‘There Will Be Bankruptcies’

Under Yeltsin, the oligarchs' power rivaled the Kremlin's. It was a small group of Russia's richest men who singled out Putin and set him on the path to succeed the ailing president in 2000. As it turned out, they chose wrong: instead of protecting their interests, Putin turned on them. He closed their TV stations and forced them to hand over their assets to younger men more personally loyal to him. Within a year, two of the most powerful oligarchs—Boris Berezovsky and Vladimir Gusinsky—were driven into exile. The wealthiest of them all, Mikhail Khodorkovsky, ended up in a Siberian prison camp on charges of tax evasion.

The survivors of the purge shared one thing: total loyalty to the Kremlin. Although Putin and Deripaska never became close friends, the young man did everything to please the president. At a word from Putin, Deripaska took over and revived not only decrepit factories but entire industries. "Deripaska changed our Russian straw shoes for shiny boots," says Deripaska spokesman Sergey Rybak.

But as fast as Deripaska created value, he leveraged it. He met Nathaniel Rothschild, the son of Jacob, Lord Rothschild, in 2003, and they teamed up. Deripaska needed capital, and the Rothschild name "was crucial in making Deripaska respectable," says one London banker asking not to be named discussing a colleague. Backed by Rothschild and other Western moneymen, Deripaska built an edifice of leverage that would make "even Lehman Brothers a bit queasy," as one of Deripaska's foreign creditors puts it. "Everything was bought on borrowed money, and then the equity was pledged again." And it all rested on a bubble: in just two months last fall, aluminum prices plunged from $3,500 a ton to $1,350. Demand also went off a cliff, with more than 10 million tons—a full quarter of RusAl's 2008 production—lying unsold.

Deripaska was dangerously exposed. In March 2008, at the very top of the metals market, he had bought 25 percent of the metals giant Norilsk Nickel for $4.5 billion from his fellow plutocrat Mikhail Pro-khorov. By late October, foreign creditors were threatening to seize Deripaska's piece of the company. National pride forced Russia's finance minister to order a $4.5 billion credit line so Deripaska could refinance his piece of Norilsk.

Putin now has two options, says Dorenko: "He can nationalize everything Deripaska used to own—or he can throw Deripaska onto the people's pitchforks, like they did with barons here in the Middle Ages." That's bad news for Deripaska: cash is too tight these days for the government to bail him out. The Kremlin's sole priority is to avoid mass layoffs, possibly by letting foreign investors step in. Medvedev seems sincere in his desire to end the culture of oligarchy, says Kirill Kabanov, head of the National Anti-Corruption Committee, a Moscow-based NGO. But like it or not, the president's only choice may be to have another oligarch take over Deripaska's empire, despite the old system's flaws.

© 2009