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By John Helmer, Moscow

To those who listen, it has been made clear that President-elect Vladimir Putin and his closest policy advisor, Igor Sechin, believe that what they need to know about the oligarchs’ misconduct and mismanagement of Russia’s resource concessions, they don’t need to ask the Federal Security Service (FSB) or the Foreign Intelligence Service (SVR) to find out.

The London courts have been doing this job for them; possibly more slowly than Putin and Sechin prefer, but probably more reliably and precisely than the Russian intelligence services can deliver.

That’s why Victor Vekselberg’s filing on April 4 to the London Court of International Arbitration of claims against Oleg Deripaska’s mismanagement of United Company Rusal and his schemes of self-enrichment are likely to have been endorsed by the Kremlin. For the Kremlin’s observers, there are now two tests for Deripaska and his team at Rusal – the first from the High Court trial of Michael Cherney (Mikhail Chernoy) v Oleg Deripaska, which commences in eight weeks’ time, and will be publicly accessible. The second for the Vekselberg arbitration will run in parallel.

The first London litigation will expose Deripaska to the risk that he will be adjudicated by the British court as a liar and a thief in the past, liable to Cherney for a bill of up to $5 billion. The second will expose Deripaska to the adjudication by the same court as a liar and a thief in the present and for six years into the future. Putin and Sechin appear content to sit back, watch, wait, and count.

Vekselberg has also exposed Deripaska to vulnerability to the very people he’s tried so long and so expensively to placate – the US Government. Lawyers at the US Department of Justice in Washington won’t be slow to see in the allegations now pending in London violations by Rusal and Glencore of the anti-trust laws. And if they are slow, Alcoa won’t be slow to bring them to their attention. Whether the evidence will sustain a racketeering case against Deripaska and Glencore boss Ivan Glasenberg will attract the attention of other departments of the Justice Department.

Until now the trading and sales contracts between Rusal and Glencore have been presented by Deripaska as an emergency measure to rescue Rusal from trading while insolvent in the last quarter of 2008, and enable the company to continue operating with enough working capital through 2009 to the present. Although both Rusal and Glencore are publicly listed companies, they have deliberately concealed as much of the small print of the metal pricing, trader’s margins, and sharing of profit as Deripaska and Glasenberg are famous for.

Here from May 2011 is as much of the detail as could be gleaned from the available public documents and financial reports. The Glencore initial public offering (IPO) prospectus does not reveal how much aluminium and alumina trading makes in Glencore’s consolidated metals total. But it coyly acknowledges that half (50%) of the aluminium which Glencore sells comes from the two producers in which it holds stakes – Rusal (8.75%) and Century Aluminium (44%). The precise physical tonnage and dollar value remain Glencore secrets. Century, a US company, reports that it was loss-making in 2009, when it sold $230.9 million worth of metal to “related parties”. In 2010, it made $413.4 million in sales to the same related parties, which appear to be Glencore trading companies.

Rusal is equally coy in disclosing how much aluminium or alumina it is selling through Glencore. The Rusal prospectus on the Hong Kong Stock Exchange reported in 2010 that “the Group sold to Glencore approximately 36% of its excess alumina in 2008. The Company also has a variety of supply contracts with Glencore for alumina and primary aluminium, including long-term supply contracts, and Glencore was the Group’s largest customer of alumina and primary aluminium in the six months ended 30 June 2009, accounting for approximately 21% of the Group’s sales of primary aluminium and alloys.”

Guesswork published by Vedomosti suggests that about one tonne in five of Rusal’s physical sales volume has been going to Glencore, and perhaps as much as 40% of Rusal aluminium sales revenues earned through Glencore trading operations. According to Glencore, on the basis of the 2010 results it trades 6.7 million tonnes of alumina per annum, and 3.9 million tonnes of aluminium, making market shares of 38% and 22%, respectively. In 2010, Century says it sold just under 268,000 tonnes of aluminium. Rusal says that for that year it shipped 7.8 million tonnes of alumina and 4.1 million tonnes of aluminium. Allied Alumina (aka Sherwin Alumina), another Glencore affiliate operating in Texas (100% Glencore-owned), says it has production capacity for 1.7 million tonnes of different alumina grades, but there is no information on how much it produced and shipped in 2010.

Go back a little into the history of Rusal’s relationships with aluminium traders, and there are two key witnesses with plenty to say if obliged to. One is the former Rusal chief executive, Alexander Bulygin; the second is Gulzhan Moldazhanova, former commercial director of Sibirsky Aluminy, then Rusal, and then head of Deripaska’s holding, Basic Element. Bulygin is believed to be living outside Russia; the whereabouts of Moldazhanova, a Kazakh by origin, are unknown. Both used to be explicit about Rusal’s trading strategy – they said they aimed to trade both aluminium and alumina directly to end-users, and avoid having to pay the double-digit commissions demanded by intermediaries. Bulygin and Moldazhanova were regularly, explicitly, consistently opposed to trading through Glencore.

That was achievable so long as Rusal wasn’t stripped of cash, over-leveraged, and on the edge of insolvency. Deripaska removed Bulygin in January 2009; Moldazhanova disappeared not long afterwards. It would be unhealthy for them to testify against Deripaska in a UK court. Bulygin claimed health reasons for not appearing in the recent High Court trial of Boris Berezovsky’s claims against Roman Abramovich.

The latest Rusal financial report for 2011, issued on March 19, 2012, reports this much about the contract with Glencore: “The Group transacts with other related parties, the majority of which are entities under common control with the Group or under the control of SUAL Partners Limited or its controlling shareholders or Glencore International Plc or entities under its control or Onexim Holdings Limited or its controlling shareholders. Sales to related parties for the year are disclosed in note 5, trade receivables from related parties are disclosed in note 22, cash and cash equivalents are disclosed in note 23, accounts payable to related parties are disclosed in note 29, commitments with related parties are disclosed in note 31 and other transactions with shareholders are disclosed in note 24.”

Note 5 reveals that last year Rusal’s sales of aluminium came to $10.414 billion. Of that amount, sales to “related parties – companies capable of exerting significant influence” totalled $3.745 billion; that’s 36%. That looks to be the minimum which Glencore takes.

But the Rusal accountants report that of total sales of primary aluminium and alloys, just $6.359 billion worth went to “third parties”. This raises the question of where about $4 billion in sales have been going. A small fraction must go to Rusal’s downstream plants for production of aluminium foil. Where else? The Cherney trial will bring into open court evidence of elaborate decade-old schemes through which Deripaska channelled metal and revenues away from the Russian taxman and also away from his partners. The Vekselberg initiative will now provide evidence of how the secret Glencore contract is channelling metal and money to the disadvantage of the company which produces it, and its shareholders.

Even supposing the internal sales of aluminium aren’t an extra channel for Glencore to take discounted metal for trading at an enhanced profit margin, Glencore’s share of Rusal’s aggregate external sales is no less than 59%.

The alumina line in the Rusal report is much less. Total alumina sales for 2011 came to $676 million; sales to “third parties” amounted to $300 million; sales to “related parties – companies capable of exerting significant influence” totalled $177 million. That’s 59% — coincidentally the same proportion as Glencore appears to be taking from the flow of aluminium. Perhaps it isn’t a coincidence.

A leak to Reuters from the Vekselberg camp on April 5 reports from the newly lodged arbitration court papers that late last year Deripaska rammed through the board a new 6-year contract with Glencore for supply and sale of aluminium and alumina totalling $47 billion. This makes $7.83 billion per annum. But wait — that is $795 million more than Rusal is reporting it sold to “third parties” last year. Since Rusal is proposing to reduce metal production and sales until market demand for aluminium lifts price, how is this possible? Is Glencore being given Rusal off-market inventory of aluminium at a special discount?

Reuters didn’t notice this phantom aluminium and alumina. It reported its source as claiming that “Glencore would raise the share of RUSAL’s output that it markets to 50 percent from 30 percent this year.” The terms, according to the Reuters source, were approved in December. There was no announcement in the company’s press releases that month.

Depending on exactly when, before or after December 31, the Glencore contract should have qualified for inclusion by Rusal’s accountants KPMG in note 36 of the financial statements for the year, “Events subsequent to the reporting date”. But that note is silent. If KPMG didn’t know that Rusal and Glencore had done their deal, despite a recorded board of directors’ vote, they are off the hook if Rusal failed to inform them. According to KPMG’s disclaimer, “we have nothing to report in respect of the following matters…we have not received all the information and explanations we require for our audit.” Since the KPMG accountant signing off was a Russian, Andrey Shevtsov, whose English is probably not his native tongue, the ambiguous and faulty wording in his disclaimer may be shared with his client.

Reuters is reporting an indirect and anonymous response from Rusal to the Vekselberg claims against the Glencore contract. “The dispute is, by its nature, between shareholders and there is no proper basis whatsoever for making any claims against Rusal.” The caption on the London court filing reportedly names as defendants Rusal, Deripaska, EN+ (the holding through which Deripaska holds his shares in Rusal), and Glencore.

“Sual Partners [Vekselberg and Len Blavatnik] will seek to halt the contracts, have them recognised as null and void, and will seek compensation and a sum to reflect wrongful enrichment,” the Vekselberg leaker has replied.

The Financial Times and Bloomberg, whose familiarity with Deripaska has ensured a flow of positive news from Rusal headquarters, have missed the latest lawsuit. The Hong Kong and London stock markets are closed for the Good Friday holiday, and they will remain shuttered on Easter Monday.

The morning financial newspapers in Moscow have reported being briefed by four leakers from Sual Partners, one from Rusal. The former are disclosing that they cast two votes against the Glencore deal at a Rusal board meeting last December, and that Mikhail Prokhorov also cast his board vote against the deal. Since the Glencore arrangement amounted to a benefit for a related party among Rusal’s stockholders, Vekselberg is claiming in the London court that those votes amounted to binding vetoes. In the court claim he alleges that Deripaska ignored them, and signed the contract in March.

The claim also reveals that the purported independent directors on the Rusal board – Barry Cheung, the new Rusal chairman, Else Leung, Philip Lader, and Peter Kenny supported the Glencore deal and did what Deripaska told them to do. Eventually the court will be presented with the official vote tally. Then it should be possible also to learn how the representative on the Rusal board of the state creditors, Anatoly Tikhonov, voted; last month he refused to vote in favour of Cheung as Deripaska’s candidate for the chairman to replace Vekselberg.

If Glasenberg, chief executive of Glencore, didn’t keep arm’s length, and voted in favour of enriching himself at Rusal’s expense, that would confirm exactly what Rusal’s managers in the past suspected Glencore of doing and being. Officially, spokesmen for Rusal, the Sual Partners, and Glencore are not commenting.

A source close to Sual partners reveals that before the London court now there are two contracts between Rusal and Glencore. The first covers aluminium. It is for 14.5 million tonnes to be traded up to 2018 at roughly $43 billion in value. The second contract is for alumina worth about $4 billion sold over the same period. The source said that in May of 2011 the Rusal board had approved a marketing strategy plan according to which 80% of the aluminium the company sold should be traded directly within three years. After last summer, the source said, the percentage was reduced to 60%. Then came the Glencore contracts in December reversing the percentages altogether; the vetoes; and Deripaska’s decision to ram through the changes in March.

This process amounts to self-dealing by Deripaska at the expense of Rusal, its Russian and foreign creditors, the Russian electricity industry supplying it with cheap power, and its shareholders, Vekselberg’s submission alleges. The votes in favour by the independent directors are alleged to be a violation of their fiduciary duty to minority shareholders.

The go-ahead from the Kremlin to try this bill of particulars in a London court, alongside the Cherney trial of Deripaska’s contract and trust violations, is a clever solution to the well-known problems of Russian jurisprudence; it’s also a harbinger of changes to come.

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