Paying Debts: Deripaska’s Takeover of Gorky Auto Plant

A New CEO

            At the end of the year 2000, Haden completed a second major contract with the Gorky Auto Plant (GAZ), and the equipment of a new paint shop went into use. Two months later, the Russian company took on new ownership. Aluminum king Oleg Deripaska had bought the automaker. Nikolay Pugin remained president in name, but authority in day-to-day decisions now went to the new CEO, Victor Belyaev. When this happens, there is a change of the key executives and a detailed review of the previous boss’s work. Much of the company’s ongoing business stops for six to eight months. They cease payment on contracts. The new team is clarifying how much its predecessors stole.

Gorky Auto Plant, Nizhny Novgorod, Russia. Credit: Vitaly V. Kuzmin, Wikipedia.

            They checked the two contracts with Haden with particular exhaustiveness. Sixty million dollars had been spent on them, an enormous sum by Russian standards. The new bosses started looking for kompromat, any hint that the previous executives had violated the law.

            According to contract, $2 million was to be paid one year after the equipment was put to use. At first, the new administration said that it needed time to work on the issue. Then it acknowledged the legality of the debt and started working on a payment schedule. We were supposed to sign an agreement for the schedule in November of 2001.

Another New CEO

            I went to the factory on the appointed day for my planned meeting with GAZ CEO Belyaev. But something unexpected happened. I heard on the radio that very day that the CEO had been changed again. Belyaev was fired, and Dmitriy Strezhnev was appointed in his place. The CEO had worked for exactly one year, changed all the key executives, conducted a total review, had only just begun dealing with the ongoing business processes and now was cast aside. A new carpetbagger was sent in to follow the same path. He’d change all the key executives and start a new review. He’d stop all payments. First of all, he would stop our payment.

            That was some unpleasant news, but we couldn’t do anything about it. Business in Russia always brings surprises. One surprise was waiting for me right after I heard the news. The newly appointed CEO’s assistant called me and said that day’s meeting at GAZ would take place after all. The new president would talk to me. I said that I wasn’t insisting on the meeting. I understood that the new CEO might have more important things to do on his first day than meet with me. But the assistant said that the meeting was very important, and the new CEO was expecting my arrival.

Dmitry Strezhnev, now CEO of EuroKhim chemicals group. Forbes estimates his net worth to be $700 million, making him the 156th richest person in Russia. Credit: Kompromat.ru.

This is a Stick-Up

            The meeting did indeed happen that day. The new CEO was not yet thirty. He looked like a typical up-and-coming “new Russian.” It didn’t bother him that he, without the necessary education and experience, had taken charge of a company with a hundred thousand employees and a solid global reputation.

            After we said our hellos, the president began a monologue that continued for over twenty minutes. It was all about how GAZ had spent a huge sum, over $60 million, on its contracts with Haden, but had received poor equipment. The equipment did not meet the conditions of the contract. He then started listing off the main shortcomings of what we sold. It wasn’t worth the money they’d paid. Clearly, millions had been stolen. He knew exactly how much had been taken. His team would search for that money and find it. They could do it. They would punish everyone who gave and took bribes. So, we needed to forget about that $2 million debt. He had no intention of paying that debt. Was that clear enough for me?

            Then he gave me my turn to speak. “What do you have to say about it?” he asked. I was in a tough spot. He was clearly trying to intimidate me. This is what Russians call a gop-stop, a curbside stickup. A con dreamed up from whole cloth. A predator was sitting before me. He was in a position of strength, and he knew it. People like him respect the strong and rob the weak. Ten years later, he would become one of Russia’s famous oligarchs.

The Tale of the Wild Jackass

            In response, I said that this was the first time I’d been put in this kind of unpleasant situation. So, I wanted to break the ice with a favorite joke of mine. It features a lion, lev, in Russian.

Joke: “The Tale of the Wild Jackass”

            There were stories of a strange beast stalking the jungle—a wild jackass. A sexual gangster. The animals reported on him to the King of the Jungle, the lion. They said the jackass was out of line and creeping on all the lion’s subjects.

            The lion asked: “Has he already sexually molested many creatures?” “Yes, many! Almost half of your kingdom.” The lion raged and demanded that the criminal be brought to him.

            They brought in the jackass. The King started shouting and roaring at him, shaking his mane and opening his maw. He wanted to leave a terrible impression upon the wild jackass. It clearly worked. The jackass was crouched down on the floor, shaking all over.

            The lion felt he had achieved his purpose and put fear into the little beast. He asked, “So, jackass, are you afraid of me?”

            “I am afraid, your majesty.”

            “What are you afraid of? I’m a really nice guy.”

            The jackass spoke: “How could I not be afraid? I’ve never fucked an animal this big before.”

Strezhnev was speechless. His face turned red and asked me angrily, “Do you know who you’re dealing with? How dare you talk to me like that!”

            I told him I understood the situation and I knew what I was saying. Did he realize what he had just said to me? There wasn’t a word of truth in his little monologue. All lies, with the one possible exception: he knew exactly how money is stolen and where to find it.

Who Signed the Act of Acceptance for the Equipment?

            I then proposed setting aside our emotions and discussing his notes on the GAZ-Haden contract. I refuted his notes point by point. In the CEO’s office were two of the Chief Engineer’s deputies, Victor Serdyk and Vladimir Gorynin. They were serving as his technical experts. They were the ones who prepared the tough technical report that Strezhnev used as the basis for his monologue. Serdyk was not a specialist in painting. Gorynin knew about painting equipment and understood what was going on. It was Gorynin who’d signed the Act of Acceptance.

            I started refuting the CEO’s technical notes. The CEO understood nothing about the technical subject matter at issue. He watched the reactions of his experts and asked if they agreed with my conclusions. They couldn’t object to any of them. They nodded their heads and agreed with my clarifications.

            The last note from the new CEO was about how the Act of Acceptance of equipment in operation was unlawful. He claimed it was signed by a GAZ employee who didn’t have the right authorization. I objected that the Act of Acceptance was signed by Deputy Chief Engineer Gorynin, who was there in the meeting and had put a copy of the document on the table. I asked Gorynin whether he recognized his signature or if it was forged. He then answered that testing had shown the equipment corresponded completely to contract conditions, and the Act of Acceptance was signed by him in accordance with the law. 

            So, step by step, we went through all the claims against Haden. Not one of them held up. Not one turned out to be backed up with facts. Those who had prepared the claims could not deal with the subject matter and put together a real lightweight argument. If I’d been in the place of those experts and had put my boss in Strezhnev’s position, I would have burned with shame. But clearly that’s the way people were used to working in that company and similar lightweight arguments had been sufficient in other situations.

            As a rule, the executives of Russian companies do not understand the details of the technical and commercial issues under discussion. They don’t have any concrete numbers. They don’t write the documents. Their underlings do that. They’re used to behaving as generalized businesspeople, knowing a little bit of everything and nothing in depth. They can read what’s been written for them, but they aren’t capable of discussing it as professionals.

            Similar things occur in American companies. At meetings of Haden executives, the Vice-President for Finance often reported incorrect data on Russian payments, which I then had to clarify. That’s no surprise. He had numbers for all the projects in his head, while I only had my Russian ones. He dealt with many issues at once, while I was focused on one thing. Naturally, that allowed me to know my subject more deeply than others did.

            At the end of our discussion, we returned to Strezhnev’s refusal to pay the $2 million debt and looked at the possible legal ramifications. That was our first and last meeting. Strezhnev stayed on as GAZ’s CEO for eight months, after which he was replaced by another carpetbagger who had previously worked in the aluminum business.

Oleg Deripaska. Forbes puts his net worth at $3.5 billion (down $1 billion from January 27), making him the 248th richest person in the world. Credit: Michael Wuertenberg, Wikipedia.

Debts are Only Paid in Rare Cases

            Oleg Deripaska, the owner of Gorky Auto Plant, was and is a very hard-nosed executive. In Russia, he’s known for paying his debts only in rare cases. He’s been compared to Al Capone. Nearly two years went by before the issue was resolved. To do this, we had to build connections in Deripaska’s inner circle and sneak information of possible negative ramifications through to him.

            After that, GAZ got the go-ahead to negotiate the terms of debt repayment with Haden. In the process of negotiations, we agreed to a discount of 25 percent. GAZ paid its debt in 2003.

            No one at Haden had believed it was possible. We had no leverage over the debtor, and no desire to go to court. We were clearly the weaker side, but we managed to agree on a compromise.

            Al Capone never paid his debts. His creditors were afraid to ask him. In Russia, you can come to an agreement with anybody, even the Russian Al Capone. It was my best deal in Russia.

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