Cherney warns Western bankers through suit against Deripaska

Published August 21st, 2006 - 05:06 GMT

Michael Cherney (Mikhail Chernoy), an Israel-based international industrialist, may soon file a lawsuit against Oleg Deripaska, the owner of RusAl, the largest Russian and second-largest world aluminum producer. Cherney claims that Deripaska has deliberately concealed from Western banks the fact that Cherney owes 20% of Rusal and has failed to honor a contract with Cherney, which obliges Deripaska to pay the cost of these shares, currently estimated at $3 billion.


Russian metals industry sources believe this development will be an embarrassment for the European Bank for Reconstruction and Development (EBRD), the International Finance Corporation (IFC, the World Bank’s commercial lending arm), and other top Western banks, including BNP Paribas – the primary sources of loans to RusAl. These financial institutions agreed to help Deripaska issue Eurobonds on the condition that he provide full transparency and disclosure of all financial obligations to his partners, present and former.

Cherney made his fortune in Russian metals business in the early 1990s. He brought Deripaska, then a novice aluminum broker, into the business, an act that eventually made him the second richest Russian industrialist, second only to Roman Abramovich.

Prior to 2001, Cherney and Deripaska were equal partners in several businesses, including Siberian Aluminum (SibAl), then the largest Russian metal company.

In March 2001, Cherney announced he was leaving the aluminum business. Deripaska did not have sufficient funds to buy him out at that point and offered a payment plan outlined in an agreement signed by the two partners on March 10, 2001.

According to the agreement, Deripaska would pay Cherney $100 million for 17.5% of the stock out of company funds, then would pay Cherney another $150 million for investments; he committed to converting the balance of Cherney’s shares in their business into the 20% of the stock of the newly formed company Russian Aluminum (RusAl).

Cherney agreed to let Deripaska manage the 20% RusAl holdings for three to five years, leaving Deripaska the right to sell this package and pay Cherney back its value. Other stockholders in RusAl were Roman Abramovich acting with partners, who purchased 50% of the stock, and Deripaska himself with 30% of the shares.

In 2002, Deripaska fulfilled the first part of the contract and paid Cherney $250 million.

The five-year term specified in the contract expired in March 2006. Cherney says that in the course of five years both he and his representatives had repeated meetings with Deripaska to inquire when Deripaska would fulfill the second part. According to Cherney, Deripaska promised to begin the payments as soon as the lawsuits involving RusAl were settled.

Cherney says that Deripaska repeatedly asked him not to publicize their agreement, claiming it might hurt him in securing credits for RusAl.

Cherney further states that he never publicized nor concealed the deal. When the term of the agreement was about to expire and Western banks announced they were extending Deripaska credit and would promote his Eurobond program, they insisted on full transparency. Deripaska was obliged to reveal the names of all large shareholders and carry no debt. Deripaska, who had by then purchased 50% of the stock from Abramovich, officially stated – and continues to reiterate– that he owns 100% of RusAl stock, and the company is free of debt to former partners.

“The banks were deceived through these concealments,” Cherney says, “I will have no part of it. I repeatedly stated on public record that I own 20% of RusAl. Deripaska merely manages this stock until his debt to me is fully settled. I am surprised that not one of the banks ever asked me for an explanation or requested a copy of the agreement that would prove my allegations”.

Cherney’s claims raise suspicions that the banks were so inclined to do business with RusAl that they may have "ignored their own stated policies", industry sources claim.

Deripaska argues he owes Cherney nothing, and the debt is settled in full. Yet in May 2006, Cherney’s attorneys sent Deripaska a letter indicating that the latter had fulfilled only the first part of the 2001 contract by paying $250 million and had yet to fulfill the second part by paying Cherney $3 billion for the remaining RusAl stock.

Today, Cherney says that he is entitled to as much as 40 percent of the company stock, since Deripaska failed to pay his ex-partner the dividends from Cherney’s  original holdings that were under Deripaska’s management. Instead, he used the money to buy 50% of RusAl stock from Abramovich. In Cherney’s eyes, this justifies the amount of $3 billion mentioned in his claim.

International lawyers familiar with the case consider Cherney’s chances in litigation against Deripaska to be good. Since Deripaska paid Cherney off on the first part of the agreement, and admits as much, then the Appendix would seem to be fully applicable, also.

Some Russian journalists call Deripaska the “treasurer” for Yeltsin’s family, who allegedly “appointed” Putin as the next President; yet if the RusAl owner becomes a defendant in new international lawsuits, the Russian President’s support might not be forthcoming.

 

Recently Herman Gref, Russia’s Minister for Economic Development, stated “Corporate raiding in Russia is criminal by nature. Russian billionaires who made fortunes in corporate raiding should be locked up, instead of posturing at the top of Forbes rankings”.

 

Many of Russia’s wealthiest individuals listed by Forbes are in one way or another involved in corporate conflicts. Russian media claim that last summer the office of “Razvitiye” company (one of its main assets is Glavmosstroy, Moscow’s largest construction company) was the target of an armed assault. It turned out that, unbeknownst to the company owners, an emergency shareholders’ meeting had changed its general director, seal and registrar. Eventually, Oleg Deripaska became the new owner. Currently he occupies 62nd ranking on the Forbes’ list, with estimated wealth of $7.8 billion.

 

According to experts, EBRD, IFC, BNP Paribas, and other RusAl’s Western creditors would be concerned should Cherney proceed with his lawsuit, preferring to see the ex-partners settle out of court. An open trial could shed light on other unpleasant aspects of the RusAl business empire.


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