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By John Helmer in Moscow

The Bubble Metric Index (BMI) is a measure of the distance between the fantasy of money and financial reality.

In the past month, it has been weighing unusually heavily on the oligarchs who own pieces of Norilsk Nickel, Russia’s largest mining company. Especially those whose obligations have been secured by the value of commodities that have dropped in price, and by shares whose value has plummeted.

In the Russian macro-economy, the BMI can be expressed as the distance between the market capitalization of the listed stocks, as recorded on the stock exchanges, and the money supply as reported by the Central Bank. Between the year 2000 and the autumn of 2005, the two measures tracked together closely. You could say that the amount of cash available to invest correlated with the cash value of the investment. Then the market cap took off, hitting a peak of about $1600 billion in May of this year. Money supply, however, grew at a snail’s pace. When market cap was at its May high, money supply was around $600 billion. The gap between the two, lasting the thirty months from 2006 to mid-2008, is what is popularly known as the bubble, or, on account of its duration and magnitude, the MEGA-BUBBLE.

That buboe has now burst, but the bubonic plague it has released is infectious. The only cure is cash. Without that, oligarchs get just as sick as the rest of us, or worse.

Norilsk Nickel (tickers GMKN:RU, MNOD:LI, and NILSY:US) has followed the price of nickel and the Russian indexes steadily downward since May 21, when the share price was $316.50. The descent of nickel metal started earlier, in March. But the conflict between Vladimir Potanin, the controlling shareholder, and the takeover faction of Oleg Deripaska, owner of United Company Rusal, and Mikhail Potanin, Potanin’s former partner, has been driving sharp changes in the volume of shares traded.

When Deripaska and Prokhorov first announced their deal for 25% of Norilsk Nickel a year ago, and Rusal followed with its public bid to merge and take control from Potanin, the Bloomberg charts show the heaviest one-day volumes in the stock’s trading history over the past year. While the trajectory of the share price has followed commodity and global index trends, the steepness of the inter-day rises and declines stems from news from the battle front.

After Potanin demonstrated that he had Prime Minister Vladimir Putin’s support to block Deripaska, volumes jumped, and so did the share price. Following Deputy Prime Minister Igor Sechin’s confirmation that Deripaska’s takeover would not be approved by the government – on July 28 — Potanin applied his strengthening grip to brake the downward pressure on the share price that was driven by the bursting of the bubble.

On August 22, the NorNick board announced the terms of a share buyback, commencing September 29. Altogether, almost 8 million shares are to be bought (4.2% of the total share issue) by the company treasury at an offer price of Rb6,167; in August that was equivalent to $254; it is now $241. The calculation of the offer price, the company said, reflects “a volume weighted average share price for the period from February 15, 2008 to August 15, 2008 according to MICEX data. The period was selected to reflect the medium-term movement of the Company’s share prices and minimize the effect of short-term developments.”

The company announcement explained the buy-back was “to support the Company’s securities, which went down in price significantly in the last several months. This price drop was impacted mostly by factors that are irrelevant to the Company’s fundamentals.”

The immediate effect of the announcement was muted, sustaining shareholder and sharebuyer expectations for the month ahead, until NorNick’s buying window opened. Then the share price started downward, along with everything else. That much is understandable.

But over the past few days, despite the premium on offer in the buy-back and improvement in the nickel price, the charts for Moscow and London show an unusual increase in the volume of shares sold. Market analysts claim the share price trend had been upward until the volume of sales overwhelmed demand, and pushed the price in the downward direction. The analysts believe someone was selling a lot of NorNick shares. The suspicion, reported in the Financial Times, is that it was Deripaska. The reason rumoured in the markets is that the sharp decline of asset value and market cap in the marketplace have triggered margin calls, and liquidity problems, throughout Deripaska’s Basic Element holding. The only cure for that is cash.

The last major borrowing undertaken by Deripaska through Rusal was in March, when he raised $4.5 billion to pay the up-front cash demand from Prokhorov for his NorNick stake. The banks called it an “Amortising Secured Acquisition Bridge Finance Facility.” Note the term “secured”, for that’s the rub now. The lenders were ABN Amro, BNP Paribas, Credit Suisse, Merrill Lynch, Barclays Capital, Calyon, ING Bank, Natixis, and Unicredit. The lead banks then sold down their participations. According to the loan announcement from Credit Suisse, “the number of banks that are eager to support UC Rusal is constantly growing.”

That was March 10. Today, at least three parts of the Deripaska asset holding are reflecting stress, and it is far from certain that the bank support is still there.

The first of the problems is the core financing unit, through which the cash generated by Deripaska’s cash cows, like Rusal, is allocated among the group’s working capital needs, and the proprietor’s. Bank Soyuz is the holding’s bank. It is described by RusRating, a Moscow banking sector specialist, as 29th in its table of Russian banks, with a B+ rating. By contrast, Rosbank, a Potanin house recently sold to Societe Generale, is ranked 3rd, with a BBB+ rating. According to the RusRating report, “Soyuz is the key bank of the Bazovy Element/RAINKO group, a major financial-industrial holding controlled by Oleg Deripaska. Although much of its business involves serving affiliated companies, Soyuz is also strong in investment banking and is actively expanding its corporate and retail business. …Constraining factors include a higher than usual concentration of liabilities, the large share of business done with affiliated companies, and above-average sensitivity to market risks.” In short, Soyuz risk is magnified by Deripaska risk.

There has been market-wide appreciation of this in recent days, and this has pressured the bank’s deposits. Soyuz has responded by imposing new limits on the maximum amount of cash available from its ATM dispensers (Rb15,000, $586); and a 3-day waiting period for withdrawals of Rb50,000 ($1,953) or more.

Some bank analysts believe the measures were taken to cool panic among small depositors. But Olga Kogut, spokesman for Soyuz, acknowledged to Mineweb that the bank has been under other pressures. Last week, it announced that it had fully repaid a $50 million loan from South Africa’s Standard Bank, Raffeisen and Commerzbank. That obligation was for 364 days at 1.9% over LIBOR.

At the same time as this debt was paid, Soyuz announced that it would take a capital replenishment from Deripaska’s holding totaling Rb5.7 billion ($223 million). The holding issued a statement that it “is closely monitoring situation on Russian financial markets. Bank SOYUZ being part of the Group duly fulfills all its obligations on transactions with counteragents including REPO deals.. Bank SOYUZ has got no exposure to the financial institutions which are facing difficulties due to the market situation. In case negative trend in the market progresses Basic Element Company will make all necessary steps to support liquidity position of the Bank.”

A second unit of the holding, Glavstroy Corporation, is also reported to be feeling the pinch, and in need of fresh cash. Described on the website of Basic Element as a key asset in its construction division, Glavstroy “is a vertically integrated corporation founded in 2006 by merging several companies with fifty years of operations behind them. The Corporation consists of four divisions uniting dozens of industrial and construction units: Glavmosstroy – Construction Division, Mospromstroymaterialy – Production Division, Glavstroy-Engineering Division and Glavstroy Housing and Development Division. Glavmosstroy was founded in 1954 and is the oldest of the companies owned by Glavstroy Corporation. In the fifty years of its existence, Glavmosstroy has built ¾ of Moscow’s modern housing stock, which is equivalent to some 150 million square metres.” Much of the project portfolio listed is in the currently cash-short residential segment of the construction market, while some projects depend on complicated and slow state funding arrnagements.

Moscow analysts specializing in the real estate and construction sector are unwilling to talk on the record about Glavstroy and Glavmosstroy. “Now the sector is having difficulties — I wouldn’t hide this,” one analyst said. “Each company has loans that have to be refinanced. I don’t want to talk about Glavmosstroy on the record, as we are not covering it,” Another source said Glavstroy is a company with strong governmental support. “I doubt they will be in deep trouble, as Deripaska will definitely find the money.”

Another analyst said there are rumours in the market that Glavmosstroy is having problems with short-term financing. It is speculated that this in turn has put pressure on Bank Soyuz, and the bank in its turn on Deripaska and Rusal. Alexei Yazukov of Renaissance Capital told Mineweb: “many of the large developers are moving to delay their large projects, or even putting them aside. All unstarted projects they intend to suspend. The reason for that is that money on the market is very difficult to find, or very expensive.” For builders committed to priority state projects, such as Glavstroy’s commitments at Sochi and St. Petersburg, the timing of bail-out state financing is now crucial.

Vitaly Korolev, spokesman for Glavstroy, told Mineweb: “According to the information that I have, we haven’t frozen any projects in Moscow. In St. Petersburg, our projects are in the pre-construction phase. The costly construction phase will start only in 2009.” He declined to respond to market rumours which lack specificity, and apply to the entire sector.

Since Rusal remains privately owned and unlisted, there are no public financial reports, and Rusal declines to respond to questions relating to the two financing issues viewed intrernationally as the key to Deripaska’s financial condition – can he borrow the funds required to meet the UK High Court claim of former partner Mikhail Chernoy (Michael Cherney)? Can he borrow the funds he will be required to pay other shareholders in Rusal – Prokhorov, Victor Vekselberg, and Glencore – if Rusal does not achieve a public listing for its shares on an exchange agreed to by the minority shareholders within twelve months?

At Deripaska’s holding, spokesman Sergei Rybak said: “All Norilsk Nickel issues are handled by the Rusal company, as they are the shareholder. I can’t comment.” At Rusal, spokesman Olga Sonarova and /vera Kurochkina were asked to clarify Rusal’s current liquidity position, and to identify how much of the company’s estimated total indebtedness of $8 billion falls due between now and next March? Mineweb also asked Rusal to say if it has had margin calls from the banks in the $4.5 billion syndicate; and what its debt and deposit position is at Bank Soyuz.

The answers to these questions are the numbers which allow the market to calculate the bubble metric between the costly ambition which Deripaska and Rusal have pursued for the past year, and the cash position in which the group finds itself at the moment, net of the obligations it owes.
At first, Rusal declined to answer directly. Then Kurochkina indirectly confirmed that Rusal is in negotiations with its bank lenders over the $4.5 billion loan. “It was a bridge-financing,” Kurochkina is quoted as telling a Moscow newspaper, “and we already carry on negotiations with the banks for refinancing of this debt. Probably we will make it even before the term fixed.”

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