Financial Post (Canada): Magna’s man in Moscow remains a mystery; ; Who Is Oleg Deripaska?

EXTRACT: “It’s a bit like doing a deal with the devil,” said a manager with one of Magna’s major institutional shareholders. “The Russians have structured a lot of deals so that they work in their favour, whether it’s the forced takeover of the assets of Yukos or the virtual expropriation of the Sakhalin island project from Shell. And you sort of think: ‘Well you know, are you going to get a fair shake from these guys?’

THE ARTICLE

Published: Aug 25, 2007

Russian metals magnate Oleg Deripaska was holed up in a room in the basement of Toronto’s Roy Thomson Hall with his new business partner, Magna International Inc. founder and chairman Frank Stronach, as burly security personnel guarded the doors.

Reporters had been asking where Mr. Deripaska was. He didn’t show up at the morning news conference to discuss his proposed deal with Mr. Stronach –easily the biggest deal the auto parts big shot has hammered out in years. Magna executives were left to defend him over questions about why the State Department won’t let the Russian into the United States. They also countered queries over whether his stormy career would scar Magna’s reputation.

Half an hour later, here he is: One of Russia’s biggest industrialists, at 39 certainly its youngest billionaire, a survivor of one of most violent episodes in Russian business history, the last person in the world you might expect to see on a typical fresh May day in Toronto.

Sitting at a small table with Mr. Stronach, Mr. Deripaska spoke quietly and enthusiastically about his US$1.54-billion proposed investment in Magna. That’s the price he will pay to win six of 14 seats on the company’s new board of directors. That’s the price for access to its technology. In return, Magna says, he will lead the Canadian auto parts company to a sales bonanza in the Russian region — one of the fastest-growing automobile markets in the world.

Appearing relaxed with the top button of his dress shirt undone and wearing a plain grey Polar-brand exercise watch, the almost boyish-looking Russian praised the manufacturing capability of Magna’s Steyr assembly plant in Graz, Austria, where he first met Mr. Stronach. He talked of Russia’s growing middle class and its hunger for new cars.

He said Magna, “one of the best companies,” can help Russia revive its domestic auto industry and expand its business in the process.

On the eve of the Magna shareholders’ vote on the deal Tuesday, and in the three months since he made those statements, what has become clear is this: As he expands investments in his holding company, Basic Element, from aluminum into planes, cars, timber and construction, Oleg Deripaska has done little to dispel the mystery that surrounds him.

In fact, his advances to Western companies like Magna and General Motors Corp., in which he has reportedly bought a 5% stake, is generating some angst on this side of the Atlantic. And it’s far from certain the concern will go away.

At least two of Magna’s biggest shareholders say there is significant strategic risk in Magna hitching itself to a Russian oligarch with such close ties to the Kremlin. They say Mr. Deripaska is more hungry than Mr. Stronach to do this deal. And they have vowed they will not endorse this change of control without getting something more than what has been proposed in return.

Magna, recognizing shareholder doubts over the deal, has restored most of its dividend and will do another share buyback in addition to the one previously announced to sweeten the pot. Both moves will buy some goodwill among investors. But will it be enough to ease any fears that Magna is playing Russian roulette by getting hitched to Oleg Deripaska?

“It’s a bit like doing a deal with the devil,” said a manager with one of Magna’s major institutional shareholders. “The Russians have structured a lot of deals so that they work in their favour, whether it’s the forced takeover of the assets of Yukos or the virtual expropriation of the Sakhalin island project from Shell. And you sort of think: ‘Well you know, are you going to get a fair shake from these guys?'”

Oleg Deripaska is no ordinary investor. He is married into the family of former president Boris Yeltsin. He is chummy with Russian President Vladimir Putin. He controls an empire of energy, resource and manufacturing companies that is expanding with Mr. Putin’s blessing, including aluminum giant Rusal and automaker Gaz. And, as is the case with many Russian oligarchs who rose to great wealth and power amid the chaos and confusion of the country’s reorganization, his biography is not entirely squeaky clean.

Mr. Stronach calls his new partner “the most successful Russian businessman.” He says he is credible and has “a social conscience.” Others who have dealt with him are much less kind. Former partners and business rivals have sued him in courts in London and New York. Michael Cherney, a former associate, claims Mr. Deripaska broke legally established financial and business agreements and owes him 20% of Rusal. The former heads of two large smelters in Russia also sued, alleging Mr. Deripaska coerced them into selling their stakes in the businesses. They eventually settled out of court.

Mr. Deripaska has said the suits are intended to sully his reputation. “I am not ashamed and I don’t need to hide,” he told the Financial Times this summer.

These things about Oleg Deripaska are known: Married with two children, he was born in the town of Dzerzhinsk near the industrial city of Nizhny Novgorod. At age four, he settled in a traditional Cossack village in southern Russia with his widowed mother. He lived with his grandparents for a time, but moved from relative to relative for seven years, helping his family with chores like milking cows.

That time without a real home steeled him, he told a recent interviewer. “Difficulties are not a catastrophe,” he said. “If there was a flood, you would just go out and deal with it. You solve the problem.”

Later, he served in the Russian Army, guarding a missile battery near the Chinese border before starting physics studies at Moscow State University. When the Soviet Union disintegrated, Mr. Deripaska struggled to feed himself in the turmoil that ensued. He worked on construction sites to earn money. He got his degree eventually, but decided there were more opportunities outside science. He became a metals trader, joining other arbitrage players selling low-cost Russian-made aluminum internationally at much higher prices. And he used the money he made to buy shares in the Siberian aluminum smelter Sayansk, eventually becoming its director.

Exactly what happened after that, and how Mr. Deripaska amassed his personal fortune estimated at more than US$13-billion, is more muddied. Confusion over the Russian’s explanation of his past is also perhaps the reason the United States has denied him a visa. Mr. Deripaska was asked in 2006 not to enter the U.S. “pending resolution of certain unspecified questions that had arisen within the government,” Magna has said.

Russia’s aluminum industry went through a major period of conflict in the mid-1990s during its privatization that has come to be known as “the aluminum wars.” There were bloody fights. There were gun battles. There were contract murders. Mr. Deripaska’s finance director in 1994 reportedly survived an attempt on his life in Moscow. But he and his associates hit back when the Sayansk smelter was attacked, crushing the local mafia. Mr. Deripaska has said he won the wars by controlling supplies of alumina, the raw ingredient for aluminum.

“His business techniques are not anything that would be acceptable to any investor in the West,” said an American businessman with long experience in the former Soviet Union.

Mr. Deripaska also took a run at forestry. There was a much-publicized takover attempt of Russia’s Ilim Pulp, in which Mr. Deripaska tried to take the company’s mills by armed force. He had legal documentation to back up his claim, but rivals charge it was questionably obtained. An armed stand-off lasting two years ensued. Ilim cried for help, drawing international attention. The Russian government eventually intervened and the two sides agreed to bury the hatchet.

Mr. Deripaska never faced any criminal charges during that period. But it’s clear some who have dealt with him believe he has not lost his hunger for expansion. Last month, another oligarch, Mikhail Gutseriev, was forced to give up his oil company RussNeft after apparently losing favour with the Kremlin and facing what he called “unprecedented persecution” by state agencies. Mr. Deripaska has applied to Russia’s antimonopoly agency to take over control.

“It’s very clear that he’s been able to do things that others have not and that Putin gives him a pretty wide berth,” said Marshall Goldman, a specialist on Russia at Harvard University and author of an upcoming book called Petroleum, Putin and Power. “But I wouldn’t want him investing in my business.”

More recently, there are concerns over Mr. Deripaska’s comment that he would be ready to give Rusal back to the state at any moment. “I don’t separate myself from the state. I have no other interests,” he told a business newspaper. Georgy Oganov, advisor to Mr. Deripaska, told the Financial Post by e-mail the comments were taken out of context and misrepresented. “He was simply expressing his commitment to Russia as a patriotic businessman,” Mr. Oganov said. Magna has done extensive research on Mr. Deripaska and his business practices comply with “the best international standards,” Mr. Oganov said.

Russian analysts such as Kirill Chuiko at Uralsib Capital argue there’s nothing to fear about doing business with Mr. Deripaska or his countrymen. Several Russian companies have bought foreign assets with no negative consequences, such as Norilsk Nickel’s takeover of Canadian miner LionOre. Doubts in the West persist about oligarchs but the risks are overstated, Mr. Chuiko said.

Others make the same point: “More rubbish is written and spoken about Russia than any other country on the planet Earth,” Daniel Thorniley, senior vice-president of the Economist Intelligence Unit, said at the St. Petersburg International Economic Forum this past June. “Business success in Russia is the best kept business secret in the world.”

That’s what Mr. Stronach is hoping Magna investors will have concluded when they vote on Tuesday. Institutional Shareholder Services has given its approval to the deal, arguing Magna has to diversify geographically given the weak outlook in the North American auto industry.

Other analysts say it makes sense for Magna to choose Mr. Deripaska as a partner simply because he can open doors in Russia and elsewhere. “[His] political clout and understanding of the Russian automotive market will significantly reduce the business risks associated with Magna launching business in Russia,” said Elena Sakhnova, an industrials sector analyst with Deutsche UFG in Moscow.

Mr. Stronach, who sought blessing for the deal from Mr. Putin, said he told the president he could help create 300,000 manufacturing jobs in Russia within 10 years. But this is not a charity mission for the Magna boss. Through a side deal negotiated with Mr. Deripaska, he will pocket $150-million when the transaction closes in exchange for giving up control of half of his consulting company to the Russian. And he gains millions more through a special dividend-sharing structure. By one measure, Mr. Stronach is selling his future compensation now.

Wayne Lilley, author of Magna Cum Laude, a recent biography of Mr. Stronach, sees the deal as a way for the Magna chairman to plan his exit from the business he founded in a small garage 50 years ago.

John Doddridge, Magna’s chief executive from 1992 to 1994, thinks otherwise. He says he cannot fathom Mr. Stronach letting go of the company, and argues he is rather making a very calculated bet to push East. Everyone is afraid of Russia, he says, and that has left the field wide open for companies like Magna.

“The bottom line is this may not be as crazy as it sounds,” Mr. Doddridge said of the Magna-Deripaska deal, arguing shareholders have done well with Magna while investors in several rival companies lost their shirts. “Working for Frank, I underestimated him. I was trying to run a business and he was out doing everything else. And he’d come up with these, I thought, wild ideas, high-risk ideas, including some things he wanted to buy in Europe. It was too risky for my blood. I didn’t think it had been well thought through. And he proved to be right –for the most part.”

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