MOSCOW - Alcoa's bid to buy two downstream aluminium-rolling mills from Russian Aluminium (Rusal) is under parallel investigation by the Federal Anti-Monopoly Service (FAS) of the Russian government, and also by anti-trust authorities in Germany.

The Kremlin has also begun investigating the broad-ranging activities of Rusal's controlling shareholder, Oleg Deripaska; while multi-million dollar tax breaks issued to Rusal companies through the Chukotka region have been revealed by the Russian state auditor, the Accounting Chamber.

Konstantin Dorokhin, spokesman for FAS, confirmed that the transaction documents for the Alcoa deal had been received at his agency, and are now under investigation. "Currently we cannot give details about the investigation, or the review procedures, because this is against service rules. Nobody can be informed about the details before that will finish." The FAS was newly created a few weeks ago after its predecessor, the Ministry of Anti-Monopoly Policy, was abolished by President Vladimir Putin.

The new agency, headed by Igor Artemiev, may be the lead federal government investigator, Dorokhin said. "We don’t know who else will have to review the procedure." Other ministry officials say that the FAS will lead, but other ministries, including the security agencies, are likely to add their views before the government issues its decision on whether to approve or disapprove the proposed deal.

A Kremlin source has said that the Kremlin is aware of the Alcoa purchase, and judges its value to be relatively small. The source said that a Kremlin investigation is under way of the broader range of activities of Deripaska, who runs Rusal through a Moscow-based holding company called Basic Element, and whose other interests include stakes in paper and pulp, auto building, electricity generation, and insurance.

In a joint announcement on May 6, Alcoa and Rusal said they had agreed on a sale and purchase of the Samara and Belaya Kalitva plants. Alcoa also said that the deal required Rusal to allocate supplies of primary aluminum to the mills, while semi-fabricates produced at the mjills would be made available to can production and other fabricating units Rusal retains.

Russian media reports and industry sources suggest that the transaction price is between $200 million and $250 million. An Alcoa source declined to confirm that.

Alcoa and Rusal also announced last month that their transaction is subject to Russian government and regional approvals, which will be sought by June 30. Vladimir Pervakov, deputy chief of the Samara region's Natural Resource Ministry, said: "Unfortunately, we are not in the sale [review] procedure. It should be accepted by the federal authorities, I think the Federal Anti-Monopoly Service. We have no fresh information on what’s happening now.” Kiril Zhitenev, an official of the Rostov regional administration, said he had been to the Belaya Kalitva plant recently where he reported "there are no changes on the production.” He added that the regional government is not informed about the deal review.

An Alcoa source has confirmed that his company has filed for approval of the transaction with the German government's anti-trust agency. "It is part of the overall anti-trust process," he said.

He also confirmed that the transaction has been structured so that the shares of the two Russian mills will be vested in a new corporate entity called Prime Alum, and the shares of the latter then sold to Alcoa. "Rusal has set up the shares in Prime Alum," the Alcoa source said, "and we will be purchasing those shares. It is a legal technicality."

Samara Metallurgical is one of the world's largest producers of aluminium semi-fabricates, sheet products, forgings and castings, with a design capacity of 800,000 tonnes per annum. In 1998 it was producing at just 10% of that capacity. Output was raised to 199,404 tonnes in 2002, but last year, Rusal admits, it fell by 13% to just under 174,000 tonnes. That is just 22% of capacity.

The Belaya Kalitva Metallurgical Plant is much smaller, with design capacity for 250,000 tons of rolled products. Production in 2003 was just 41,430 tons; that was up 8% on the 2002 result, but just 17% of capacity.

According to a website posting by Rusal's CEO, Alexander Boulygin, "this transaction arises from Rusal’s strategy to focus on its strengths upstream, as a leading producer of primary aluminum and alloys."

Late last month, Russia's Accounting Chamber -- the independent state auditor comparable to the US General Accounting Office -- issued a report of its financial audit of the financial operations of the Chukotka region, whose governor is Roman Abramovich. Abramovich, who amassed a fortune through the Sibneft oil company, was a 50% stakeholder in Rusal until he sold a 25% bloc of shares to Deripaska last autumn.

According to the Accounting Chamber report, the Chukotka government has issued several hundred million dollars worth of tax privileges to a list of 22 enterprises. "In 2003," the report says, "the sum of foregone revenues in connection with the granting of tax privileges stipulated by the local legislation, has amounted to 13,7 billion roubles [about US$472 million]. Privileges have been given to 22 enterprises registered in Anadyr, including Trading House Aluminium, Open Company Billings, Trading House Russian Foil, Open Company Omolon, and a number of others. The specified enterprises did not conduct active economic activities in the territory of the district."

A search of Russian corporate registration files has turned up confirmation that Trading House Aluminium and Trading House Russian Foil were registered in Anadyr, in Chukotka. On October 19, 2001, the two companies are recorded as having founded a Moscow company, Russian Aluminium Finance LLC. All three companies are part of the Rusal group.

At the time, and until September 2003, Abramovich's holding company, Millhouse Capital, controlled 50% of the shares of the Rusal group, while Deripaska and his holding, Basic Element, controlled the other half. Each took substantial dividends from the after-tax profit of Rusal. Thus, if Abramovich's regional government issued savings on tax for the Rusal group, Abramovich could have benefitted personally from the concomitantly larger dividends Rusal paid him.

Andrei Belyaev, chief spokesman for the Accounting Chamber, says that he can confirm that in all, the tax privileges issued to all enterprises totaled Rb13.7 billion, but he said the Chamber report does not provide itemized amounts for the individually named companies. Asked specifically about the Rusal group companies, Belyaev said that tax relief was "detected in the schemes in which the 22 companies participated. We did not make conclusions about what money was washed away by whom. We just certify the fact of financial activity of these companies in Anadyr city without physical activity in the region."

John Mann, a spokesman for Abramovich, Millhouse Capital, and the Chukotka regional government, has issued the response that the Chukotka special tax zone legislation required that "investors who received tax breaks in accordance with [Chukotka] legislation were required to invest no less than 50% of their total tax savings in state projects in the region." Belyaev confirmed this is the legal requirement.

Arguing that the Chamber had found "no infractions of the law", Mann claimed that "as of January 1, 2004, [Chukotka] received more than 14 billion roubles (about $483 million) in investments under agreement signed with investors by the current administration." Belyaev disputes this: "the 14 billion number is not in the report. We don't have information about the value of such investments."

Rusal spokesmen Fred and Yevgeniya Harrison were asked to say what was the value of the tax privileges the group received through Chukotka; what business they did in the region; and what investments they have made in the region. They did not respond.

Independently, a Rusal source confirmed that the group's companies did not invest any money in Chukotka.

The Accounting Chamber auditors, Belyaev told The Russia Journal, are not able to itemize the value of the tax breaks issued to the beneficiary companies, nor the value of their spending in Chukotka, if any. "They did not examine the affairs or accounts of each enterprise."