By Catherine Belton in Moscow

Oleg Deripaska had reason to be in ebullient form as the late August sun washed the grey steel hull and white aluminium superstructure of his yacht, the 72-metre Queen K, as it sat moored off the coast of Corfu.

Russia's richest man, who had made his money in metals, was in the middle of a nickel take-over battle but was taking time to throw a party on board for Britain's political and business elite.

As has now become the stuff of furious debate, guests at that glittering Ionian occasion - aboard what is ranked as one of the 50 biggest yachts to ply the seas - included Peter Mandelson, then a European Union commissioner, and George Osborne, shadow chancellor. As part of his tussle for control of Norilsk Nickel, the world's biggest nickel miner, Mr Deripaska was considering floating his UC Rusal aluminium producer in London. Drinks with friends in high places could surely do no harm.

But that was the calm before the storm. In just two months, the tens of billions of dollars Mr Deripaska was playing for have been obliterated in Russia's stock market rout. Norilsk Nickel is worth less than one-quarter of its $40bn (£26bn, €32bn) summer valuation and Mr Deripaska faces the possible forced divestment of his stake.

With Mr Osborne this week having to deny allegations of soliciting a party donation from the tycoon, and Lord Mandelson - newly appointed as business secretary in the Labour government - rejecting suggestions of a conflict of interest with his own role at the time as EU trade commissioner, the Russian's meetings with British political figures have meanwhile become as toxic as the debts Mr Deripaska appears to hold.

The 40-year-old oligarch is scrambling to find refinancing for a $4.5bn loan from western banks, including Royal Bank of Scotland, that paid for part of his 25 per cent Norilsk stake, after a plunge in the value of the shares he pledged as collateral. If he fails to gain an extension from the western banks of a waiver on repayments or a bail-out from the Russian state by the end of next week, he could have to hand over the shareholding to creditors. Rusal says it is optimistic it will win refinancing from the government, adding that it is in the meantime "conducting negotiations with the banks" on a extension of the waiver.

But what had been Russia's biggest industrial empire "is starting to look like a house of cards", says one person close to Rusal. "[Mr Deripaska's] people think they have a lot of options. But they are starting to run out . . . Every billion counts. It is going to be very close run."

Mr Deripaska is not alone. The global credit crisis has wiped an estimated $230bn off the peak $300bn total value of stocks held by Russia's oligarchs. Others who have lost paper fortunes in the market's slide include Roman Abramovich and Alisher Usmanov, the respective backers of London's Chelsea and Arsenal soccer clubs.

But those who, like Mr Deripaska, raised tens of billions of dollars by pledging shares as collateral are in the most precarious position. In a reverse of the 1990s privatisations, when oligarchs dictated terms of the sell-off to a weak state, now the cash-rich government is in a position to decide the fates of the country's most highly leveraged businessmen. Setting the stage for the biggest redistribution of property since the 1990s, the Kremlin has set aside $50bn to refinance the foreign loans of strategic enterprises such as Mr Deripaska's Rusal.

If Mr Deripaska fails to land an extension of the waiver or a state bail-out by the October 31 deadline set by the banks, he could face defaults on another nearly $10bn in loans Rusal owes to foreign banks. People with knowledge of the situation say the banks would prefer to extend the waiver to give time for VEB, the state-owned development bank, to provide refinancing, which may not come before November. But with 100 per cent approval required from creditors, there are still risks.

Mr Deripaska has already been forced to divest stakes in two foreign holdings to meet demands by foreign banks. Other debts are stacking up. Rusal says it has persuaded the billionaire, Mikhail Prokhorov, to allow it to defer a $700m tranche it owes him for buying his 25 per cent stake in Norilsk.

Basic Element, Mr Deripaska's holding company, does not disclose the total level of its debts. But by at least one account, Mr Deripaska borrowed to the hilt. "We bought this and then we bought that," says a former business partner. "If he bought something he would immediately pledge it as collateral and borrow money for something else. This is how he built up turnover." Alexander Temerko, former vice-president of Yukos, the defunct energy group, says: "Everything is fine when the market is growing. But this system of loans generating more loans is very dangerous when the market falls."

Basic Element denies it has any problems with liquidity, saying it does not intend to hand over any more shares to creditors. It managed to raise €500m in refinancing from co-shareholders in order to keep its 25 per cent stake in Strabag, the Austrian construction company, following a call by banks for more collateral.

But the leverage that went into building Mr Deripaska's empire, via which he controls 90 per cent of the country's aluminium output, is symptomatic of a borrowing boom by Russia's richest men. The hundreds of billions of dollars raised on Russian collateral helped make Moscow one of the world's most expensive cities, in a country where the average wage is still only about $700 a month. "This was part of the expanding wealth gap," says Chris Weafer from the Moscow-based Uralsib investment bank. "The growth of high-end restaurants and clubs and the purchasing of west end apartments in London is a reflection of that."

But when the market started to fall after the war in Georgia in August, cutting the value of collateral, the leveraging sparked a vicious circle of forced selling, helping send the Russian stock market down more than 70 per cent since its peak in May.

The practice of pledging shares in Russian blue chips to raise billions of dollars in loans became widespread as the stock market climbed for nearly five years in a row. Russian banks and western ones led by Credit Suisse and Deutsche Bank headed the trade, say market participants. Estimates on how much money was raised by pledging Russian blue chips vary as widely as $40bn to $120bn. As a result, "no one knows" how much Russia's actual debt is on top of the $527bn the central bank reports Russian companies and banks have borrowed from foreign banks, says Andrei Illarionov, a former presidential economic adviser.

Mr Weafer agrees: "One of the reasons Russia's market has gone down so much further is because investors fear there is a bigger debt problem than the official statistics show." Among those worst affected, he adds, are a second tier of so-called minigarchs. "A lot of their fortunes were predicated on the growth of asset values. But now they are the most exposed."

Of the oligarchs, however, Mr Deripaska stands out. He had cultivated close ties to Vladimir Putin, the former president and current prime minister, by promising to help rebuild Russia. Basic Element took the lead on the construction programme for the 2014 Sochi winter Olympics and Mr Deripaska pledged to invest up to $3bn a year in rebuilding Russia's roads, airports and other infrastructure - a commitment that added to his debt.

One market participant says Mr Deripaska "flew too close to the sun both on a political and economic level", adding: "He is the public face of Sochi's problems with rising costs."

Mr Deripaska is thought likely to win refinancing from the state before the foreign creditors call in the $4.5bn loan. Russia will not want a big stake in the strategically important Norilsk to fall into the hands of foreign banks, analysts say. Igor Shuvalov, first deputy prime minister, said this week that he believed the foreign banks would extend the waiver to give time for a state bail-out to be disbursed. "What do the banks want? They want their loan back. If it's a question of three weeks, then there should be no problem, because getting money from VEB is no problem but selling 25 per cent of Norilsk - that is a problem," he said.

But the state bail-out could come at a high price. The opportunity to control 25 per cent of Norilsk could prove too tempting an opportunity for some in the government who for years have been wanting a state-controlled national champion in the metals and mining sector, says Mr Weafer.

A battle is still being waged in the government over what to do with the shares VEB will take as collateral in return for bail-out loans. But even with refinancing from the state, Rusal could face problems paying off government loans when they fall due. A London High Court case brought by Michael Cherney, a controversial figure in Russia's 1990s aluminium industry, involving a 20 per cent stake in Rusal also threatens the oligarch's reputation.

Mr Deripaska once told the FT he would surrender Rusal if the state asked him to. "If the state says we need to give it up, we'll give it up," he said. "I don't separate myself from the state. I have no other interests."

He now says that line was a joke. Soon it might not be.

URL: http://www.ft.com/cms/s/0/b3b416dc-a22d-11dd-a32f-000077b07658.html