The Battle for Commodities

(Photo: The Moscow Times)

Against a backdrop of rising commodity prices there is a titanic struggle happening in many parts of the world for control over natural resources and the resulting cash windfall.  Resource-rich countries are seeing this as an issue not just of economic gain but of national security.  Who owns what resource is becoming ever more important to economic growth and state power.  Enter Norilsk Nickel.  It may be one of the largest companies you’ve never heard of and a central actor in the Battle for Commodities.  Revenue has rarely been so high and the stakes so great for Russia as it crawls toward economic recovery.  What’s happened though is that this Battle for Commodities has been reenacted in the boardroom, and lost amidst the struggle is one of the most important issues for Norilsk Nickel’s future, not to mention that of Russia: corporate governance.

Norilsk Nickel is quite the prize for any institutional investor or self-respecting oligarch.  It earned a net profit of $2.65bn last year on revenues of over $10 billion.  Beyond mining nickel, Norilsk has its hands in palladium, platinum, copper, and cobalt, and is one of the world’s largest producers in nearly every one of these categories.  Two of Russia’s most powerful oligarch’s, Vladimir Potanin of Interros and Oleg Deripaska of RusAl, each own a quarter of Norilsk Nickel.  This normally wouldn’t be much cause for conflict, and since the two made peace in 2008 (interestingly, just as commodity prices plummeted) the boardroom has been relatively quiet.  That is, until this year’s annual meeting.

RusAl realized, much to the shock of its boss, Mr. Deripaska, that it had lost the election for one of its four seats on the board of Norilsk Nickel.  Until that point, both Interros and RusAl had four seats apiece, befitting their equal portion of shares.   It turns out that Norilsk may have been siding with Interros in the larger debate over how to return to shareholders the billions in cash it had received that year, and offering Interros effective control of the company along with it.  When Mr. Deripaska cried “foul” to the Russian government, some reports say that the Kremlin offered to buy out RusAl’s stake for $8 billion.  Officially, the Russian president, Dmitri Medvedev, “ordered the nation’s prosecutor general office to resolve the dispute between the two Russian oligarchs”, whereupon it found no evidence of legal violations.

Where are the minority shareholders?  After all, they hold 38 percent of the company’s shares, more than either of the oligarchs.  The fight over the fate of Norilsk Nickel has not favored average shareholder’s profits or rights though.  Norilsk’s shares have fallen by an eye-watering 51 percent since their 2008 peak.   In a recent letter to investors, Norilsk stated that it complies with the “best corporate governance standards,” and in the annual meeting it thus “voted in line with the interests of all shareholders and the outcome of the vote reflected the opinion of minority investors.”  Yet, 17 percent of the minority shareholders votes somehow disappeared over the course of the voting process.

Moreover, it appears that the argument over how to distribute Norilsk Nickel’s cash is closely correlated to the financial needs of its major shareholders.  RusAl has debts of over $15 billion owed to nearly 70 banks across the world.  In short, RusAl needs cash and the Norilsk dividend payments that it is fighting for would go a long way to aiding its own financial position.  Norilsk has so far rejected RusAl’s calls for $3 billion in dividend payments (more than its net profit), but when Interros faced margin calls in 2008, “Norilsk’s power unit bought $600 million worth of assets from Interros.”

The interests of minority shareholders, just as with those in the political minority, are particularly vulnerable to the actions of controlling shareholders.  Corporate governance is especially meant to protect minority shareholders from having their voice taken away, whether from battling oligarchs or undue government interventions.

Corporate governance is a structure of rules resting on a framework of transparent relationships between management, board, and investors.  Good corporate governance is fundamental to improving economic efficiency, as well as promoting the sort of transparency and investor protection that inspires confidence.  In the bigger picture, it instills in the private sector the same values desired in a democracy: fairness, transparency, responsibility, and accountability.

The fundamentals of good corporate governance mustn’t be lost in the Battle for Commodities.  Minority shareholders demand it and Russia needs it.