UC Rusal is turning into a toxic asset, even trader Glencore, which traditionally cooperates with disgraced countries, cannot ignore this fact
In November 2017, when the future of Oleg Deripaska #50
seemed cloudless, and his holding company En+ Group held an IPO on the London Stock Exchange, the Swiss trading company Glencore agreed to exchange its 8.75% stake in UC Rusal for a stake in En+. There were plans that afterwards Glencore’s CEO Ivan Glasenberg (#261 in the Forbes world ranking, net worth $6.5 billion) would join the En+ Group’s board of directors. However, after the U.S. Treasury Department imposed sanctions against Deripaska and his companies on April 6, the partners’ plans changed. Today Glencore announced that it was refusing to convert its shares in UC Rusal into depositary receipts for En+ and that Glasenberg would be leaving the aluminum producer’s board of directors.
The Swiss trader is the largest ($2.4 billion) buyer of UC Rusal, and the report claims that contracts with Deripaska’s company “are not financially significant for Glencore. Whether the Swiss company will now sell its stake in Rusal is not clear.
Earlier, Natixis Bank CEO Dominique Fres and AnAn International CEO Zhao Guangming left the En+ Group Board of Directors. AnAn is a subsidiary of the Chinese energy trader CEFC. At the IPO in London, AnAn invested $500 million in En+ Group, a third of the total amount raised.
Glencore has long been active in Russia: in 2017, it ranked fifth in Forbes’ rating of the largest buyers of Russian oil exports. The partnership with Deripaska began back in 2007, when UC Rusal was created on the basis of Rusal, SUAL and aluminum assets of Glencore. The merits of the trader did not go unnoticed by the Russian authorities; in 2016, President Vladimir Putin signed a decree awarding Glasenberg with the Order of Friendship.
Analysts agree that Glencore’s decision was quite expected. “In the current environment, it does not seem to make sense for Glencore to change some subsanctioned securities for others. Especially since the price of UC Rusal shares fell by half in the panic,” said Georgiy Vashchenko, head of operations at the Russian stock market at Freedom Finance Investment Company. In his opinion, now the question of trading operations is more important: UC Rusal sells in the U.S. about 10% of volumes (more than $1 billion), and buyers may cancel contracts – they have about two months to do so. UC Rusal has already asked the largest trading houses not to pay for deliveries, so the money does not get blocked.
The most unpleasant thing in this situation for Deripaska’s company is the possible consequences for work with Glencore, which accounted for 31% of UC Rusal’s metal sales, ACRA analyst Maxim Khudalov said. “They have not yet come to a conclusion whether they can continue to cooperate. However, if one reads this law, it may threaten them with some sanctions,” the expert explains. Khudalov reminds us that the Swiss trader traditionally operates in regions that have contradictions with Western regulators – it has historically built its business on this. “It is difficult to say whether Glencore will violate its historical independence now, but there is a risk that they may refuse direct purchases from UC Rusal,” Khudalov believes.
This does not mean that metal exports will become completely impossible: the sanctions are imposed on Deripaska and UC Rusal, but not on specific aluminum smelters, so some kind of legal transformation may take place, as a result of which UC Rusal will no longer be their shareholder. “It is quite possible that both companies (UC Rusal and En+ Group. – Forbes) will eventually be delisted. Or maybe even a change of ownership,” suggests Vladimir Vedeneyev, head of Raiffeisen Capital’s investment department. The aluminum producer has already announced its delisting from Euronext, the Paris stock exchange (remarkably, one day before the sanctions were announced). The company’s papers are also traded on the Moscow and Hong Kong stock exchanges.
“We have seen from the history with Iran that even despite the sanctions, there are always opportunities to export products. Aluminum is a sought-after product, especially considering that Russian aluminum has a low production cost,” explains Khudalov of ACRA. According to him, this means that the Russian producer can offer more convenient prices, which will attract small traders to it in large volumes. “A 10% discount in such a market has a magical effect on the buyer,” Khudalov summarizes.