The global financial crisis has caused a meltdown among Russia's billionaire oligarchs - and none has been hit so hard as GAZ owner Oleg Deripaska. Where now for Russia's second largest automaker, asks Mark Bursa

How quickly things have changed. At the end of 2007, Oleg Deripaska reached the top of the Russian oligarchs' league table. His assets were worth an estimated US$40bn, almost twice the US$23bn in Roman Abramovich's bank account.

Fifteen months later, and according to the latest Forbes rich list, Deripaska is down to his last US$3.5bn. He's down to number 10 in the Russian rich list - and it could get much, much worse. The global economic crisis has hit Deripaska's many investments, leaving him saddled with all measure of toxic debt.

According to some estimates, his debts total up to US$25bn and will soon rapidly consume his remaining fortune, leaving him technically insolvent, having seen a US$60bn reversal of fortune in just over a year. Deripaska's empire is crumbling - cash is running out; businesses are starting to default. The future looks bleak.

Among the highest-profile businesses at stake is GAZ, Russia's second-largest automaker. Only last October - less than six months ago - I wrote an extensive analysis of GAZ, which portrayed a positive, ambitious company that was not unafraid to make strategic acquisitions in a bid to build a sustainable future.

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These included UK van-maker LDV, a good strategic fit as GAZ is the dominant van-maker in Russia. LDV's relatively modern Maxus van, which was developed originally for Daewoo, is a major upgrade on the almost-20-year-old GAZ Gazel and Sobol vans.

In the car business, GAZ offered an upgrade path for buyers of its ageing Volga sedan by acquiring the old Chrysler Cirrus production line - the cars are now sold in Russia as the GAZ Siber. A deal to buy a 50 percent stake in Italian engine-maker VM Motori was lined up, which would give access to state-of-the-art diesels to power cars and vans. As Deripaska entertained Russian premier Vladimir Putin at the Siber roll-out, nobody predicted the brewing storm.

Now GAZ is facing a liquidity crisis. It has short-term debts of US$1.24bn, according to investment bank Troika Dialog. A major steel supplier, Novolipetsk Steel, has threatened to bankrupt GAZ unless it pays the US$28m it owes - money that it does not have. The VM Motori plan was abandoned. A shareholding in Magna International has been sold - after the shares lost half their value. LDV is on the auction block - ideally to a management buyout led by Erik Eberhadson, former GAZ CEO.

But the UK government has turned down Eberhardson's request for a GBP25m loan to fund the MBO and convert the LDV plant in Birmingham to make electric vans. A terse UK Government statement read: "The primary responsibility for supporting LDV and a possible management buy-out rests with the company's current owner, GAZ."

The LDV proposal left far too many unanswered questions. What was the money for? How much of the GBP25m would be used for the electric vans project, and how much would be paid to Deripaska? And what would the management be buying? Would LDV have access to the intellectual property rights of the Maxus van?

You can't really fault UK Trade and Industry secretary Peter Mandelson for turning down such a vague proposal - especially when you factor in LDV's recent track record - it's not made a profit for years, and since 1990 this relic of the old British Leyland empire has been in receivership twice: once when part of the DAF group; later when the MBO team that rescued LDV in the 1990s crashed too.

Of course, Mandelson and Deripaska have some 'previous' - the now infamous 'yachtgate' incident. Mandelson, then an EU Commissioner, was a guest on Deripaska's yacht last summer, along with a senior UK opposition politician, Conservative shadow chancellor George Osborne. It was Mandelson who leaked the story that Osborne - by now a political rival following Mandelson's appointment as UK industry minister - had been trying to tap up a donation to his party funds from the oligarch. But Oleg's hospitality doesn't seem to have paid off - he's getting no favours from Mandy, it seems.

How has Deripaska crashed and burned so badly? Like most oligarchs, he got rich by being the right man in the right place when the giant Russian state-owned corporations were privatised. Deripaska ended up in charge of giant aluminium producer UC RusAl, but world aluminium prices have tumbled, hitting RusAl hard. The company has run up a staggering US$14bn bank debt.

Basically, Deripaska has built his business by borrowing money to fund acquisitions. But as share prices have tumbled, the value of these investments has been wiped out. Now he has to sell the businesses at a loss, just to pay off the banks from whom he borrowed the money.

Rather than that, he's trying to restructure the debt. Most of the banks are helping - realising that the basic core of the Deripaska empire is sound, and a repayment moratorium has been agreed for the stricken oligarch. On March 6 RusAl reached a standstill agreement for two months on US$7.4bn of loans from more than 70 banks, including ABN Amro, Citigroup, BNP Paribas and Merrill Lynch. But others are playing hardball. Alfa Bank, Russia's biggest private lender, rejected the deal, and is aggressively pursuing US$1bn of debt from Deripaska's companies.

A bigger problem lies in the shape of the man who has replaced Deripaska at the top of the oligarchs' premier league, Mikhail Prokhorov. With an estimated US$9.5bn fortune, Prokhorov has vaulted ahead of Deripaska, Abramovich and the others. And he has several links to Deripaska which could, in the worst case, provide the dénouement.

RusAl owes US$2.8bn to Prokhorov, part of a cash and equity payment for a 25 percent stake in mining company Norilsk Nickel, acquired last April before the crisis hit. However, the value of Norilsk shares has plunged since then. Meanwhile Prokhorov is a 14 percent shareholder in RusAl, but worst of all, he has a put option on this stake, which means he could force Deripaska to buy the shareholding back for US$7.3bn - clearly a sum beyond Deripaska's diminished resources.

Some believe the ideal solution would be some kind of merger, where Prokhorov emerges in control of a lot of Deripaska's assets, in a way that allows Deripaska to save face. Even this has flaws. Prokhorov has seen his own fortune halved in the past 12 months, and he might struggle to do a deal - even though he has nothing like the same debts as Deripaska.

Is there an endgame? Frankly, it's hard to see either GAZ or LDV avoiding some form of receivership. Both businesses are simply running out of cash. Last year we were viewing GAZ as an acquisitive player, snapping up bargains in the West. Now it's likely to be bought itself.

Is there a potential Western buyer? The obvious candidate would be Fiat, still smarting at missing out on GAZ's bigger rival AvtoVAZ, which chose Renault as its global partner rather than Fiat. Fiat has links with GAZ - in the late 1990s, it was poised to set up a major plant to build Palio/Siena 'world cars' there, bankrolled by the European Bank for Reconstruction and Development.

But the 1998 financial crisis put an end to that plan - and subsequently Fiat has concentrated its Russian activities on a venture with another automaker, Sollers. Naturally GAZ owes Sollers a pile of Roubles too - it buys engines from Sollers. Perhaps a Sollers-GAZ merger might be on the cards? There's a certain logic here, given GAZ's links with Chrysler, and the fact that Fiat is about to rescue the US automaker.

This is pure speculation, of course. But in the mad, melting-down world of Russian business right now, anything is possible.


'Coolbear'