Robert Amsterdam

Is Magna concerned that Oleg Deripaska and Basic Element could become a trojan horse for the Russian government to become a minority shareholder in the corporation?

On August 28th, the Canadian automotive parts manufacturer Magna International Inc. will be holding a shareholders meeting to vote on the "Arrangement" between Magna and Russian Machines (owner of GAZ), a company owned by billionaire Oleg Deripaska's holding company Basic Element. As first reported by the Moscow Times, Magna has filed a Management Information Circular / Proxy Statement with the Securities and Exchange Commission in the United States, outlining the risks posed to shareholders associated with doing business in Russia.

The language used in this SEC filing shows that the lawyers were paying attention to a recent Deripaska interview in the Financial Times, when he addressed the nationalization issue and his close relationship with the state, commenting that "If the state says we need to give it up, we'll give it up. ... I don't separate myself from the state. I have no other interests." Magna's unease was likely reinforced by the state's attack on Russneft and subsequent application to purchase by Basic Element.

The following excerpt is from page 77 of Magna's Proxy Statement dated July 25, 2007 - the full document can be downloaded here. (emphasis in the last paragraph is ours).

Magna’s proposed Russian strategy involves making investments, and carrying on business and operations, in Russia, which will expose Magna to the political and economic risks and uncertainties of that country and which could, in turn, have an adverse effect on Magna’s ability to implement its proposed Russian strategy and on Magna’s financial results.

Since the break-up of the Soviet Union in December 1991, Russia has undergone a profound political and economic transformation that has led to federal and regional political instability. There is no assurance that the political, economic and market reforms will continue, remain unchanged and not be rescinded. Nor is there any assurance that the final result of the reform process that began with the break-up of the Soviet Union will lead to a Western-style democracy, rule of law and free market economy. The unstable political climate and ongoing political trends in Russia could have an adverse effect on Magna’s proposed investments, earnings and financial condition to the extent derived from or relating to its Russian strategy.

In addition, the fundamentals of the Russian economy have been relatively unstable since economic reforms were launched in the early 1990s. Despite attempts to adopt economic and market reforms, many basic economic and legal issues remain unresolved. There are no assurances that recent Russian economic trends — including GDP growth, a relatively stable rouble and slower inflation — will continue. Recent fluctuations in international oil and natural gas prices, the appreciation of the rouble against the U.S. dollar, and the consequences of a more deregulated monetary policy could have an adverse impact on the Russian economy.

The speed with which or whether the Russian economy transitions from state control to a Western-style free market approach will be a function of the country’s political climate. There are no assurances that the Russian economic reform will continue. Nor is there any consensus that the country as a whole will embrace the free market. Certain political forces continue to call for the results of economic reforms, including the privatization of Russian enterprises, such as Basic Element, to be reversed. Moreover, the government is continuing its efforts to control certain key industries. Thus, the outcome may be nationalization of Russian enterprises. If companies controlled by Basic Element and/or Russian Machines were nationalized, the governance arrangements between the Stronach Trust and Russian Machines would be terminated and the Russian Government could, indirectly, become a minority shareholder of Magna.