The Russian Connection: Chrysler Saga Takes Intriguing Foreign Twist

The Russian Connection: Chrysler Saga Takes Intriguing Foreign Twist

By Michelle Krebs May 11, 2007

The "Saga of the Chrysler Group Sale" took another intriguing twist this week when leading contender Magna International announced a hefty $1.54-billion investment from a Russian billionaire, questioned by the U.S. government of having ties with Russian organized crime.

Oleg Deripaska has purchased about 20 million shares –- about 15 percent -– in the Canadian auto supplier Magna. Magna says Deripaska’s investment, subject to various approvals, would  be used to hasten Magna’s expansion into the fast-growing Russian market and Eastern Europe.

But that’s only half the story. The timing of the investment –- when the Chrysler sale is coming into the home stretch –- suggests the funds would be used to help buy Chrysler. Magna chairman Frank Stronach acknowledged the Russian connection would be good for Chrysler. "Let's build Jeeps in Russia," he told The Wall Street Journal.

As they say, the plot thickens. In this case, the plot's real-life characters rival any a novelist could invent. And more characters could be drawn into the story before it ends. At Magna’s annual shareholder meeting on Thursday, Stronach said Magna could bring in additional partners in its upcoming bid for Chrysler. Magna already is working with the Canadian investment firm Onex Corp.

Deripaska’s Dossier

The 39-year-old Deripaska has a net worth estimated at $13.3 billion by Forbes magazine, which ranked him No. 40 among its 2007 list of billionaires. He is believed to be the second-richest man in Russia.

The most intriguing footnote to Deripaska is the fact that the U.S. State Department rescinded his visa in mid-2006 because of alleged ties to organized crime in Russia. Though no criminal charges have been filed, lawsuits in the U.S. and the United Kingdom allege Deripaska used tactics, such as extortion and violence, to further his business interests.

Deripaska started building his wealth in the aluminum industry. He bought into a huge aluminum smelting plant at age 26. Media reports say he slept next to its poisonous furnaces to protect the plant from a business rival who phoned to issue death threats.

He amassed an even larger fortune by accumulating a business empire through "ruthless, although technically legal, takeover raids after the collapse of the Soviet Union in 1991," according to various media reports, including the Toronto Star.

His tactics angered business partners and competitors alike. They have sued him for objectionable dealings, though none of their charges have held up. The Times of London reported that once when he returned home, his enemies were waiting for him with a grenade launcher. He dodged them.

Today, Derispaka's holdings are under the umbrella of Basic Element, a Russian holding company. It has controlling interests in: United Company RUSAL, the world’s largest aluminum maker; GAZ, Russia's second-biggest automaker that makes cars under the Volga and Gazelle brands; Russian Machines; Aviacor, an aircraft manufacturer; and Ingosstrakh, an insurance company. He also recently acquired a variety of construction assets.

Deripaska, like many wealthy Russians, is forming partnerships with overseas firms to tap into his flourishing home market. He connected with Magna late last year as it looked for a way to enter the Russian market. The result was Deripaska's GAZ and Magna forming a joint venture to produce car parts. That venture already is involved with Chrysler products. It will modernize a stamping facility for models bought from DaimlerChrysler and will adapt the Chrysler Sebring and Dodge Stratus models for Russia. It also includes a new plastic parts plant.

Well-connected politically in Russia, Deripaska has ties to President Vladimir Putin and is one of the few businessmen to flourish during Putin’s tenure. Deripaska also had close ties to the late former Russian President Boris Yeltsin; he's his grandson by marriage and is married to Polina Yumashev, daughter of Yeltzin's former chief of staff.

U.S. officials revoked Deripaska's visa and later reinstated the ban after concluding he wasn't candid about past business activities, The Wall Street Journal said. The newspaper said he originally received the visa so FBI agents could interview him about several individuals including former partner Mikhail Cherney, an alleged Russian organized crime figure. Deripaska and Cherney have denied any links to organized crime.

Stronach's Story

Magna’s Stronach is a story in and of himself -- a classic rags-to-riches story of the poor immigrant who arrived in Canada with a few bucks in his pocket and now is one of the country’s richest men and an influential figure in Canada, the U.S. and increasingly in Europe.

In fact, today, Michigan Governor Jennifer Granholm, born in Canada, and Robert Ficano, executive for Michigan’s largest county, were meeting with Stronach to discuss Magna’s possible purchase of Chrysler and his plans to build a $100-million thoroughbred racetrack near Detroit.

Now 74, Stronach, according to a CBC documentary, was a tool and die apprentice who left war-ravaged Austria in 1954 with a one-way boat ticket and $40 in his pocket. In 1957, after three years of picking up golf balls, washing dishes in a hospital and working as a machinist, Stronach and his friend Tony Czapka opened their own tool and die business.

By 1959, Stronach and business partner Burt Pabst acquired their first auto parts contract -- 300,000 sun visor brackets for General Motors. Today, Magna International ranks No. 3 among the world’s top 100 global suppliers, according to industry trade journal Automotive News.

Stronach has strong beliefs on how a company should be run. Though he was part of Canada’s labor movement in the 1970s and 1980s, he’s adamantly opposed to trade unions, a contentious point with Chrysler’s unions in the U.S. and Canada. He keeps the union out of his businesses, in part, by giving employees an ownership stake. In terms of management, Magna sets up divisions in competition with each other, which works sometimes and doesn’t in others by not leveraging its resources.

In addition to his automotive business, Stronach owns with his son, Andy, Magna Entertainment, a horseracing entertainment company. Andy Stronach has become one of the largest and most successful horse breeders in North America, worth more than $100 million.

Stronach has been richly rewarded -– and highly criticized. His pay packages in recent years have totaled $25 million to $50 million. He has been criticized for his multiple voting shares, which allow him to have majority voting power despite owning only 4 percent of Magna's equity. He’s been quoted as saying of disgruntled shareholders: "If they don't like the restaurant, then don't eat there."

Stronach dabbled in politics with an unsuccessful bid as the liberal candidate in federal elections in 1988. His daughter, Belinda Stronach has held the federal seat in the Toronto area, but recently announced she won’t run for re-election. Instead, she will return to Magna as the executive vice chair for the company, at her father’s request. Belinda Stronach has provided fodder for Canada’s gossip pages, as she was rumored to have had a tryst with former U.S. President Bill Clinton -- a claim never substantiated -- and with a  Canadian hockey player.

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.