ZAO Russia

By Leonid Krutakov

The President’s new “Family” divided up Russia’s metal industry in just one instant.

On December 21, 2000, three Swiss companies filed a suit in a New York court against Russian Aluminum and Oleg Deripaska. The suit was founded on an American Act targeting rackets and the influence of corrupt organizations. In this case, the “corrupt organization” is Russian Aluminum and the “racketeer” is Deripaska.

The suit’s object was Novokuznetskii Aluminum Factory (NkAZ), which in March of last year was leaning towards foreign management. Then Russian Aluminum invited Sergei Chornyshev to become the manager of NkAZ.

The former bosses, the brothers Zhivilo, were sidelined from the management of the factory. At the same time, the three Swiss firms—which had invested several million and been exporting Novokuznetskii’s metal for the Zhivilos— were also pushed out. In response to this bullying, the Swiss companies filed the aforementioned suit for the sum of $2.7 billion dollars.

In the middle of February last year, the New York Federal Court provided Russian Aluminum with the unprecedented delay of 120 days (they usually give no more than 60 days) to prepare their defense. At the same time, the trial lawyer for the Swiss side, Bruce Marx, gave an interview with Vedomosti:

“The information we received after the suit was filed proves that the organized criminal group that stood for the seizure (meaning NkAZ!) is composed of Mikhail Chernoi, Iskander Makhmudov, MDM-Bank and Anton Malevskii. And we will prove this in court.”

Considering the postponement, the New York court apparently is predisposed towards siding with Russian Aluminum. But one of the reasons for the delay in the suit was so that it would take place after the meeting of the “Big Seven” in Genoa, where Vladimir Putin and George Bush will have their first tete-‡-tete.

Better timing for the start of an all-encompassing anti-Russian campaign would be impossible.

At the Group of Seven meeting, one of the main topics will be dealing with “dirty money”—the adoption of strict controls over offshore channels for moving and laundering the money. If the Swiss are able to win the case in New York, then the “organized criminal group” will be virtually all of Russian metallurgy.


Today the “organized criminal group” consists of Mikhail Chernoi, Roman Abramovich, Oleg Deripaska, Iskander Makhmudov, Aleksandr Mamut and Aleksandr Abramov. This group’s criminal actions unfolded immediately after Vladimir Putin came to power and the Bank of New York money laundering scandal involving the “Russian Mafia.”

Actually, first the BoNY scandal broke and then Putin ascended to the presidency. What does BoNY mean here?

The scandal over the “Russian Mafia’s” money in the epicenter of the world’s financial capital became a signal to all “civilized society.” The case signaled the worldwide liberal revolution accepting defeat, and it was time to consider a bailout of the national economy. And it was acknowledged that the bulk of the national economy sat in offshore havens.

Russia found itself in a very difficult situation. In order to protect its national economy, it would have to first gain access to that same economy. Furthermore, there was now a harsh time limit before the window of access to the offshore accounts closed.

The anti-offshore campaign uncovered itself with unbelievable speed. After BoNY, Citi-Bank followed, and wrestling with “dirty” money from Russia became a favorite pastime in European countries.

But the fact is that in the last 10 years offshore havens were using the G7 (especially the USA) for secret speculation on the markets of developing countries. These developing countries (Russia is also one) all stood in line to use offshore havens to remove assets and capital from their national economies.

This process should have ended in a series of funding crises, with each step pushing the national economy of developing countries further under the control of international capital. For example, there might be a crisis in South East Asia. But the main target of the “big game” was Russia, as it has a significant portion of the world’s natural resource reserves. Only Russia, with its vast untapped resources, could pull off fanning the flames with an unbelievable mass of dollars. But Moscow preferred default to giving up sovereignty. On the horizon loomed a global economic crisis.

The financial capital of the world believed that the “Russian Mafia” tossed the default onto them. In Russia, they are still convinced that the West wanted to bring the state’s economy to a full stop. They explain that during one of the meetings with foreign investors after defaulting. Oleg Deripaska said the following:

“Yes, you may be indifferent to managing our property, but we still have a lot we need to learn. So come and teach us. We have 40 vacancies in our holding, with an annual salary of $500,000 dollars. Please, we’re asking you. But we aren’t planning on returning the properties for free.”

20 million dollars a year from a monster like Russian Aluminum— it isn’t a sum that could excite the kings of the financial world. The company was beginning to struggle with dirty money.

After the default, approximately 80% of the assets from all Russian businesses were stashed in offshore accounts. By blocking the return of this capital to Russia, the USA could continue to dictate Russia’s financial direction.

After Putin’s assent to power, he was faced with the responsibility of quickly returning the offshore assets to the balance of the residents. Then the process of filling the real sector of the national economy with that money would begin. Ultimately, this would lead to price stabilization and the growth of a tax base.

Putin figured he could quickly return the offshore assets to a national registration if he came to an agreement with the “group of merchants” about guarantees for their property and a new set of “laws” for the power game between power and business. This in turn created a new “Family” or “Mafia” - whichever you prefer.


In the fall of 1999, the most powerful “Family” banker, Aleksandr Mamut, became head of the overseeing board of MDM-Bank— the main calculating center for the “group of Mikhail Chernoi.” At the same time, Oleg Deripaska joined the board.

From this moment it became clear that a new, pro-Presidential “Family” was forming. True, members of the old “Family” didn’t notice (or at least gave the impression that they didn’t) the trend, and due to inertia continued the old manor of asset-stripping.

On February 11, 2000, the “organized criminal group” (using the phrase of Marx, the lawyer) definitively formed their relations to power. On that day, they released a statement declaring the formation of Russian Aluminum. This was tantamount to announcing exceptional protection under the Kremlin’s krysha.

It remade metallurgy into a new sphere; influence was re-fashioned in an instant. In some places (like NkAZ) they used bankruptcy as the mechanism to seize power. Thanks to the debts owed by various national enterprises that were approaching maturity, the companies got sucked into a pit of debt.

In other places (The Kachkanarskii GOK, for example) new management took control into their own hands with the help of the local OMON (the militsia’s special forces), and then took internal management and formed a new roll of shareholders among the management.

It is notable at this point that bankruptcy and changes in the internal management took place in practically all cases during the expansion of the new “organized criminal group.” Generally, when all capital is kept offshore, loan schemes were the only possible variant to quickly gather property into the framework of the new “Family.”

Today, the layout of power in the national metallurgical complex is the following:

Oleg Deripaska answers for practically all aluminum.

The boss of Uralskaya Gorno-Metallupgicheskaya Kompania Iskander Makh-mudov began “watching over” copper smelting enterprises.

The head of the Group EvpAzMetall (EAM) Aleksandr Abramov took over black metallurgy.

MDM Group controls coal and pipe factories.

Several other parts include Severstal, Magnitka, Mechel, OYeMK, NLMK, and Stilteks Group.

The next target participating in the deluge of capital was MIKOM (also formerly belonging to the brothers Zhivilo), which was snapped up by the coal company Mezhdurech’e I Prokop’ev-skugol’. Now, Stilteks managers are wrestling for the Orsko-Khalilovskii Metkombinat (NOSTA).

The interconnections within the new “Family” are a small club but figuring it out is not simple.

In November of last year, Mikhail Chernoi gave an interview to Vedomosti, in which he drew up an image of the interrelations within the group:

“In Russian Aluminum there are two groups of shareholders: each own 50% of the project. Siberian Aluminum holds half of the company’s stocks and these have been managed by Deripaska for three years.

“In Siberian Aluminum, there are also two groups of shareholders, also split 50/50. One group is Oleg and his managers. The second group is mine and within that group is Iskander (Makhmudov). The controlling stake of the group could only appear if I sell my stake to Oleg, and no other way.”

Actually, the relationships are much more complicated and convoluted.

For example, EAM is affiliated with YGMK through one shareholder from NizhniTagilskii Metkombinat, the offshore firm Martek International ltd. The firm is registered on the Virgin Islands at the same address as two other shareholders, both companies of Makhmudov.

But the real center of the metallurgical “Family” appears to be MDM Group. All the shares of MDM Bank are not registered abroad, but in a Russian offshore zone in the city of Yelista.

In the middle of a number of Kalmyk off-shores is a company with a promising name—OOO Yedinaya Strategiya [Unified Strategy]. Its registration number is 3615, Yelista, ulitsya Baidukova, 28. In that same building is another well named company - OOO Nash Uchastnik [Our Contestant]. (Note that the founding fathers of the metallurgical “Family” have a sense of humor.)

Nash Uchastnik turns up in the shareholders of MDM Bank, and the registration number, address, and even telephone of “Strategiya” link it to MDM. Except that Strategiya, together with Siberian Aluminum, founded OOO SKAL-Leasing and, together with the controlled UGMK offshore, OOO Investpromkholding.

A further nuance is that OOO Gruppa Stilteks is also registered at the same address as Strategiya. Stilteks is often linked to Grigori Luchanskii. The lawyer for the Zhivilos, apparently, is going to have do decipher this list of members of the “organized criminal group.”


On March 6 this year, the international creditors of Novokuznetskii Metallurgicheskii Zavod (NkMZ) signed a agreement in arbitration. The management of Russian Aluminum executed a path of guileless manipulation with the chief creditors of NkMZ. After acquiring a controlling package of the factory’s debts, Russian Aluminum dictated the terms of the agreement, leaving the current managers of the firm— the brothers Zhivilo and RAO EYeS Russii— helpless.

The agreement created a shake-up. NkMZ’s debts (4 billion Rubles) will be converted into promissory notes for the factory with a term of liquidation not earlier than March 6, 2001. Simply put, Russian Aluminum postponed the payment for the loan by 20 years.

Five days later a similar contract was closed in the conciliatory agreement with creditors of Kachkannarpskii GOK, which is under the management of Makhmudov’s team.

The signing of these agreements demonstrates the restoration of rights to the shareholders of NkAZ and GOK over the direction of their enterprises. But it doesn’t mean that management will be returned to the former owners.

Not long before the agreements were reached in arbitration, the Zhivilos sold their stake in NkAZ to Grigori Luchanskii. And the list of shareholders of Kachkanarskii GOK changed dramatically immediately before these agreements, too, according to the former owners. The same strategy was used on Kuznetskii and ZapadnoSibirskii metallurgical combines, which are now run by EAM.

“OPG Mikhail Chernoi” hurried to legalize his most recent acquisitions in Russia’s metallurgical industry. Remember, the G7 meeting in Genoa— when off-shores will likely receive a deathblow— is only three months away.

The metal industry, without admitting it, is undergoing a process of interior management consolidation and returning to the old intrigues will be impossible. The process has already started. New management companies (MDM Group and EAM) differ from “old” holdings (Siberian Aluminum and UGMK) as they are registered in Russia.

Turning debts into shareholders forms for the managers means that soon these new bosses should correct the payments for raw materials, electricity, coal and gas into hard currency. Furthermore, it should pad the budget at different levels. From here there is a rule: offshore capital taken earlier from Russia should return. There simply isn’t any other place to put it.

In England they are already introducing a law that could confiscate illegal money. From the point of view of taxmen, all Russian offshore money is criminal. In the EU, they are seriously considering forbidding open correspondence bills from Russian banks.

Interestingly, Russia has nowhere to put it. In the Kremlin there is not one political or engaged investigative resource except the offshore capital organization. Because of that, Putin will hold talks with the “organized criminal groups” about the rules and mechanisms for repatriating money into Russia.


On March 14, all the mainstream media reported that the Central Bank “liberalized” the rules on the use of S accounts. Remember, that S accounts were blocked after the default as a means of controlling foreign speculators on the GKO market. The meaning of the “liberalization” here is that, until the end of this year, S accounts will permit direct investment into the Russian economy to the tune of 2 billion rubles.

Simultaneously, the Central Bank permitted the sale of these accounts to various foreign companies. Apparently, these were two contradictory decisions. Really, they were codependent.

Imagine this hypothetical situation. An offshore company of Deripaska’s or Makhmudov’s buys with a large discount (say 50%) an S account and invests it into the Russian economy. Everybody wins: Russia gets a post-default loan; Deripaska and Makhmudov legalize their offshore funds and make a tidy profit.

Furthermore, investing via an S account allows direct capital investment from the shareholders, and the loan has a three-year term. But returning after three years, the credit may have already slipped over the border.

Here non-cash reminds one of a broad sound bite from a government program called “loans in exchange for investment.” The program invites internal Russian creditors to exchange debts owed them for shares of lucrative enterprises. The internal debt Russia now trades on a second market for 40% of its original worth.

Basically, Putin has given the “criminal group” an offer they can’t refuse. Furthermore, the meetings in Genoa are getting closer and closer. It would be a waste struggling over the offshore question, if all the money was returning. It would be better for Putin to pitch himself as the center of “loans in exchange for investment.”

The money from offshore will need to be immediately placed into “legitimate” bank structures. And returning offshore capital to Russia stands between the “organized criminal groups” and one very important task— preparation for a new investment plan.

In 1999, Siberian Aluminum started grabbing up unprofitable enterprises literally by the handful: PAZ, GAZ, Bolzhskie motory, the conflict with Severstal for ZMZ, the attack on AvtoBAZ...

Many figured that Deripaska had lost his mind. But now it all fell into place when on March 12 Siberian Aluminum announced the idea of RusAvtoPromkholding and Deripaska appeared ready to invest 2.5 billion dollars in the project.

Currently, only 20% of Russian capital is returned to the Russian market, while the rest spins around the world in offshore accounts. Russian Aluminum alone couldn’t return that size of an investment alone. Financing inevitably will come from different parts of the industry that continue to work through barter. Here the organized criminal group decided earlier to take control of future investment currents. Like I already wrote, next Russian Aluminum will become Russian Steel, Russian Auto, Russian Plane.

We can label it very simply: ZAO Russia.