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Nov 29, 2007 | 18:36 GMT

3 mins read

Russia: Oligarchs, Steel and Mergers

VALERY MELNIKOV/AFP/Getty Images
Summary
Russian oligarch Mikhail Prokhorov said Nov. 27 that a merger of two Russian metals giants is inevitable. Such a merger would serve the interests of both the Kremlin and an oligarch who often is at odds with it.
The merger of two Russian metals giants is inevitable, Russian oligarch Mikhail Prokhorov said Nov. 27. The ambitious Prokhorov has no intention of going the way of Roman Abramovich (who retired from the Latin American soap opera of Russian oligarchic life in 2003). Recently, it has become apparent that the Kremlin intends to assert control over Norilsk Nickel, a leading global producer of nickel, platinum and palladium that Prohkorov controls jointly with Vladimir Potanin. This prompted Prokhorov to swing into action. One of Prokhorov's options was selling his share to Potanin and raising some $16 billion in cash, but Potanin lacked the necessary funds. Another was to sell his stake to Lakshmi Mittal, owner of the ArcelorMittal steel empire, who did have the cash. A third was to hive off parts of Norilsk Nickel to form his own company that would not be nationalized. The problem is that Prokhorov pursued all of these avenues simultaneously. The comedy of crossed wires would have been bad enough had the Kremlin not gotten wind of the Mittal option, subsequently explaining to Prokhorov in no uncertain terms that even partial foreign ownership of Norilsk Nickel is forbidden. The government, at that point, nudged (or rather, ordered) Oleg Deripaska, another oligarch, to ride to the rescue. Like Potanin, Deripaska lacked the cash to buy Prokhorov's shares, but what he could offer (translation: was ordered to offer) was a share swap. Under the newest deal, Prokhorov's 25 percent share in Norilsk Nickel will be swapped for an 11 percent share in RUSAL. Prokhorov has gone on to publicly surmise that RUSAL eventually will swallow Norilsk Nickel whole. This is something that the Kremlin is likely to approve. Though Norilsk Nickel was on the fast track to state ownership, Deripaska repeatedly has proven that when the wind blows from the Kremlin, he will be the first to adjust tack. RUSAL, therefore, is viewed as a company loyal to the state — and a well-run one, too. Shifting Norilsk Nickel under RUSAL would, therefore, not overly upset the Kremlin — and would even ensure that, in the future, Prokhorov does not get too cute with his foreign flirtations. This means that, in the short term, there really are only two losers. The first is Victor Vekselberg, another major player in RUSAL, who is annoyed (to say the least) that Deripaska is so willing to satisfy Kremlin desires, as well as peeved at the presence of another oligarch on the RUSAL team. The last think Vekselberg wants is increased Kremlin attention on his assets. Vekselberg also is a major player in another asset that the Kremlin is eyeing for nationalization: oil firm TNK-BP. Vekselberg would like to maintain a low profile these days, but Deripaska's flexibility and Prokhorov's ambition are making that impossible. The second is Mittal, who reportedly is less than thrilled that the "consulting fees" he paid to secure Prokhorov's shares in Norilsk Nickel have landed him nothing but a broken promise. It comes as no surprise, then, that during ArcelorMittal's Nov. 28 announcement, the company said it plans to focus its expansion efforts on Turkey and the Mediterranean basin in the near future, keeping the firm as far away from Kremlin-oligarch relations as is prudent.

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