Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Magna Worries About the State's Role

Itar-TassDeripaska and German Gref listening during a session of the St. Petersburg International Economic Forum in June.
Magna, Canada's largest automobile parts manufacturer, warned last week that Oleg Deripaska's $1.5 billion investment in the firm could result in the Russian government becoming a minority shareholder.

In a memorandum filed with the U.S. Securities and Exchange Commission ahead of a shareholder meeting on Aug. 28, Magna outlined the risks involved in the tie-up with Deripaska, including the possibility that Deripaska's Basic Element holding group or its automotive subsidiary, Russian Machines, could be nationalized.

"Certain political forces continue to call for the results of economic reforms, including the privatization of Russian enterprises, such as Basic Element, to be reversed," Magna said in the memorandum.

"Implementation of the Russian strategy ... will pose challenges commensurate with the opportunities," the memorandum said.

Deripaska, whose business interests have thrived under President Vladimir Putin, told the Financial Times in an interview in July that he sees his interests as the same as the state's. He also said he would be prepared to give RusAl back to the state.

Kirill Chuiko, an automotive analyst with UralSib, said the risk had been exaggerated. Even if the state were to become a minority shareholder, it would not pose a problem for the firm, Chuiko said. Moreover, the Kremlin looks favorably on Magna's cooperation with Russian Machines and AvtoVAZ, he said.

On May 18, President Vladimir Putin gave his blessing to a preliminary deal between AvtoVAZ and Magna to build a plant for Russia's biggest carmaker.

In May, Russian Machines and Magna announced the $1.5 billion deal, which will help Magna secure a well-connected partner in the country and give the Russian firm access to Western technology.

Before the companies agreed on the current plan, Deripaska proposed privatizing publicly traded Magna -- a suggestion rejected by Magna chairman Frank Stronach, the filing said.

On Monday, a Basic Element spokesman said former World Bank president James Wolfensohn would represent Deripaska's interests on Magna's board of directors.

Wolfensohn, who headed the World Bank from 1995 to 2005, is one of the four directors that will be appointed to the board if the investment plan is approved by shareholders, Magna said.

Basic Element's spokesman said that as an independent director, Wolfensohn would represent Deripaska's interests in the company. Deripaska has no plans to take a seat on Magna's board, the spokesman said.

"[Wolfensohn] boasts experience that is extremely valuable to us," including in corporate governance and sustainable development, the spokesman said, adding that Wolfensohn and Deripaska have known each other for a long time.

Wolfensohn & Company, a boutique investment bank set up by Wolfensohn, who has also served as chairman of Citigroup's international advisory board since 2006, provides advisory services to Basic Element, Magna's filing said. Overall, the board will increase in size to 13 from nine members now.

The filing also said Siegfried Wolf, Magna International's co-CEO, would receive a $500,000 bonus for his efforts in developing Magna's business in Russia.