current state are limited. Its competitiveness on the world market will decline because of the inevitable growth in costs and the consolidation of global players," Prokhorov said.

"I think a merger would be the best option."

A spokeswoman for RusAl confirmed Tuesday that the deal was a logical first step in a wider deal to gain control of Norilsk.

Ever since RusAl pulled its IPO in the fall, speculation has swirled that Deripaska was in talks that would change the nature of RusAl's business.

A lingering hurdle on the horizon for BasEl has been a long-running lawsuit by Deripaska's former partner Mikhail Chernoi for a 20 percent stake in Russian Aluminum, to which Chernoi claims he is entitled under a 2001 agreement.

BasEl said Chernoi's claim had been dismissed by an English court on jurisdictional grounds and that he has yet to receive permission to appeal that dismissal.

A spokesman for Chernoi did not return calls.

An alliance with Norilsk could make some sense, investors and analysts said.

"If the goal is simply [to create] a large-scale company that can outbid BHP Billiton and hunt for assets globally, then it does make sense," said Tim McCutcheon, a fund manager at DBM Capital.

Metals is the biggest strategic sector currently without a national champion, said Chris Weafer, chief strategist at UralSib. As one of several oligarchs with close connections to the Kremlin, Deripaska could offer the next best thing to a state-owned corporation, he said.

"People like Deripaska understand so well what is required of them," Weafer said. "The state is directing the orchestra, and as long as the players follow the music sheet, there is no reason for the conductor to interfere anymore."

"Effectively what we are looking at is the creation of a national champion by proxy," he said. "I would expect the combined entity to develop as if it was state owned."

A Kremlin spokeswoman declined to comment Tuesday on whether the state supported a tie-up between RusAl and Norilsk.

But some analysts argue that the concept of national champions is more driven by business than by the Kremlin.

"If a deal happens, whereby Norilsk merges with RusAl, it would be supported by the Kremlin," said Vladimir Zhukov, metals analyst at Lehman Brothers. "But I do not think the Kremlin is pushing either Deripaska or Potanin or Prokhorov to merge."

BasEl's run has not gone entirely unchecked. The Federal Anti-Monopoly Service is expected to rule Friday on BasEl's bid for Russneft, and earlier this week the Natural Resources Ministry's environmental watchdog said it was looking into suspected breaches of Russneft's license agreements.

Deripaska has dropped his bid for UES's 25 percent stake in Power Machines, clearing the way for rival Alexei Mordashov to buy the stake, Vedomosti reported.

And elsewhere, concerns still linger over BasEl's commitment to the corporate governance mantra it has started to preach.

The Wall Street Journal reported in April that Deripaska paid Bob Dole, a former U.S. presidential candidate, $560,000 to lobby on his behalf to obtain a U.S. visa. The visa was granted in 2005 but withdrawn last year. The U.S. State Department did not provide a reason.

Last month, Deripaska launched a charm offensive aimed at winning over Canadian public opinion over his acquisition of the Magna stake. An interview with a group of Canadian journalists prompted a wave of positive coverage.

Closer to home, PPF Investments, which belongs to Czech businessman Petr Kellner, is alleging that BasEl, its co-owner in Ingosstrakh, tried to dilute its stake without its consent.

A Russian court has temporarily halted the share dilution while an investigation is conducted. But PPF claims the damage has already been done.

"We think that every case of wrongdoing, in terms of corporate governance, is closely monitored in the West and can harm the overall positive picture of the investment climate in Russia," PPF chief executive Tomas Brzobohaty said in e-mailed comments.

BasEl has declined to comment on the case, but a company official argued that Ingosstrakh could lose out on lucrative contracts involving state security agencies with a foreign investor on board, Reuters reported.

But if one thing is clear, it is that the issue of corporate governance will grow in importance along with the size of Deripaska's empire.

"The larger they become, the less acceptable it is not to behave in a good corporate manner," DBM's McCutcheon said of BasEl. "They are simply too big to be anything but strive to be a well-run company and a good corporate citizen."