Issue #11/92, June 8 - 22, 2000   

GAS ATTACK

The eXile is proud to announce its partnership with a new Russian newspaper, "Stringer", edited by Leonid Krutakov, the author of this article. Krutakov, eXile readers may remember, soared to the top of our Most-Likely-To-Be-Assassinated list after his expose on a $3 million loan Anatoly Chubais received from Stolichny bank caused the firing of Izvestia editor Igor Golombiyevsky. He went back on the list a few years later, when his expose on money-laundering and embezzling schemes connected with Boris Berezovsky and Aeroflot was published in Moskovsky Komsomolets.

The eXile and Stringer will periodically exchange material. The article below, "Gas Attack", details the war between Rem Vyakhirev and Chubais over control of Russia's aluminum industry. It is a complicated article, but we feel it reveals the naked, cynical truth about the machinations and methods of the oligarchical wars in this country over the past year, and therefore, how Russia's future is being shaped. The article should help foreign investors into UES better understand Chubais' controversial plan to break up the company and sell off its subsidiaries on the cheap to Chubais-friendly insiders. As with the loans-for-shares scheme, Chubais shows once again that his political survival and power drive his modus operandi, rather than shareholder interests.

For information about Stringer, contact the eXile at our usual addresses, or write Leonid at stringer_np@mail.ru.

While Vyakhirev and Chubais fought for control of national industry, Berezovsky pulled the chestnuts out of the fire

Starting Position

On February 11, 2000, Lev Chorny sold the remains of his aluminum empire to Boris Berezovsky and Roman Abramovich. The incident was a revelation to some observers, while for journalists, it was the smash hit story of the year.

All the same, the purchase of Lev Chorny's aluminum business by the Sibneft shareholders was really just one more link in a long chain of events that could roughly be described as the Gazprom-RAO-UES war. Beyond that, the Sibneft purchase could not have happened without the direct interference of Gazprom itself.

The war between Chubais and Vyakhirev started not on February 11 and not even on January 26, when a gang headed by Iskander Makhmudov took over the Kanchkanarsky mineral-enrichment factory in the Sverdlovsk oblast. The war began with the resignation of First Deputy Prime Minister Oleg Soskovets, who was the krysha for the metallurgical empire of the Chorny brothers, which brought in nearly $10 billion in revenues every year.

Lately not a day passes without intriguing news from the metallurgical front. The names of Makhmudov, Deripaski, Friedman and Abramovich never leave the newspapers. But the two main figures in the metallurgical war are never named...

There is little need to describe the methods by which the Chorny brothers established their reign over Russian metallurgy. Only the lazy failed to write about the aluminum wars of 1993-1994. In any case, the Chornys by the end of 1994 had, with the help of Soskovets, managed to take control of nearly the entire aluminum market in the CIS states and a large part of the black metallurgy market.

Order was imposed with an iron hand. Within Russia, the factories worked under the tolling system. The former giants of state industry received alumina on credit and converted it into finished aluminum. They were compensated for the enrichment process, but all the actual metal became the property of the Chornys' British company Trans World. Trans World was the only company which traded aluminum on the London metals market, where most of the real money was made.

Everybody knows that on currency markets money is made through speculation. But the same thing happens on commodities markets. If you have a large enough reserve, you can easily raise or lower the price of this or that product. All it takes is a news release on the Itar-TASS wire announcing an alumina deficit at the Krasnoyarsk Aluminum factory, and the price of aluminum will instantly rise. You sell all your reserves, and immediately a new story appears on the TASS wire refuting the last story. The prices fall sharply again, you buy back all your reserves, and send the profits offshore.

Money made on the markets is especially desirable in the sense that it isn't connected to the actual flow of products and resources. It is especially convenient for the purchase of yachts and villas. Or you can convert it into cash in Russia and use it to buy a hit on your latest competitor.

Trans World's share of the aluminum market in London was more than a little impressive - about 20 percent. The system remained in place throughout Soskovets's tenure. Naturally, such a tasty morsel couldn't go without some looking after. Deciding to provide that supervision were Gazprom - and Anatoly Chubais.

All Debts Must Be Paid

At first, the Chorny brothers held out against the Chubais-Gazprom onslaught. But after one of the Chornys, Mikhail, joined forces with Chubais, TWG started to cede its position.

The first to fall was the Novolipetsk Metallurgical Factory. Immediately afterward the Sayansky Aluminum factory and the Achinsky Alumina plant were broken off from the TWG empire. Following that, TWG was pushed out of Kazakhstan. And everything started from there.

The other Chorny brother - Lev - was left with no choice but to run to Gazprom for help. Once he did so, war was inevitable.

In his first attempts to seize control of the metallurgy industry Chubais turned to the financial might of Oneximbank, at the time closely aligned with the Ministry of Finance, where Anatoly Borisovich held absolute power. Gazprom answered with the creation of "Mezhregiongaza", a company which concentrated the supply of gas to all the metallurgical enterprises under one subsidiary. This way, Vyakhirev countered Chubais's financial strength as Finance Minister with his own leverage via veksel system of account settlements for gas deliveries. In other words, he fed them gas in exchange for IOUs, thus undercutting the allure of Chubais' funds. Meanwhile, Gazprom was provided with political cover by Viktor Chernomyrdin.

In initiating in his own day that gigantic transfer of property which for some reason was called privatization, Chubais had consciously tightened up Russia's monetary mass. In this way he created an ideal atmosphere for the transfer at bargain prices of whole industries into the hands of bankers close to him. The politics of demonetarization in the end led to the creation of RussiaÕs unique barter economy - a system which the oligarchs fed at Chubais' troth made very good use of.

Competition from the financial market moved over to the debt market. The oligarchs threw themselves into building infinitely-long chains of subsidiary companies. The more companies, the more inhouse accounting and the better the chances of setting all prices inhouse. And by raising these prices high enough, companies could show minimal or even negative profits. Of course, the lower the declared profit, the more money can be funneled abroad.

Such an environment greatly upped Gazprom's chances of getting a hold over the metal's industry, as every metals producer uses gas in production. The entire aluminum industry rests on fuel and electricity, and gas accounts for 40 percent to 60 percent of UES costs.

At the start of 1998 it became obvious that Gazprom was winning its battle for the metals sector, and that Chubais' financial system had exhausted itself. The veksel-debt economy was not designed to funnel money into the budget, with the subsequent profits being split between "friendly" banks, but to channel money out of the country. In 1998 it also became evident that GKOs wouldn't last another half a year. The center of gravity started to slowly tilt away from speculative activities to the real sector of the economy.

The first to understand this was Anatoly Borisovich, which explains his serendipitous move out of government to the chairmanship of UES. Chubais' move had nothing to do with his being the smartest and shrewdest out there, of course. In fact, Chubais left because, having set in motion the whole government debt mechanism and having propelled himself to the top of the government elite, there was nothing left for him to do. As soon as the "great manager" lost his ability to influence the distribution of property, the oligarchs lost all interest in the "great manager." Or to be more precise, he would have been dumped in the garbage, with little consolation but the "World's Best Finance Minister" award he'd won from Euromoney magazine the year before.

The First Run-Ins

That the open war between Chubais and Gazprom for Russian industry was inevitable had become evident after the appointment of Boris Brevnov to the post of chairman of UES.

The reason for this is that UES was a key player in the whole veksel-debt scheme of accounting. It was obvious that the appointment of a "young reformer" to the chairmanship of UES would pique the ire of Chenomyrdin and Vyakhirev.

The first showdown took place around the Magnitogorsk Metals Plant, in the Chelyabinsk region. The first blow was thrown by Chelyabinskenergo, a subsidiary of UES, when it cut off electricity to the Chelyabinsk tractor factory for not having paid its debts. The counterattack was not long in coming: Mezhregiongas, Gazprom's metals-oriented subsidiary, cut gas deliveries to Chelyabinskenergo by 2.8 times.

The tractor factory belonged to Gazprom's empire, which uses about 60 percent of its output. The debt breakdown, and resulting power balance, went as follows: the tractor factory owed Chelyabinskenergo 108 million rubles, while the ChelEnergo itself owed Gazprom about 1 billion rubles. About the same lopsided power ratio between debts owed by industry to UES and by UES subsidiaries to Gazprom, about 1 to 10, was the norm in the metals sector throughout Russia.

The main attack failed. Brevnov did not live up to expectations. Moreover, the "young reformer" was mortally wounded in the process himself. The chairman of the UES board, Dyakov, himself a Gazprom man, revealed during a press conference that Brevnov was earning a $10,000 dollar monthly salary, kept a lavish Moscow apartment and took an extremely expensive family trip to the States (chartering an entire Il-86 jet passenger liner) - paid for by UES.

The two powers next clashed in Samara, though this time it was Gazprom launching the offensive.

What happened was gas suppliers starting selling off Samaraenergo's debt to various enterprises. The enterprises, in turn, began paying Samaraenergo - again, a UES subsidiary - for electricity supplies with that very same debt. Samaraenergo retaliated by cutting off electricity to these enterprises, only to find itself immediately embroiled in an ugly court battle.

It appeared at this stage that Gazprom had found the perfect method to deal with Chubais' protégé at UES. The Samaraenergo experiment showed that energy companies could be easily excluded from the veksel-debt scheme, while at the same time depriving them of their source of income. But this ideal form of retaliation was destroyed by the debt default in August, 1998.

Having come to understand that something as important as the redistribution of property can't be entrusted to even the closest of allies, Chubais decided to head UES himself, and quickly began to draw up the next plan of attack.

The first thing Anatoly Borisovich did was go to the people - beginning with trips to the regions and diplomatic overtures to the governors to solidify relations. At the same time, Chubais' and Mikhail Chernov's ally, Oleg Deripaska, was busy building up Siberian Aluminum from his base at the Sayansk plant.

As the Trans World Group relied almost exclusively on the tolling system to preserve its massive profits, a decision was made to base Siberian Aluminum around actually increasing output of finished aluminum product: foil, cans. This strategy allowed the company to achieve two very important goals.

First of all, it elongated the chain of internal accounting, which allowed it to hide its profits and avoid taxes even more effectively than its competitors. Second, it was building a system that would soon be able to present itself as an alternative to tolling, which would allow it to hit at TWG's weakest point by initiating a campaign to end the tolling system. In a very basic sense, the current redistribution of the aluminum industry started with the movement to end tolling.

By the time open hostilities began, Chubais had managed to come to an agreement with the governors of the Khakasii and the Sverdlovsk region: the younger Lebed and Eduard Rossel. In Khakasii the object of the agreement became Sayan, which linked SaAZ and the Bratskaya energy station. In Sverdlovsk, Ural energy, which combined the power station and the coal sector.

Chubais likewise managed to get the support of Kemero governor Aman Tuleyev and the elder Lebed, now governor of Krasnoyarsk. The governor of Samara, Konstantin Titov, was already eating out of his hand. During the peak of hostilities, Samaraenego lowered the price of electricity for SaMEKO, part of Siberian Aluminum, by 50 percent.

And Chubais prepared well for his attack on the metals sector. But politics mixed everything up. Yeltsin's early resignation and Putin's rise forced Chuabis to show his hand ahead of time, which allowed the opposition to devise just the right counterattack.

The Old Men on the Front Lines

Vyakhirev's announcement of the need to divide up Gazprom shot through the Russian political community like thunder through a clear blue sky. It seemed to be indeed not the most fortuitous moment for such an extreme move on Vyakirev's part. He made his announcement on January 28, the day construction began on the so-called "Blue Stream" pipeline.

The "Blue Stream" - a gas pipeline stretching across the Black Sea floor to Turkey - is one of Gazprom's most ambitious projects, alongside the Yamal-Belarus-Western Europe pipeline. It is designed to ensure Gazprom's continuing domination of the Near Eastern markets. At the same time, the United States and the European Union have favored the Trans-Caspian pipeline and gas supplied from Turkmenistan. Meanwhile, Algeria has its own proposal for Turkey.

To announce a breakup under these circumstances seemed equivalent to suicide. On the following day, Gazprom shares fell almost eight points in the space of one hour's trading. The news was so startling that many observers immediately came to the conclusion that Berezovsky and Chubais had undertaken yet another attack on Gazprom, and Vyakhirev had therefore been forced to "put a gun to his own head" in an attempt to prove to Putin how dangerous the games surrounding Gazprom were. The next developments proved, however, that if Vyakhirev had indeed blackmailed Putin, the motives weren't political. On the very same day as Vyakhirev's announcement - January 28 - Chubais advanced his first units on the metallurgical world. One of Mikhail Chorny's closest comrades-in-arms, Iskander Makhmudov, seized by force the Kachkanarsky mineral-enrichment plant. The motive behind this move was to establish a beachhead for further takeovers of metallurgical factories in the Sverdlovsk and Chelyabinsk regions.

Kachkanar was, first and foremost, the main supplier of raw materials for the Nizhnetagilskogo Metallurgical Plant (NTMK). And it was NTMK that was due to acquire equipment for the production of pipes for Gazprom - pipes to be used in the "Blue Stream" and Yamal-Belarus pipelines. NTMK, according to some sources, was to produce up to $1 billion worth of pipes per year for the deal.

To recap, it was just two days before the Kachkanar takeover (Jan. 26) that Chubais had struck a deal with Eduard Rossel to create "AO Ural TEK", which would have consolidated the region's electrical stations as well as some Kazakh coal reserves. And with electricity, coal, and ore in one's hands, one can seize control of metallurgy with no trouble at all.

There's one more nuance to this story. On January 27, Chubais' deputy, Valentin Zavadnikov, presented in London a plan for the reorganization of RAO-UES. The purpose of the program was to sell controlling stakes in regional Russian electrical companies to foreigners. The list of companies due to sell stakes included "Samaraenergo", "Sverdlovenergo", "Khakasenergo", "Novosibirskenergo", "Orenburgenergo", and "Kuzbassenergo". All the abovementioned companies are located in metallurgical regions. Chubais through this move was clearly striking out at Gazprom's interests. The next blow was struck in Kuzbass.

On the 8th and 9th of February the Kuznetsky Metallurgical Plant (KMK) and the Novokuznetsky Aluminum factory (NkAZ) were declared bankrupt for non-payment of debts to Kuzbassenergo. The shareholders in these factories were pushed aside to make way for a new management forced upon the factories by the court. The new management were people from the governor's office, and from Siberian Aluminum.

The Kuzbass incident unveiled not only the tactics, but the overall strategy of Chubais' assault on metallurgy. The tactics were based on the veksel-debt economical system, while the centerpiece of the overall strategy depended upon the reorganization of RAO-UES.

The sale of controlling stakes in the electrical companies to foreigners was saving Chubais from "raids" on the companies by Gazprom. The current debt of UES for gas exceeds at least 70 billion rubles. That sum is more than enough to declare the companies bankrupt, and thrust them into the hands of "Gazprom". But doing so would mean problems with powerful foreign investors.

Vyakhirev at this point was forced to appeal to the public relations capabilities of Berezovsky and Gennady Zyuganov. The whole first half of February was marked by the violent antipathy towards Chubais both in Duma proceedings and in the press. Vladimir Putin himself kicked off the anti-Chubais campaign. Appearing before colleagues in at the Ministry of Justice, Putin called RAO-UES a "runaway mechanism".

It was natural, of course, that the temporary (out of necessity) union between Vyakhirev and Berezovsky ended on February 11 after the "deal of the century". Trans World sold controlling stakes in KrAZ, BrAZ and the Achinsk alumina plant to Sibneft, while LogoVaz bought the Novokuznetsky Aluminum Factory.

The Young Have Roads Everywhere

After the appearance of Berezovsky and Abramovitch on the field of battle, the character of the war changed dramatically. Putin was forced to intervene in the battle. The acting president was the first to describe the mechanism of the "deal of the century", doing so in a meeting with editors of several regional newspapers. The first to publish Putin's commentary was the newspaper "Krasnoyarsky Rabochy".

At the time of the deal, Chubais was sitting on a plan to take over the Trans World empire via the debt system. RAO-UES gave the Siberian Aluminum group the energy debts of KrAZ and BrAZ. The debts were supposed to be converted into shares, but Vyakhirev interfered. It was Gazprom who handed the gas debts of UES to the Sibneft shareholders, making it possible to block the share-realization scheme and force Lev Chorny to sell his empire.

The next stages of the fight took place in a significantly different realm - in the political arena, around the proposed restructuring of UES. The chronology of these events looks as follows:

On March 18, the "Gazprom governors" met in Izhevsk and announced their opposition to the program. On the 22nd, Siberian Aluminum sent a complaint to the Anti-Monopoly Ministry (MAP) protesting the Trans World sale. On the 23rd, Chubais sent to the Duma a request to remove the limits on the capital investment of foreigners into RAO-UES.

Putin throughout this time was meeting occasionally with Chubais, occasionally with Vyakirev. And Mr. Yuzhanov, the anti-Monopoly Minister, changed his mind about the TWG deal three times. At first, he declared that the deal didn't violate anti-trust laws. Afterwards, he announced that the purchasers of KrAZ and BrAZ would eventually surface from under the cover of offshore companies, and that if it turned out that one person had more than 20 percent of the market, the deal would be canceled. After that, he again changed his mind, and said everything was 'o'key'.

Against the backdrop of these large-scale political machinations, the fight continued on the tactical level in the regions. Chubaisites bought the Nikolaevsky Alumina factory (the main supplier of alumina to KrAZ and BrAZ), and began right away to put pressure on the new TWG shareholders. In response, the Sibneft shareholders got themselves confirmed on the board at Achinsk (the factory which supplied alumina to Siberian Aluminum, Chubais' allies) and in this way started the two groups on a collision course again. Gazprom, meanwhile, instituted bankruptcy proceedings against the Kachkanrsky factory, where Chubais' people had not long before seized power.

The same kinds of battles were meanwhile taking place in the coal and even in the oil sectors. For instance, Alfa-Group received for its services to BrAZ and KrAZ 12.8% of Slavneft. Meanwhile, the political game was winding up in a total collapse of Chubais' UES restructuring plan, as announced at the Kremlin on April 4. The war had moved into an open conflict between Vyakhirev and Chubais.

On April 1, Gazprom cut gas deliveries to RAO-UES by 30 percent. It is worth noting that Vyakhirev met with Putin in the Kremlin two days before this move. And on April 5th-just one day after the Kremlin announcement of the collapse of the UES plan - Chubais met with Vyakhirev.

Clearly, Chubais didn't get much out of the face-to-face approach. On April 7, Putin visited Vyakhirev at the offices of Gazprom. Chubais, for his part, met with regional directors of UES in Vologda, and announced that the company was facing an energy crisis, and that it was threatened with the need for temporary electrical shutdowns. The war was then moved to the international arena, where Chubais tried to play his last card.

On April 11, in the offices of Vice-Premier Viktor Khristenko, Vyakhirev promised Chubais to increase deliveries of gas by 2.2 billion cubic meters. On April 13, Putin received both of the two heavyweights in his office for a chat. And on April 17, an endgame compromise was reached on another front, as the Sibneft shareholders and Siberian Aluminum announced their merger to create Russian Aluminum, The young warriors (Abramovich and Deripaska) turned out to be more amenable to compromise than the hardened war horses - Chubais and Vyakhirev.

WAR?

The creation of "Russian Aluminum" inspired observers to accuse Siberian Aluminum of treachery, who went over to the other side and joined up with the enemies of Chubais. It seemed that even Chubais himself felt this way. On April 24, he claimed to be deeply upset by the union of Deripaska and Abramovich.

But things are not that all that simple.

On April 26, Deripaska headed the national committee of the International Chamber of Commerce, which list RAO-UES and Vimplecom - both organizations which are sympathetic to Chubais - as members. And Chubais, despite his professed displeasure with the existence of Russian Aluminum, nonetheless promised to provide electricity for a new factory to be built in Kharkov for Deripaska.

At the same time, the Novolipetsky Metallurgical Factory - part of the Chubais group - began to make inquiries about the Lebedinskogo Mineral-Enrichment Plant, which belongs to Gazprom. Vyakhirev, for his part, began to apply pressure via the debt route on Samaraenergo, which subsequently was forced to cut off electricity to Siberian Aluminum. Chubais, meanwhile, pressed ahead and went forward all the same with the sale of UES stakes to foreigners, this time using the vehicle of American Depository Receipts.

Why did most observers feel that Deripaska had betrayed Chubais? Maybe it was Berezovsky and Abramovich who did the betraying - of Vyakhirev, and a real thorough job of it, at that. So the war is over. Long live the war...

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