Capital Markets

How Not to Be Russian

How one Russian company reckons it can convince the global investment community that it upholds state-of-the-art corporate governance standards.
Tony McAuleySeptember 1, 2007

None of Russia’s largest industrial companies has done as much as United Company Rusal to try to convince the international investment community that it upholds state-of-the-art corporate governance standards. And the investor community may soon get a chance to judge whether it is succeeding.

The company, formed in March from the merger of Rusal, Russian rival Sual and the Russian aluminium interests of Switzerland-based trading group Glencore, was the world’s largest aluminium producer until it was eclipsed in July by the $38 billion (€28 billion) merger of Rio Tinto and Alcan. Indeed, Rusal’s owners want to make it a leading consolidator of the aluminium industry and have appointed six big-name banks to pursue a full listing on the main market of the London Stock Exchange (LSE), with all the corporate governance requirements that entails. A full main market listing, rather than the less onerous global depository receipt listings that all other Russian companies have gone for, will help maximise the company’s value, offer liquidity for investors and “create a currency” for acquisitions, says CFO Vladimir Solovyev.

Rusal has already implemented a governance programme, partly to meet loan requirements set by the European Investment Bank, which included the appointment of former Standard Chartered Bank CFO, Nigel Kenny, and former US Ambassador to the UK, Philip Lader, as non-executive directors.

However, as with most large Russian firms, UC Rusal has a murky history, one in which Oleg Deripaska, related by marriage to former President Boris Yeltsin, emerged as Rusal’s beneficial owner in the 1990s. Deripaska has found favour as one of the “loyalist tycoons” under President Vladimir Putin and retains 66% of UC Rusal, leaving Sual’s owner, Viktor Vekselberg, and Vekselberg’s business partner, Russian-American investor Len Blavatnik, with board seats and 22% ownership, and Glencore with 12% and a board seat.

Despite Rusal’s governance efforts, what of the “Russian risks” stemming from the fluid application of rules at the government’s whim? “We consider ourselves a global company and don’t want to be compared with other Russian companies,” says Solovyev.

However, Deripaska has benefited greatly from being in the government’s favour. In July, he took over Russneft, a Russian oil firm, under protest from its owner, who claimed on Russneft’s website that the government “tightened the screws on the company” after he initially refused to sell. Meanwhile, at investor road shows, Rusal has made it clear that access to cheap Russian energy is one of its competitive advantages.

Meanwhile, the LSE has benefited enormously from Russian listings, attracting some 70 companies to the main or alternative market in the past few years, far exceeding New York. Critics say the LSE has turned a blind eye to governance issues. “The LSE is a market with vast investment in the integrity of its offering,” says Robert Amsterdam, a Washington-based lawyer who represented Mikhail Khodorkovsky, former owner of Yukos, now imprisoned in Russia for fraud and tax evasion. “If you are going to align yourself with people whose corporate governance has been compared to that of Zimbabwe [in July’s World Bank revue of global corporate governance] then you put that at risk.”

An LSE spokesperson said the exchange’s job is to promote transparency. “It is up to investors to assess the risk.”