UNITED COMPANY RUSAL: MAKING OF A RUSSIAN NATIONAL

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 012713

SIPDIS

SIPDIS

STATE FOR EUR/RUS, EB/TPP/BTA
NSC FOR TGRAHAM, TMCKIBBEN
USDOC FOR 4231/IEP/EUR/JBROUGHER

E.O. 12958: DECL: 11/02/2016
TAGS: ETRD ECON RS
SUBJECT: UNITED COMPANY RUSAL: MAKING OF A RUSSIAN NATIONAL
CHAMPION?

Classified By: Econ M/C Quanrud by reason 1.4 (b) and (d).


1. (C) SUMMARY. The proposed merger this coming spring of
Russian Aluminum (RUSAL),Siberian Ural Aluminum (SUAL
Group),and Glencore International AG (Glencore) into "United
Company RUSAL" will create the world's largest aluminum
producer, unseating Alcoa. Industry insiders cast the deal
more in terms of global aluminum M&A trends than as part of
the Kremlin's drive to create national champions, but both
factors are at play. Neither RUSAL nor SUAL were able to
launch IPOs on their own, and a clear goal of the current
exercise is an IPO as soon as market conditions are ripe
sometime in the next 18 months. President Putin has blessed
the deal, but it still faces antimonopoly approvals in Russia
and the European Union, and issues surrounding taxation,
registration, and litigation could be difficult -- although
RUSAL executives see these more as "technicalities" than real
barriers. Igor Artemyev, Chairman of the Russian Federal
Antimonopoly Service (FAS) tells us that he plans to take a
vigorous look at both the impact of the merger on domestic
players as well as overall trends in the global aluminum
business in making his decision, but we doubt he will stand
in the way of this deal. END SUMMARY.

UNITED COMPANY RUSAL
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2. (U) The transaction will bring the three groups under a
new holding company, United Company RUSAL, with RUSAL owning
66%, SUAL 22%, and Glencore 12%. The new company will be the
world's largest aluminum and alumina producer, with an
estimated worth of $25-30 billion. It will employ more than
110,000 people in 17 countries on five continents, with
annual production volumes of roughly 4 million tons of
aluminum and 11 million tons of alumina -- approximately
12.5% of global aluminum production. Profits are projected
to reach $10 billion a year, much of this due to cheap
electricity from hydropower in Siberia, which is said to be
at the heart of the new company's business plan.


3. (C) RUSAL representatives tell us that the decision of
where to register the company has not yet been made, but
London seems to be where the partners are leaning. The
Russian Government is likely to want to see the holding
company registered in Russia, for both tax and prestige
reasons. In this light, a London registration would be a
significant bow to pressing commercial considerations, and is
something to watch carefully. RUSAL reps say the new company
has definite plans to launch an IPO -- "a key ingredient to
the merger." They say the timing of the IPO will be
determined by market conditions, but for the partners,
especially SUAL's Viktor Vekselberg, clearly the sooner the
better.

ANTIMONOPOLY APPROVALS
AND OTHER GRITTY DETAILS
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4. (C) The new company will need approval from at least three
foreign antimonopoly agencies (the European Union, Bulgaria,
and Ukraine) in addition to Russia's FAS. Tolling schemes
for the export of aluminum smelted in Russia will be
carefully scrutinized. Artemyev tells us he plans to analyze
the effects of the merger on the world market, as well as
Russian domestic companies, and will seek informal input from
Alcoa (as an expert third party) in this regard. He hinted
any restrictions that might be placed on the merger could be
formed by guidance from Alcoa.


5. (C) The new company will need to contend with several
litigation issues to ensure its commercial survival. One
case involves Mikhail Chernoy, who claims that Oleg Deripaska
(RUSAL) has shorted him by about $3 billion on payment for a
stake in Siberian Aluminum (Sibal). Press reports put total
liability (taking into account other outstanding litigation
against RUSAL) at approximately $4 billion. RUSAL reps tells
us this figure is inflated, and refer to litigation issues as
&a technicality.8 Simply put, no one from the firm seems
very concerned that on-going or threatened litigation would
affect the new company.

ALCOA AND ALCAN:
DEALS AND REACTIONS
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MOSCOW 00012713 002 OF 002




6. (C) Conversations with senior representatives of ALCOA
indicate that SUAL was not Deripaska's first or only choice
for this merger (which is one possible reason why it has
taken more than five years for the two parties to come
together). Deripaska approached ALCOA in the first half of
this year, but the talks broke down when the asset valuation
gap could not be closed to Deripaska's satisfaction. The
announcement of the RUSAL/SUAL merger has shelved, probably
indefinitely, a number of pending ALCOA plans with RUSAL in
Russia, given the unlikelihood of FAS approvals going
forward.


7. (C) According to contacts in both the aluminum industry
and those close to SUAL, Vekselberg appears to have been
equally reluctant to partner with RUSAL, but reconciled
himself to the merger as a way to cash out of the business
(through the eventual IPO) reportedly "on his own terms."
Vekselberg has articulated a desire to IPO SUAL for some time
now, but appears to have been unable to pull it off on his
own. A back of the envelope analysis of the proposed equity
division between the partners suggests Vekselberg more or
less held his own in this negotiation, and that he was
neither dragged into the deal, nor is facing a loss of his
investment, assuming the IPO is successful.


8. (C) Meanwhile senior ALCAN representatives have
volunteered to us their pleasure with the pending merger.
The merger will force RUSAL and SUAL to play by generally
accepted rules, which will have the effect of leveling the
playing field. If United Company RUSAL wants to be a global
leader, the firm will have to leave behind bad past practices
-- which would be inconsistent with global practice, and
could cost the firm its commanding edge. The merger, they
say, makes a good deal of sense in light of global
consolidation trends, and was likely driven in large part by
pure commercial considerations.

COMMENT
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9. (C) The prospective merger was announced by Deripaska
immediately following a meeting with Putin (at which
Vekselberg was also present) which RUSAL contacts say signals
the deal has Putin's blessing. Deripaska enjoys a favorable
relationship with President Putin -- he is a more or less
permanent fixture on Putin's trips abroad, and he is widely
acknowledged by our contacts to be among the 2-3 oligarchs
Putin turns to on a regular basis. Viktor Vekselberg has
arguably been at the sharp end of the stick more than once
over the past year, between being bought out of his VMSPO
titanium shares, and being caught in an uncomfortable squeeze
play with his TNK partners. The merger is both good business
and potentially good politics for both of them, but there is
a fine line emerging here. The degree to which the partners
are allowed to pursue their commercial instincts (registering
the firm in London, with a probable IPO on the London Stock
Exchange) will tell us how important the drive for national
champions is to the Kremlin. Our RUSAL contacts were visibly
nervous on this point, and we understand why. END COMMENT
BURNS