‘I don’t need to defend myself. I am not ashamed and I don’t need to hide’
- Oleg Deripaska, July 20071
ON THE AFTERNOON of Saturday 6 October 2007 Roman Abramovich was browsing through designer clothing and luxury accessories in the exclusive Hermès shop at 179 Sloane Street, Knightsbridge. At that very moment his former friend Boris Berezovsky was perusing the shoes and clothes in Dolce & Gabbana, the Italian fashion house, just two doors down. It was to prove an expensive day’s shopping for Abramovich.
The two oligarchs were unaware of each other’s presence until one of Berezovsky’s three bodyguards spotted the Chelsea owner in Hermès and told his boss. Six months earlier Berezovsky had filed papers at the High Court, claiming multi-billion-pound damages against Abramovich and was desperate to serve the ‘writ’, necessary under British law, for the case to proceed. He had been trying for months and had even hired security operatives to catch him when Chelsea were playing at home. But his former protégé had proved elusive. ‘There was a plan to ambush him with the writ when he went to watch Chelsea play Hull in an FA Cup match, but Roman got wind of it and didn’t turn up’, according to a Berezovsky spokesman.2
Now that Berezovsky’s moment had finally come, he ran over to his armoured Mercedes Maybach. Shrewdly, he kept the legal documents in the limousine’s glove department at all times. With the papers in hand and surrounded by his minders, he marched towards the Hermès boutique, but two of Abramovich’s bodyguards noticed their approach and formed a human blockade at the entrance.
As astonished shoppers looked on, the respective bodyguards faced off, staring each other down like boxers before a heavyweight bout. Then they started jostling. An animated Berezovsky tried to join the scuffle. Eventually, after much pushing and shoving, the wiry oligarch - clutching his writ like a rugby fly-half with the ball - charged through the scrum and handed the envelope to Abramovich. ‘It’s a present, from me to you,’ he snapped. A startled Abramovich pulled away and put his hands in his pockets, allowing the envelope to fall to the ground.3 ‘I think that he’d been watching too much television, because he seemed to think that if he didn’t have physical contact with it then the writ would not be served,’ said a Berezovsky aide.4
This extraordinary showdown was captured on Hermès’ CCTV and was later used in court as evidence in the case. It was a clear illustration of how the raw business methods of many of the new plutocrats - built on litigation, distrust, and security - had spilt over into the heartland of Londongrad.
The ‘writ’ stemmed from 2001 when Berezovsky claimed that he had been ‘induced’ into selling valuable shares in two companies they jointly owned - the oil and metal giant Sibneft and the aluminium combine Rusal - to Abramovich at knockdown prices. The exiled oligarch was claiming damages of ‘$4.3 billion arising out of allegedly wrongful actions committed by Mr Abramovich.’ Berezovsky claims that Abramovich was ‘a party to the explicit and implicit coercive threats and intimidation’ against him and that he had lost out hugely as the value of Sibneft soared off the back of escalating oil prices, enriching his former protégé in the process.5 Abramovich hotly disputes each of Berezovsky’s allegations against him.
Berezovsky had earlier said that he had no intention of suing. ‘No, because I think it is useless,’ he told Abramovich’s biographers in 2004.6 But the resentment continued to smoulder. His own fortune had been shrinking with the costs of his high-profile campaigns against Putin and a successful legal challenge against Abramovich might restore his pot of gold. The catalyst for Berezovsky was when Abramovich sold Sibneft - the oil company they had jointly acquired - back to the state in 2005 for £7.5 billion. The sale consolidated the power of the state-combine Gazprom, and its chairman Dmitri Medvedev who later became President, but also greatly inflamed Berezovsky, who wanted his own cut from the sell-off.
The Commercial Court in London confirmed that the case was ongoing as of December 2008. It is thought that neither will relish the prospect of being cross-examined in public about their pasts and the sources of their wealth. The question is: who will blink first? The Chelsea owner in particular will be uneasy about the idea of his alleged role as President Putin’s agent being scrutinized so publicly by Berezovsky’s lawyers.
Many of the oligarchs may have become near neighbours in London’s smartest streets and squares, but the bitter, decade-old rivalries over media, business, and political deals have not gone away. In the 1990s business disputes were resolved in the notoriously corrupt Russian courts or through the barrel of the gun on the streets of small industrial towns. Some oligarchs hired private armies for protection. By 2007 and 2008, however, many of these rancorous and simmering disputes - involving billions of pounds of former state assets - had moved to the streets and the courts of London.
A year before Berezovsky’s bizarre encounter with Abramovich on Sloane Street, another of his former business associates had also been singled out for legal action. On a misty evening on 26 November 2006 Oleg Deripaska flew into Luton Airport on one of his private Gulfstream jets, a routine visit for the aluminium magnate who had regular business meetings and a house in London.
What he did not know was that private detectives had been keeping tabs on him for weeks. They were employed by Michael (originally Mikhail) Cherney - the controversial founding father of the post-Soviet-era aluminium industry and a former business partner of Deripaska. A few days before, Cherney had filed a High Court claim against his former protégé but needed the document to be served before the case could proceed. The detectives’ task was to check when Deripaska was in London and to alert Cherney’s aides immediately.
That evening they struck lucky when they discovered that their quarry had landed at Luton. He was then flown to Battersea heliport in his Sikorsky helicopter and from there was driven by a Mercedes Maybach to his grand town house on Belgrave Square. After tracking him, the detective called the process server - hired to hand over the documents - who raced over by motorbike to Belgravia to await Deripaska’s arrival.
He was just in time. When the armoured limousine pulled up at 10.40 that evening, the server made his move. He failed to reach Deripaska, who disappeared quickly into the house, and so he approached one of the security guards, explaining that he had an important document to be delivered to him personally. The guard agreed to pass on the A4 envelope. Without any idea of the potential legal implications of what he was doing, the guard duly passed the envelope containing the writ to Deri-paska and told him it was from a ‘courier’.
The connection between the two men went back to the early 1990s, when Cherney dominated the aluminium industry, largely through his contacts in the Kremlin. Deripaska was Cherney’s protégé and rose rapidly, in less than a decade, to overtake his mentor as the most powerful force in the industry.
Introverted and obsessive, Deripaska leads a relatively ascetic and frugal lifestyle. A workaholic, he works fourteen- to sixteen-hour days and even failed to attend President Yeltsin’s funeral in 2007 because he was ‘too busy’. He spends most of his time on his private jet travelling the world, often whiling away the hours with his favourite pastime - reading physics books. In business he is tough, smart, ruthless, and calculating. But in his private life he is quiet, abstemious, and very low key. His one cultural interest is ballet. ‘He is motivated by power and deals and making his business as big and powerful as possible,’ a former aide said.
Like his former business ally Abramovich, Deripaska likes his toys - private jets and yachts. He has also invested in a Moscow nightclub, but there his taste for luxury goods and trophy assets ends. Despite rumours of an interest in West Bromwich Albion, he has not to date bought a football club. Although he has been seen at Chelsea matches, that is because of his friendship with Abramovich rather than because of any particular enthusiasm for the game. Uncomfortable with the media and suspicious of people in general, he is a man of few words, as Toronto Globe & Mail journalist Eric Reguly found when he interviewed him in December 2007:
Mr Deripaska arrives casually dressed - it is Saturday - and pecks away at his food. He is slim and fairly tall with close-cropped hair. He gives little away about himself or his companies. His answers are usually short. ‘Why?’ or ‘Why not?’ are often the responses to questions. His English is good but his voice is soft and he sometimes places his hand over his mouth. He has a friendly smile…Deripaska does not smoke or drink, a rarity among Russian men. He stays fit by swimming.7
Despite being married, Deripaska has been one of the billionaires most ruthlessly targeted by female gold-diggers. In early 2008, for example, a group of 18-year-old Russian models claimed that he was the oligarch they would most like to meet. His wife Polina is twelve years younger than him and, despite her husband’s aversion to publicity, something of a socialite. An Anglophile who insists on a British nanny for their two children, she was often seen at fashion and art events and was best friends with Abramovich’s girlfriend, Daria Zhukova. The two planned to create a new social networking site. Although more colourful than her husband, she is not an extrovert. Vedomosti called her a ‘fragile, modest young woman with a quiet voice’. Her husband invested in some media companies and she became head of the publishing house Forward Media Group, which publishes the Russian Hello!, as well as an owner of the gossip website www.Spletnik.ru.
Deripaska and his family have lived most of the time in a vast top-floor apartment in the most expensive area of Moscow, Ostozhenka, known as the ‘Golden Mile’. In true oligarch-style he built an extra floor on top of the building despite opposition from local residents. He spent hundreds of thousands of pounds redecorating the apartment. He also bought an enormous dacha in the southern region of Khakassia, Siberia, based near a private skiing resort and a golf course designed by Jack Nicklaus.
In London Deripaska could not resist a Grade I-listed eleven-bedroom Regency house on Belgrave Square, a property he bought through a British Virgin Islands company in April 2003 for £17 million. Built in the 1820s and formerly the home of Sir Henry ‘Chips’ Channon, society host, Conservative MP, and notoriously indiscreet diarist who died in 1958, it was designed for entertaining royalty and diplomats with its grand staircase, reception rooms, Madame Recamier sofas, and flamboyant décor. By the light of a thousand candles, Channon’s wife, Lady Honor Guinness, treated the house like a theatre and became one of the great society hostesses of the 1930s and 1940s. When Harold Nicolson arrived at the house, he declared. ‘Oh my God! How rich and powerful Lord Channon has become.’ To maintain its grandeur and to forge his own links to the English political family tradition, Deripaska employed Graham Bonham-Carter, a cousin of the actress Helena Bonham-Carter, as the household manager.
In the Home Counties Deripaska bought a house on Surrey’s St George’s Hill, also overseen by the discreet Bonham-Carter. He paid £7.1 million for the property in September 2001, using a Cyprus-registered company, and installed a gymnasium and swimming pool. Not to be outdone in the oligarch property stakes, across the Channel, he bought three houses in France, as well as properties in Sardinia, New Delhi, Beijing, and Kiev.
Deripaska’s other major luxury asset was his super-yacht Queen K. Built by Lürssen, by 2008, it was the forty-eighth-largest yacht in the world. Designed for long crossings, it had a range of approximately 5,000 miles at a constant speed of 12 knots.
By contrast, Michael Cherney, the man who issued the writ against Deripaska, has little time for the attendant luxuries of being an oligarch. He does not own a private jet, and his favourite pastime is watching boxing and his favourite Bulgarian football team on television. Born in 1952 in Ukraine, he grew up in Uzbekistan. He enjoyed significant influence and extensive contacts in the Russian government from the early 1990s. But he left the USSR with his family, finally settling in a suburb of Tel Aviv in 1994. A year later he was the target of an assassination attempt on Israeli soil.
Cherney started to trade in metals in 1989 and within a few years had stakes in raw materials, metallurgy, engineering, and seaports. Many of his businesses were registered in Liechtenstein, Switzerland, and Cyprus. In 1992 he and his brother turned to aluminium, creating the Trans-World Group (TWG) owned by Cherney, his brother Lev, and the Indian-born, British-based brothers David and Simon Reuben. TWG became the world’s third largest producer of aluminium. The company’s scope was so vast - from the Siberian steppe to the shores of Cyprus - that it became known as ‘a state within a state’. Much of its business was with Russia, supplying aluminium ore from their refineries elsewhere to four smelters in Russia, building huge profits in the process. By the mid-1990s, Cherney, something of an instinctive entrepreneur, was a billionaire.
By Cherney’s own admission, he is an unconventional businessman. As he spent so much time outside Russia, he delegated daily management to his partners, among them Deripaska. He did not retain or receive much in the way of routine documentation, preferring instead to close deals for enormous amounts with a handshake or primitive ‘trust’ agreements, a commonplace of business life in Russia.
Cherney first met Deripaska in 1993 at a metals conference at London’s Dorchester Hotel. Deripaska was only twenty-five at the time but impressed the Uzbek oligarch with his technical knowledge and diligence. Like Berezovsky and Abramovich, their partnership was initially something of a father and son/mentor and student relationship. By late 1993, Cherney had already acquired a substantial stake in the Sayanogorsky aluminium smelter, partly through buying vouchers from the plant’s workers. In 1994 he appointed Deripaska as his manager.
Deripaska took every advantage of his boss’s frequent absences and steadily began to acquire his own stake in the plant. By the end of 1994, TWG, Cherney, and Deripaska had between them taken control of the whole plant. By then Deripaska had become Director General and swiftly set about boosting production. He had run-ins with the plant’s communist-era bosses and learnt an early lesson about Russian business that remains true to this day: the state is stronger than the market. ‘I was expecting they would treat me as a shareholder,’ he recalled. ‘But they said, “No, you have the shares, but we run our business. And it’s separate.”’8
Deripaska has rarely spoken about the violent gangster capitalism that dominated the industry in those days but he later admitted to the Financial Times, ‘It was anarchy.’9
During one occasion, in a major assault on the Sayanogorsky facility, his commercial director was seriously wounded.10 As the New York Times put it, Deripaska ‘somehow survived the bloodbath that accompanied the privatization of the industry’.11
By 1999, after years of brutal rivalry and enforced takeovers and buyouts, the industry was dominated by a quintet of players owning two giant companies. Among those forced to sell up in the ongoing commercial battles were TWG, the Reuben brothers, and Lev Cherney. Two of the remaining players were Michael Cherney and Deripaska, who had competing claims to Siberian Aluminium (Sibal), which now owned the Sayanogorsky plant. The other three involved were Roman Abramovich, Boris Berezovsky, and Badri Patarkatsishvili.
Once again it was London - not New York or Moscow - that would become the arena for the next stage in the ongoing dissection of the multi-billion-pound industry. In March 2000 four of the gang of five - Deripaska, Patarkatsishvili, Abramovich, and Berezovsky - met at the Dorchester Hotel, according to Berezovsky’s account. Despite an air of distrust, the four agreed to merge Sibal and Sibneft to form a single company: Russian Aluminium (Rusal).
In March 2001 Cherney and Deripaska met at the Lanesborough Hotel in probably the most critical meeting in the history of Russian aluminium. They had come to discuss the future of Sibal. After a brief exchange in the Library Bar, they retreated to the Presidential Suite. There Cherney claims he agreed to sell his share of the company to Deripaska for $250 million upfront, plus a 20 per cent share in Rusal.
Two years later, in 2003, Deripaska bought a large quantity of shares from Roman Abramovich, for $1.5 billion. At only thirty-two, Deripaska had squeezed out all the other players to become the dominant shareholder of Rusal and a premier league oligarch.
It was these events that formed the backdrop to the dramatic legal claim made by Cherney in November 2006: that Deripaska had swindled him out of billions of dollars a claim that Deripaska vehemently denies. In the ensuing legal wrangles, the two men have presented opposing accounts of their roles in the ‘aluminium wars’. Despite having opportunities to settle out of court for a relatively small amount, Deripaska regarded the claim as ‘a smear against his achievement’, according to one aide. Cherney portrayed Deripaska as his precocious protégé, first making him a manager and then giving him a stake in the smelter, and insisted that without his help his young manager would not have risen to the top. Deripaska accepted that, by 1994, TWG and Cherney owned much of the Sayanogorsky plant between them, but he denied that his mentor had financed the purchase of his own shares. He claimed that he was already wealthy enough to invest in the plant himself.12
In a further show of defiance, Deripaska claimed that he operated independently but alongside Trans-World because of their dominance in the industry. ‘This person [Cherney] had no relation to my business,’ he told the Financial Times in 2007. But he acknowledged that cooperating with Trans-World was ‘the only way to trade’ because ‘they controlled all the raw material supplies at the time’. According to Deripaska, ‘These people [Cherney] pretended they were connected and helped build the business. But they were in Israel, London. What can you do from there?’13
The two men also bitterly dispute the nature of the deal at the Lanesborough Hotel in 2001. Cherney claims that although he was paid the upfront fee, Deripaska reneged on the 20 per cent agreement. Deripaska robustly denies any liability. He maintained that from 2001 he was Sibal’s sole owner and that he owes Cherney nothing. He accepts that he signed an agreement to pay $250 million but denied that he promised to hold 20 per cent of Rusal shares in trust for Cherney. ‘He was never a [business] partner in any normally accepted commercial meaning of the word,’ Deripaska stated.14 Deripaska goes much further: he alleges that, far from being business partners from the mid-1990s, his former associate had been running a protection racket and the $250 million was paid to ‘buy Mr Cherney off’.15 Cherney has always vehemently denied this allegation and pointed to a ruling from a court in Switzerland in January 2008 that found he had no connection with organized crime.16
After emerging as the dominant owner of Rusal, Deripaska went on to prosper. With rising international commodity prices and cheap electricity, he steadily expanded his empire. By 2008, his holding company, Basic Element, had 350,000 employees with interests in car and aircraft production, insurance, timber, and construction, as well as aluminium - and also had investments from Asia to Latin America. In the summer of 2008 he even showed an interest in acquiring Hummer, the struggling American automotive brand owned by General Motors.
But Deripaska’s momentous rise to the top had been dogged by controversy over his business methods. In 2002 he was alleged to have bulldozed through a hostile takeover bid for a large timber company called Ilim Pulp, then part-owned by Dmitri Medvedev. If he had known that one of those he was crossing swords with would, six years later, become President of Russia, he might have been more wary. Deripaska always maintained that he had acquired the company legitimately. Critics argued that he only obtained the mill by - according to the New York Times - plucking ‘away legal control of the mill in an elaborate legal maneuver - a takeover tactic he had perfected in the last three years of piecing together a vast business empire’.17
The much-publicized dispute between Deripaska and Ilim - racked by complex legal wrangles and accompanied by constant police raids - went on for two years, with grave consequences for investment in the industry. The Russian government eventually intervened and the two sides agreed a settlement.
Deripaska acquired many enemies en route to his billionaire status and from 2002 his aluminium empire was on the receiving end of a barrage of lawsuits. As Rusal was a private company almost entirely owned by Deripaska, he was often directly in the firing line. The legal bullets were fired by a succession of former partners, subsidiaries, and suppliers for breach of contract - their claims were mostly related to the turf wars of the 1990s.
One issue at stake was who owned Rusal - an amalgam of disparate assets from smelters to refineries and mines. As a private company with limited disclosure requirements, Deri-paska combined their constituent parts in a complex and secretive web. This made it difficult to unravel much of the company’s true ownership. As the profits rolled in, some former partners and rivals alleged that they owned some of Rusal’s assets, while other former smelter bosses claimed that Deri-paska had persuaded them into selling their stakes. In several cases Deripaska settled out of court, handing over millions of dollars to former partners, although never with any admission of liability.
The most far-reaching, long-running, and bitter dispute has been with Michael Cherney. Cherney’s case against Deripaska finally reached the High Court in spring 2007 - five months after the delivery of the writ to Belgrave Square.18 The first issue on the agenda was whether Deripaska was ‘domiciled in England’. This was critical because if he was not UK-domiciled then the case could be moved in Moscow - to Deripaska’s huge advantage, it being his home territory.
To establish Deripaska’s London connections, the High Court provided rare official insight into his movements and lifestyle. It found that in 2005 Deripaska spent twenty-seven nights in his Belgrave Square house. In 2006 he spent nineteen nights there, while his longest continuous stay was six nights. Although his wife and children spent a few more nights a year there - thirty-three in 2006 - the couple only lived there together for seven nights in 2006. In contrast, he spent 179 nights in Moscow and eighteen nights elsewhere in Russia, where he has a number of properties.19
In the event, the judge ruled that Deripaska was not domiciled in Britain: ‘In many ways its [Belgrave Square] use by Mr Deripaska resembles that of a private hotel. It is infrequent, intermittent, and generally fleeting. The house has the character of continuity and permanence; its use does not.’20 It was a key victory for Deripaska, because it made the chances of the case coming to court in England seem slim.
Cherney pressed on with his efforts to have the case heard in England. In July 2008 he got his reward - when Mr Justice Christopher Clarke announced, ‘I am persuaded that the risks inherent in trial in Russia - assassination, arrest on trumped-up charges, and lack of a fair trial - are sufficient to make England the forum in which the case can most suitably be tried.’21 Indeed, in sifting through the evidence, the judge found that Cherney had already been the victim of at least one assassination attempt - in Israel in 1995. These assassins, concluded the judge, were ‘possibly connected to the Russian secret services’.22
The court’s judgment was not merely an indictment of the legal system in Russia, it also gave Deripaska a new problem to think about. It meant that he now faced the prospect of being cross-examined under oath in a public court by some of the UK’s best forensic lawyers who would not hesitate to rake over the nitty-gritty of his disputed past business relationship with Cherney.
Referring to the size of the claim, potentially worth some $4.35 billion, the judge commented, ‘The payment of such a claim, if valid, would be beyond the reach of most individuals. But Mr Deripaska was, on his account, the beneficial owner of the majority of the shares of Rusal, together with many other commercial interests. The Rusal group employs some 100,000 people. Mr Deripaska’s other companies employ over 250,000. He is said to be the richest man in Russia and ninth on the list of world billionaires.’23
If the $4.35 billion is eventually awarded to Cherney, it will be the highest award of damages ever granted in a British court. Deripaska, of course, has filed his own appeal against Mr Justice Clarke’s decision and strongly disputes Cherney’s case. It will now be well into 2009, or beyond, before this titanic legal battle is resolved.
Despite the succession of legal setbacks, Deripaska’s global ambitions showed no sign of waning. In 2006, aged only thirty-eight, he began discussions to invest in Magna International, a Canadian auto parts company that then had designs on the giant US car manufacturer Chrysler. A stake in Magna would allow Deripaska’s Russian auto business to start making Western-designed car parts.
Negotiations were proceeding smoothly but then hit a major obstacle: Deripaska was not granted entry to the United States. In November 2003 he had been due to speak at the Harvard University-Dow Jones US-Russian Investment Symposium, but a few weeks before the event, his name was mysteriously removed from the list of speakers. The reason for this was simple: Deripaska had been refused a visa to enter the United States. The US State Department has not disclosed the official reason for the ban.
The ban was a major impediment to his US commercial ambitions and so in 2003 Deripaska turned to two of Britain’s best-connected bankers - Lord Jacob Rothschild and his only son Nat - for advice on how to lift it. They had met when the oligarch was visiting the London School of Economics periodically to learn English.
Deripaska, born in 1968 and raised without a father, often turned to mentors throughout his career. During his formative years, it was Cherney and then Arkady Sarkisyan, who later became a Russian Senator. From 2003, Nat Rothschild fulfilled the role. Deripaska became extremely close to the young Rothschild who, three years younger and equally driven and ambitious, was something of a kindred spirit.
The importance of Rothschild to Deripaska cannot be exaggerated and the two met regularly at an imposing house in Cleveland Row, St James’s. Situated next to St James’s Palace, the house is owned by the Rothschilds but was, in effect, Deripaska’s London office. ‘He [Nat] was consulted on everything,’ a former Deripaska aide related. ‘The joke in the office was that he asked Nat about the colour of the new toilet paper.’ They met while both were serving on the board of a Brazilian company. Deri-paska invited Nat Rothschild to join the advisory board of Rusal and consulted him on most of his deals, notably oil exploration in the Black Sea and investments in Ukraine and Kazakhstan.
It was the Rothschild name and the attendant connections invoked by that dynasty that mesmerized Deripaska. Unsure of himself in the City of London, Nat Rothschild’s contacts with the banks were invaluable. A measure of Rothschild’s importance was that he held shares in a Deripaska-controlled company in the UK called London and Russia Holdings plc, now dormant. ‘He trusted Rothschild,’ another former aide said. ‘Trust was a very important issue for Deripaska. He did not trust many of his staff and he gave them meaningless job descriptions while he micro-managed the company.’
But Rothschild also needed Deripaska’s contacts if his hedge fund, Atticus, was to exploit opportunities in the emerging markets of the former Soviet republics. Their fortunes had been inextricably linked, with the Rothschild heir making millions in fees and commissions from links with Deripaska.
But Nat Rothschild also played another significant role. In October 2004 he introduced Deripaska to Peter Mandelson, shortly after he had been appointed the European Trade Commissioner but just before he formally took up the post. They had dinner together at the Café Pushkin in Moscow, along with German Gref, the Russian Trade Minister. The former Cabinet Minister and confidant of Tony Blair had always been open to the blandishments of the wealthy and he struck up a rapport with Russia’s richest man.
Trips to Moscow were a regular feature of Mandelson’s schedule because the European Union was Russia’s largest trading partner. He would occasionally have dinner with Deri-paska, according to Benjamin Wegg-Prosser, former special adviser to Mandelson. During one evening, there was a ‘fierce disagreement, to the point of raised voices, that both men had on two issues,’ said Wegg-Prosser:
First was Russia’s entry to the World Trade Organization. Peter [Mandelson] wanted them to join, Deripaska didn’t. Second, the tariffs which the Russians were imposing on Finnish timber imports. Peter said they were illegal, protectionist, and wrong. Deripaska argued that they were a necessary defence mechanism to protect a key national industry in an emerging economy. Their friendship was founded on these sorts of jousts and arguments.24
Three months after their first encounter the trio met again: Rothschild flew into Davos in his Gulfstream during the World Economic Forum, collected Mandelson, and off they went to Moscow to meet Deripaska. The occasion was a private dinner at the Cantinetta Antinori restaurant hosted by Rusal, which was selling two aluminium plants to Alcoa, the US giant. The dinner, also attended by Alcoa boss Alain Benda, was taking place at a crucial time for the industry: companies claimed that tariff rates for exporting aluminium into the European Union were too high. While between 2005 and 2008 Mandelson reduced the tariff rates, the former Trade Commissioner has always denied he had either been asked for any favours by Deri-paska, or had offered any, or that his decision to lower the rates had anything whatsoever to do with his relationship with the oligarch or Rothschild.* He has also stated that he ‘never had a discussion with Deripaska, or anyone else from his company, about aluminium duties or any other matter relating to the EU.’
Mandelson often mixed business and politics with pleasure. In early August 2006 the European Trade Commissioner was again present at a Rusal-sponsored reception, this time a party held at the Royal Opera House, Covent Garden, to watch a performance of Swan Lake by the Bolshoi Ballet. There Mandelson once again met Deripaska but looked somewhat out of place among the aluminium traders, bankers, and industry analysts. ‘He did not quite know what to do with himself,’ said one fellow guest.
In his youth Nat Rothschild was renowned for his drinking and heavy partying. At Eton he is remembered for being scruffy, rebellious, and resentful of authority. A member of the notorious Bullingdon drinking club at Oxford University, he was an aimless playboy. In 1996, aged twenty-five, Nat Rothschild eloped to Las Vegas to marry the model and socialite Annabelle Neilson, whom he had met on a beach in Bali. The couple divorced after a turbulent two-year marriage.
When his marriage broke up, the heir to the fifth Lord Rothschild cut back on the partying, become teetotal, and left his reputation for self-destruction in the past. After working for the investment bank Lazards, he moved to New York and joined the fledgling hedge fund Atticus Capital. Helped - in part - by the Rothschild family connections, it grew, at its peak, to managing assets worth an estimated $20 billion. A near billionaire himself, Nat Rothschild commutes between his homes in London, Paris, New York, Corfu, and Moscow, although his main residence is in Klosters, Switzerland.
In the world of Nat Rothschild, connections have been priceless. In Deripaska he saw a vehicle to vast fees and contracts, and in Mandelson, the political conduit to the highly regulated markets of the European Union. The former European Trade Commissioner has known Nat and his father Jacob Rothschild since the early 1990s and has stayed at their villa in St Barthélemy, the idyllic Caribbean Island popularly known as St Barts.
‘He [Mandelson] likes to use other people’s planes and yachts,’ said one source who knows Mandelson and Rothschild. ‘He thinks that for a person of his calibre and experience, he is badly paid. He likes to spend time with people who have considerably more money than him…Peter has seniority and status, while Nat has money. Peter likes the comfort of flying on a private jet, staying on a nice yacht, and having the odd glass of champagne.’25
One Rothschild villa frequented by Mandelson was a ten-bedroom property in Corfu. Known as ‘Chateau Rothschild’, it is set on a rugged headland in the north-east of the island. A blue and gold flag flying from the battlements is decorated with a clenched fist with five arrows symbolizing the five sons of Mayer Rothschild who founded the banking empire. The family uses a military-style, gunmetal grey speedboat to transport guests at a speed of 50 knots from the airport to their villa.
It was to this exclusive setting that Deripaska sailed his yacht, the Queen K, in the last week of August 2008. It was to prove a fateful weekend. As it happened, Mandelson was in Corfu to celebrate the fortieth birthday of Elizabeth Murdoch, Nat Rothschild was at his villa, and Conservative MP, George Osborne, the Shadow Chancellor, and his wife Frances, were renting a nearby villa while on holiday.
On the afternoon of Friday 22 August, Mandelson and Osborne were invited onto Deripaska’s yacht for drinks and that evening the three attended a dinner party at Chateau Rothschild. The Shadow Chancellor, the European Trade Commissioner, and the Russian oligarch all sat at the same table. They discussed Russian and British history and politics and Osborne appeared to be impressed by Deripaska.
The following evening Mandelson, Osborne, and Rothschild attended a special dinner at the Taverna Agni, a low-key restaurant in the quiet bay of Agni with spectacular views of the Albanian mountains. The occasion was to celebrate Elizabeth Murdoch’s birthday. For the next two hours, over a mezé dinner with red wine, Mandelson and Osborne were locked in conversation. Later, reports emerged that during this dinner Mandelson had ‘dripped pure poison’ about Gordon Brown into the ear of Osborne, who was then fingered as the source for these damaging allegations (Mandelson insisted ‘there was no poison being dripped’).
By the following day, Sunday 24 August, the Osbornes had moved into Chateau Rothschild. The Shadow Chancellor had known Nat Rothschild since they were contemporaries at Colet Court preparatory school and then Oxford, where they were both members of the Bullingdon Club. Given the unpopularity of the Labour government at the time, Rothschild perhaps saw his old friend as a potential ally. That evening the investment banker invited Osborne, the Conservative fundraiser Andrew Feldman, and James Goodwin, a former adviser to President Clinton, for drinks. Then, according to Rothschild, Osborne invited Feldman to accompany him on Deripaska’s yacht to solicit a donation to the Conservative Party. Later that evening Deripaska hosted Osborne, Feldman, and Goodwin on his yacht, where they talked and drank tea for an hour. In a letter to The Times on 19 October 2008, Rothschild wrote:
George Osborne, who accepted my hospitality, found the opportunity of meeting with Deripaska so good that he invited the Conservatives’ fundraiser Andrew Feldman, who was staying nearby, to accompany him onto Deripaska’s boat to solicit a donation. Since Deripaska is not a British citizen, it was suggested by Feldman, in a subsequent conversation at which Deripaska was not present, that the donation was “channelled” through one of Deripaska’s British companies (Leyland DAF). Deripaska declined to make any donation.
The Shadow Chancellor and Feldman vehemently deny that they solicited or were involved in the solicitation of what would, in effect, have been an illegal foreign donation. ‘There was a discussion about British and Russian politics, education, and history’, Osborne said. ‘There was no mention or conversation of party funding or the possibility of Deripaska making a donation to the Conservative Party.’
This episode became a cause célèbre when, on 5 October 2008, Osborne decided to leak to the Sunday Times Mandelson’s alleged derogatory comments about the Prime Minister. ‘He [Mandelson] poured out pure poison about Brown,’ said the Shadow Chancellor. ‘It was not like a passing thing. He had really thought it through.’ The timing of Osborne’s leak was very deliberate. Just two days earlier Mandelson was restored to the cabinet by Brown as Business Secretary.
When Mandelson read the article he flew into a boiling rage. The accusation, he said, was a ‘totally baseless piece of fiction made up by the Tory Party propaganda unit’. Soon afterwards a stark, dark message reached David Cameron’s private office: tell your Shadow Chancellor to ‘back off’ because the new Business Secretary had something ‘explosive on him’. Despite the warning, information about Mandelson’s trip to Corfu continued to leak. When Nat Rothschild emailed his letter to The Times, the dam broke.
While it appeared that Rothschild had been defending one old friend, Peter Mandelson, against another old friend, George Osborne, he was in fact protecting his new friend and business associate Deripaska. As their respective fortunes had become so intrinsically linked, it was important to preserve - as far as possible - the oligarch’s reputation. In 2008 this was still a major problem: he was still banned from visiting the United States.
Despite the power and prestige of the Rothschild name, attempts to remove the visa ban to the US proved frustrating, expensive, and, by the end of 2008, still unsuccessful. Deripaska spent millions on investigators, lawyers, and lobbyists but all to no avail. The key group he hired was Global Options Group Inc, a Washington, DC-based private security and intelligence-gath-ering company. Since 2000, they have investigated many of Deripaska’s business rivals and provided litigation support. Global Options had, in turn, hired Alston and Bird - the Washington, DC law firm whose special counsel was former presidential candidate and Senate majority leader Bob Dole - specifically to lobby the US government on the visa issue. New documents obtained by the authors shed light on Dole’s lobbying services for Deripaska. One invoice, dated 15 April 2004, was sent by Alston and Bird to Deripaska himself in Moscow for £45,000. The invoice was submitted for ‘legal services in connection with…Immigration’ while ‘Robert Dole’ was the designated lawyer. In 2008 Dole himself was still actively lobbying on the oligarch’s behalf.
Global Options coordinated the whole visa ban operation, hiring personnel and arranging meetings with US State Department and Justice officials. A parallel operation by Deripaska involved hiring Rick Davis, the senior campaign manager for Senator John McCain, the Republican presidential candidate in 2008.26 McCain and Deripaska have met many times. In January 2006, for example, they met for drinks, accompanied by their aides, and then at a buffet dinner at the World Economic Forum in Davos (where Deripaska owns a chalet). Later that year, in August, they met at a social gathering in Montenegro, where Deripaska owns a house and has extensive business interests, while McCain was undertaking an official Senate trip. And they both attended a social function at Spencer House in London, organized by Lord Rothschild and his son Nat to raise funds for McCain’s presidential campaign.
Such high-level lobbying resulted in a long-running dispute between the White House, the State Department, and law enforcement agencies.27 A respite came in mid-2005 when Deripaska was granted a multiple-entry visa, which would allow him to make regular trips to conduct business; this, however, was to enable US officials to interview the tycoon about his business dealings. Deripaska has always staunchly defended his reputation as a businessman and attributes criticism to false propaganda spread by business competitors in the US and Britain.
Then, in mid-2006, the visa ban was reinstated. This continued to have a damaging impact on Deripaska’s commercial ambitions in the United States, notably his negotiations with Magna International. Magna reassured its shareholders that the delay was ‘pending the resolution of certain unspecified questions that had arisen within the government’. Irritated and frustrated by the ban, Deripaska pinned the blame on what he called ‘stupid and ignorant bureaucrats’. Until John McCain failed in his bid to win the 2008 presidential election, he seemed to be pinning his hopes on the Republican making it to the White House. ‘Maybe I’ll get the visa when the next [US] administration comes in,’ he said, only half joking.28
In comparison with the much tougher entry requirements in the United States, most Russian businessmen with controversial pasts have sailed through the British immigration system with barely a whimper from the authorities. This is partly because the government has calculated that their wealth would help fuel a London-based and wider economic boom. As a result, it has mostly turned a blind eye to allegations concerning the tainted origins and source of their wealth.
The contrast with procedure in the United States is striking. Although the US took the lead in encouraging Yeltsin to implement a laissez-faire capitalist economy, they have been much more reticent about letting fleeing plutocrats settle in the US. Many Russian settlers in the United States, such as Alex Goldfarb and the former KGB General Oleg Kalugin, are high-profile defectors who were granted asylum during the Cold War years. From the late 1990s, the United States developed much stricter visa rules than the UK, especially when it came to Russian dissidents and businessmen.
This was partly due to the crackdown on money laundering and corporate abuse that followed 9/11, and the Enron scandal, which was revealed in late 2001. In addition, to avoid escalating tension with the Russian government, the Americans have not wanted to be accused of harbouring Russia’s enemies. There was also concern about the intention of some Russian industrialists to enhance their economic and political clout in the West. When Jim Pettit, the Consular General at the US Embassy in Moscow, was asked in 2007 whether there was a ‘blacklist’ of Russian businessmen, politicians, and other citizens trying to enter the US, he replied, ‘I cannot address individual cases but it is true that we check all visa applications against a database of individuals who might be ineligible for entry to the US under our immigration laws.’29 That can be taken as a yes.
Boris Berezovsky may not have found it so easy to gain asylum status in the US. When Litvinenko fled Russia via Turkey, he was advised not to try Italy, France, or Germany and first attempted to seek asylum in the United States by approaching the US Embassy in Ankara. He was interviewed at length by the CIA regarding his work for the KGB and FSB and was only then denied asylum, forcing him to turn to the UK instead.30 And Deripaska is far from being the only Russian businessman to fall foul of these tougher rules. Because of his alleged involvement in the infamous ‘aluminium wars’ of the 1990s, Michael Cherney has also been banned at various times not just from entering the United States but also France, Austria, and the United Kingdom.
Despite being an Israeli citizen and living in Tel Aviv, Cherney regarded London as his future refuge. Even while he was barred from visiting the UK, his family lived in London and his children attended British schools. In early 2004, when he was fifty-two, the ban on his entry into the UK was suddenly lifted and he regularly began flying to London with British Airways. That spring he bought a vast luxury apartment in The Bromptons, the new deluxe, hi-tech, high-security complex in South Kensington, for £8.1 million for his wife, Anna - a Russian orthodox Christian - and his two daughters. And he purchased a much smaller flat in Knightsbridge for his chauffeur and cook.
Clearly, Cherney regarded London as a safe investment in which to park his wealth. In May 2004 he acquired two large apartments in The Knightsbridge, the contemporary apartment complex overlooking Hyde Park, for a total of £17 million. Later that summer he paid out another £11 million for Draycott House, a former hotel just off Sloane Square. The plan was to convert the property into luxury apartments but the development has been beset by legal disputes with consultants and contractors. And then, in 2006, Cherney invested a further £10.5 million for two grand flats on Arlington Street in St James’s, just around the corner from the Ritz Hotel. All the properties were bought through offshore companies.
In November 2008 Cherney was asked by Spear’s Wealth Management Survey whether Russia was closer to ‘Capitalism or KGBtalism?’ ‘What the West ought to understand is that the choice that our country once faced has long been made’, he replied. ‘My former associates have all made it. My nomadic life has been a blessing in disguise - it has saved me from having to make it. Had I remained in Russia, I know I would have chosen wrong. These days, money is deadlier than polonium.’
This has not made Cherney - by now a fledgling member of the Londongrad community - back away from his billion-pound feud with Deripaska. Both are Teflon oligarchs - not much sticks to them and they both have thick skins. Very little appears to faze either of them. ‘I don’t need to defend myself,’ Deripaska told the Financial Times in July 2007. ‘I am not ashamed and I don’t need to hide.’31
In August 2007 Deripaska appeared at a press conference in Toronto to talk about his proposed $1.54 billion investment in Magna, looking relaxed and informally dressed. Some Magna shareholders were less than enthusiastic about a buyout by someone with a controversial business reputation like Deri-paska’s.32 Despite shareholder reservations, the deal was concluded in September 2007. Such is the financial muscle offered by the oligarchs and the promise of access to Russian markets.
Western unease did little to stop Deripaska’s ambitions. In 2007 Rusal merged with its main Russian rivals, Viktor Veksel-berg’s Sual and the Swiss commodities trader Glencore, to form United Company Rusal, registered in the tax haven of Jersey. This turned it into the world’s largest producer of aluminium, holding 12.5 per cent of the global market. Deripaska held a 66 per cent stake in the new company, Vekselberg 22 per cent, and Glencore 12 per cent.
A short while later Deripaska announced his intention to float a quarter of the newly merged UC Rusal - then potentially worth $30 billion - on the London Stock Exchange. If the flotation proceeded, Rusal would have entered the FTSE100, making it the first Russian blue-chip corporation.
For some years the London Stock Exchange had been playing host to Russian flotations. In 2006 Russian firms raised £5.8 billion in new capital, a substantial rise on earlier years. By early 2007, eleven Russian companies - some private, some state-owned - had listed, mostly partially. New York, in contrast, has raised very little from such IPOs.
The motives for floating Russian companies abroad were mixed. From the moment of Putin’s strike against Yukos, many nervous Russian entrepreneurs started transferring their assets into hard cash - partly by floating shares - thereby reducing their vulnerability to the political whims of the Kremlin. ‘It is their exit strategy,’ said Pavel Teplukhin, the head of Russia’s Troika Dialog Asset Management. ‘By listing their shares in London, these companies are buying themselves political insurance.’33 While some companies have issued new shares in order to reinvest in their business at home, others have offered only existing equity in flotations. This has brought money to the owners, which has almost certainly leaked out of Russia. ‘It is like taking chips off the table,’ said one investment banker.
The way in which the City has courted controversial oligarch clients has been a highly contentious subject in the UK. As Bill Browder, once one of the West’s biggest investors in Russia, warned, ‘There are lots of corporate governance skeletons in the cupboard of all the Russian companies listed in London.’34 In 2006, despite investing more in Russia through his £4 billion Hermitage Fund than any other fund manager, Browder had his own visa to Russia withdrawn during a trip to Moscow. He had long attacked Russia’s murky corporate governance and accused state companies such as the energy giant Gazprom of ‘asset stripping’ and fraud. Although Tony Blair took up his case with the Russian authorities, the ban remains.
The most controversial flotation was Rosneft. The state-owned oil company raised £5.6 billion in London in July 2006 after the High Court overruled an attempt by Yukos to claim that Rosneft’s public listing would amount to the ‘laundering’ of illegally acquired assets. Nevertheless, the Rosneft prospectus contained one of the longest sections ever devoted to ‘risk factors’, with extensive details of lawsuits the company was facing from Yukos and its former shareholders.
Billionaire international investor and philanthropist George Soros claimed that the Rosneft float raised ‘serious ethical and energy security issues’ and should not have been permitted by British regulators.35 His criticisms were widely echoed. The Cooperative Insurance Society described those investing in such companies as ‘speculators not savers’.36 The Independent described the investment banks and accountancy firms that pocketed some £70 million in fees between them as having ‘City snouts in the trough’.37 While New York tightened the rules for Russian companies seeking to list their shares, London financial markets became what one critic described as a ‘colossal boot sale for the crony capitalists of the Kremlin’.38
Deripaska’s IPO plans for UC Rusal were dogged by both the ongoing issue of the visa ban to North America and the convoluted nature of the ownership of UC Rusal’s assets. But these were sideshows compared with other obstacles described by one commentator as the ‘hidden depth charges’ lurking beneath Deripaska’s plans.39 The first was the unresolved dispute with Cherney and the continuing risk that Deripaska might face a $4.35 billion bill.
The second hurdle was the shadow of Putin. While the Russian Prime Minister broadly approved of Russian companies issuing shares in London and the respectability and kudos it brought to the Russian state, the question remained: was the flotation a pure business deal, or one that came with hidden political strings attached? In particular, was there a risk of a sovereign takeover similar to the state seizure of Yukos?
The shadow of the Kremlin was given added depth by the remarkable image of oligarchs such as Deripaska and Abramovich discussing such deals directly with Putin on television. The concern about the hidden hand of the state was given credence by Deripaska himself when, in July 2007, he said that he saw himself as little more than the custodian of state assets. ‘If the state says we need to give it up, we’ll give it up,’ he said. ‘I don’t separate myself from the state. I have no other interests.’40
This was an astonishingly candid statement to make about the umbilical nature of his relationship with the state in the build-up to such a significant float, and his banking advisers were furious at such uncharacteristic indiscretion. Deripaska later claimed that he had been misquoted and was simply expressing his commitment to Russia as a patriotic businessman. But it is unlikely that someone as savvy as Deripaska would not have spoken as he intended. His remarks reinforced the views of those warning of the risk that Russian companies might suddenly be snatched back by the state. By the end of 2007, the Russian government had launched a number of ‘stealth takeovers’, notably that of VSMPO-Avisma, one of the world’s leading titanium producers, and of AvtoVaz, the maker of Lada cars. On the other hand many Russian companies have bought foreign assets with no negative consequences.
Deripaska, like Abramovich, has managed to stay on the right side of Putin, enjoys more independence than other oligarchs, and has been asked to represent Russia abroad. Putin, who is very selective about membership of his inner circle, once visited the oligarch’s Swiss-style ski retreat in southern Siberia. Being a Kremlin favourite is in part due to the protection afforded by his high-profile marriage into the Yeltsin family and spending his money on patriotic causes such as the restoration of Russian churches.
It has been a mutually beneficial relationship. Deripaska has offered Putin - who has long called for the creation of ‘national champions’ to project Russia’s economic power - a way of expanding Russia’s economic muscle westwards. In return, he has been given much greater freedom and flexibility than other oligarchs.
Without Putin’s blessing, Deripaska’s empire-building would have been curtailed. Before the Sual-Rusal merger was given the go-ahead, Deripaska was questioned in depth by Putin in August 2006. The President made it clear that the merger was dependent on the new Rusal remaining a Russian company and paying taxes to Russia, even if it was registered in Jersey.
Nevertheless, by the spring of 2008 Deripaska’s hopes of a London float seemed to be dead in the water, sunk in the wake of uncertainty over the future of Rusal and the High Court’s decision to allow the Cherney v Deripaska case to proceed in London. Instead, he decided to turn to Hong Kong to launch his IPO. There would be fewer ‘legal’ difficulties there than in London, he said. By the summer of 2008, a new cloud was appearing on the horizon - the unfolding economic fallout from the credit crunch. Among those swept up in the gathering global storm were the oligarchs.
*Mandelson wrote to The Times on 25 October 2008, ‘The Director-General for Trade in the European Commission, David O’Sullivan, confirmed…that I made no personal intervention to support the commercial interests of Mr Deripaska. Mr O’Sullivan explained…that in respect to both the nine-year debate in the EU over tariffs on raw aluminium and to anti-dumping duties on Russian aluminium, the decisions were made ‘after the usual consultation procedures had taken place, including with industry and all 27 European member states, and were based on sound facts.’