Business in Russia

The meaning of Norilsk

How a takeover battle provides a test case for Russian capitalism

THE drama surrounding Norilsk Nickel, the world's largest nickel producer, has all the elements of an airport thriller: billionaire oligarchs invading the French resort of Courchevel; models flown in from Moscow; wads of cash flying like confetti; all-night discos, magnums of champagne and buckets of caviar; and the whole thing topped off with a police raid. The scene then shifts to the Arctic city of Norilsk, built by slave labour under Stalin, and the nickel giant that generated all this wealth, now at the centre of a takeover battle. The Norilsk saga is being closely watched because it is a test of how the rules of business in Russia are changing.

Norilsk Nickel was one of many firms sold at a knock-down price in the 1990s in Russia's infamous loans-for-shares privatisation scheme. Vladimir Potanin, one of the original set of Yeltsin-era oligarchs, was partly responsible for the scheme, which gave him and Mikhail Prokhorov, his young business partner, control of the firm for a song. The privatisation was indefensible from almost any point of view—but it worked. Today Norilsk Nickel is more transparent, efficient and profitable than it has ever been. It has a proper board of directors, professional managers and is worth nearly $60 billion.

The pair made a good team: Mr Prokhorov ran the business and Mr Potanin handled the politics. Between them they owned 54% of the firm. Tall, handsome and outrageously rich, Mr Prokhorov became Russia's most eligible bachelor. He worked hard, but he played even harder. In January 2007 he was arrested by French police after his antics in Courchevel on suspicion of running a prostitution ring, but a few days later he was released without charge. Nobody can be sure if he was set up or if his outrageous behaviour simply went too far. “Senior people in the Kremlin told Mr Potanin to tell his friend to tone it down, but Prokhorov would not listen,” says a businessman familiar with the situation. After the incident Mr Potanin, who holidayed with Mr Prokhorov in Courchevel, distanced himself from his partner and condemned his behaviour.

Their split was, perhaps, inevitable. Mr Prokhorov ran the show, but all the credit went to Mr Potanin. Having transformed Norilsk Nickel, Mr Prokhorov faced the far less exciting prospect of having to run it. So he made a symbolic offer to sell his 25% stake to Mr Potanin for $15 billion. When Mr Potanin refused (some say he could not raise the money, others claim he did not even try), Mr Prokhorov turned to Oleg Deripaska, Russia's richest man and one of the most aggressive oligarchs. Mr Deripaska owns 66% of privately held RUSAL, the largest aluminium producer in the world. For the stake in Norilsk, he has offered Mr Prokhorov 11% of RUSAL's stock and an estimated $6 billion in cash (the exact sum is unknown). And if RUSAL does not go ahead with its planned flotation within the next year, Mr Deripaska has promised to buy Mr Prokhorov's stake.

The deal could reshape Russia's metals industry. RUSAL sees the purchase of Mr Prokhorov's 25% stake in Norilsk as the first step towards a full merger or takeover, and has loudly declared its intentions to the media, though not to Norilsk itself. Alexander Bulygin, RUSAL's boss, justifies the takeover on the basis that it would enable his firm to diversify into other metals, in keeping with a global trend for such deals.

Even if the industrial logic is sound, however, Norilsk Nickel's managers are irked that RUSAL has not made a formal approach and has not explained how it could possibly execute a merger. Given that RUSAL is a private company registered in Jersey, Norilsk's minority investors are unlikely to be interested in a share-swap. And RUSAL does not have the cash to buy them out: it is thought to be heavily indebted, even before borrowing $4.5 billion to help it pay for Mr Prokhorov's stake. The worry in Mr Potanin's camp is that RUSAL has its eye on Norilsk's cashflow and plans to sneak an extra person or two onto its board of directors, install new management and then milk the company. Many Russian oligarchs did this in the 1990s to the detriment of minority investors.

The plot thickens

So Mr Potanin has brought in another metals magnate, Alisher Usmanov, who owns iron-ore mines and has links to Gazprom, Russia's state-controlled gas giant. Mr Usmanov's private company, Gazmetall, has made a formal approach, through a foreign bank, to Norilsk. A merger with Gazmetall would certainly make it harder for RUSAL to take over Norilsk. But it could also pave the way for a merger of all three firms.

The management of Norilsk Nickel stresses that its job is to act in the interest of all its shareholders. So far it has managed to resist the pressure from its two biggest shareholders. And it has asked its minority investors to attend a shareholder meeting on April 8th and to vote in a co-ordinated way in order to protect their interests. What will happen before or after that date is hard to predict. But already the Norilsk saga holds some lessons.

The most striking thing about the affair is that a set of business tycoons have, so far, behaved in a way that is a lot more civilised than anything seen from the Russian state. When state firms want a private asset, they send in the tax police, the security services and a few health and safety inspectors, before making an offer. Here, big private firms are dealing with each other mostly using bankers and lawyers.

Admittedly, all of the oligarchs squabbling over Norilsk have powerful friends in the Kremlin, which may be why it has not sided with any of them. Yet if Mr Prokhorov manages to sell his stake in Norilsk, it will strengthen property rights. He will be almost the only tycoon to have cashed out assets privatised in the 1990s. To date, the Kremlin has treated oligarchs like renters rather than owners and no significant sale has been possible without its blessing, even when no foreigners are involved.

The Kremlin certainly wishes to see a large national mining and metals champion, but it does not seem to mind about its exact form. Many combinations are possible and the very fact that the outcome is unknown, and is not being dictated by the state, is a sign of progress.

What matters, in the end, is not just the outcome, but also how it comes about. It is heartening to see a Russian company with professional managers who no longer treat minority shareholders as just an obstacle. When the rule of law is non-existent and the Kremlin often acts like a gangster, it falls to business leaders to work out the rules and abide by them. If they can manage this, they will take Russia forward. If they fail, they will reinforce the worst clichés about its business practices.