RUXX Report: VEB Unlikely to Take Part in Nationalization of Norilsk Nickel

NEW YORK, NY -- (Marketwire) -- 06/23/09 -- Vneshekonombank (VEB), the Russian state bank that manages Russia's bailout funds, has raised its stake in Norilsk Nickel, world's largest nickel producer. The bank has bought a 3.68 percent stake in the company earlier this year. It also holds 25 percent of the company as collateral against the $4.5 billion loan made to Oleg Deripaska, the cash-strapped former Russia's richest man. Given the continued difficulties with the Deripaska's businesses, he might not be able to repay the loan on time and will have to give up his Norilsk Nickel stake, making VEB the largest shareholder of the mining giant. However, according to the experts, Vneshekonombank might choose to not take over Norilsk, fearing that nationalization might do more harm than good to the industry. According to newspaper Vedomosti, the bank is ready to give Deripaska a one year extension.

"Nationalization of Norilsk, one of the largest Russian companies, would be disastrous for the industry," asserts Michael Thompson, senior analyst for the RUXX Index, which tracks Russian companies listed on Western Exchanges. "Metals and mining is Russia's largest private industry and an indicator for the rest of the economy. Nationalization would be interpreted by Western investors as a huge risk, making investment into Russian economy less attractive."

VEB's spokesperson did not confirm the rumors of possible nationalization of Norilsk Nickel and other large companies it temporarily owns. In an interview to Kommersant, a Russian business daily, the bank's chairman Vladimir Dmitriev said that "the companies could get loan extensions if need be." He also said that VEB is "acting not solely as a bank, but as the government's agent." Earlier this year, Russia's Prime Minister Vladimir Putin signaled his support for financial stimulus in his opening remarks at the Davos Economic Forum, saying that any direct government involvement in the economy must be handled with caution. Prime Minister Putin chairs the VEB's Advisory Board. Another Russian state bank, VTB, holds a 16.7 percent stake in Norilsk as collateral against a loan made to another Norilsk Nickel owner Interros. VTB's Advisory Board is chaired by Russian Finance Minster and close Putin's ally Alexey Kudrin. VTB is likely to follow VEB's suit.

Analysts agree that Norilsk Nickel's Board, which consists of both state and private-appointed members, exemplifies a well-balanced management team, where private investors play a major role working with the state-appointed Chairman of the Board Alexander Voloshin, former Putin's Chief of Staff.

New Norilsk board members will be selected during the next Board meeting on June 30, 2009. The Board has issued the recommendation to support the private shareholders' candidates, Gerald Holden and Brad Mills. RiskMetrics, a corporate governance think tank, said in a statement to Russian media that they expect the Board to accept the private shareholders candidates.

"Investors and analysts are carefully monitoring the situation with the Norilsk Board to see if the state banks will try to increase the number of their seats, limiting the presence of private owners. This move will signal whether the government has decided to nationalize the company," adds Thompson. "Also, there is a slight possibility of the takeover attempt by Alisher Usmanov, who owns Metalloinvest, a Russian industrial conglomerate. Usmanov is known to have ties with VEB and claims to have over 4 percent of Norilsk Nickel. But in order to affect the Board, he has to disclose the ownership of the Norilsk stake."

Russian metals and mining industry has been severely weakened by the economic crisis and obviously requires government assistance. However, the less direct control is exercised by the state, the more effective the newly formed company will be. Western investors are relieved that the Russian prime minister supports this argument.