By John Helmer in Moscow

The Valdai International Discussion Club is a collection of journalists, academics and erstwhile opinion-makers from countries whose hostility towards the Kremlin has traditionally been a problem. Neutralizing that sentiment has been the principal reason the club’s annual autumn trip to Russia and talk-show with Vladimir Putin have been organized and paid for out of the state’s information budget.

The club website describes its “mission…to create an international venue where leading experts on Russia can receive trusted and competent information on the country from top federal and regional officials.” The leading experts are trusted, too.

This year’s Club meeting with Putin, the seventh since 2004, was held in Sochi (see video record, left set). The Valdai members – mostly Americans, British and Germans, with fresh inclusions from 13 other countries (none from Africa) – are scheduled to meet President Dmitry Medvedev on September 10.

The verbatim transcript of the Sochi meeting which appears on the prime ministry website is not complete. A report of the questions and answers from the US think-tank Eurasia indicates what has been left out of the official record.

“On environmental issues”, the report says, “Putin expressed support for the decision to halt work on a new highway through a forest in the Moscow suburb of Khimki. He stated that the traffic flow on the new highway would harm the environment, and referenced his decision to re-route a pipeline away from Lake Baikal to protect the environment. The strength of Putin’s words implied that environmental activists have gained traction in Russia.

“When the Khodorkovsky case came up Putin became visibly angry. He implied that Khodorkovsky had caused people to be killed, and tersely stated that this case should be left to Russia to deal with. Khodorkovsky’s fate seems very unlikely to change.

“Putin was questioned several times about whether Russia needed a ‘good Tsar,’or authoritarian rule by a strong leader. His initial response was that people want their leadership to solve all problems. Putin then stated his goal of creating a self-regulating system which would by itself, without direction from above, solve problems. The concept was not clear. When pressed on the point that institution-building was very important, Putin demurred.”

The reporters at the Sochi meeting are gradually airing their versions of what was said. Since they too are glossing the record, here is a selection of Putin’s remarks from the prime ministry record, which aren’t quite appreciated outside Russia for what they mean:

Against zigzagging

“Our objective is not to make an impression, but to set forth conditions that would enable the country to move forward smoothly, without any major fluctuations. We wouldn’t want it to have any ups and downs, swinging back and forth. We had too many such disturbances and changes in our recent history. What we need now is a stable, calm environment that would ensure incremental development.”

In favour of babies

“Only recently, it was commonly believed that Russia would not be able to get out of its demographic deadlock. In the past few years, however, we’ve seen some unexpected positive shifts take place, with the birth rate rising and the death rate decreasing. Sure, there’s still a long way to go. But already, over the last four years, we’ve seen life expectancy extended by five years, which is quite a leap, really. Last year, for the first time in many years, we saw no population decline. And for the first time in the past decade and a half, we’ve the birth rate steadily growing. All this goes to show that despite the economic downturn, many of Russia’s families now have a sense of stability, which lets them expand their family planning horizons.”

Against intervention in foreign investment regulation – US version

“I don’t think Russian law is more conservative than the law of any other European country or the United States from the standpoint of foreign investor access to strategic projects. We remember the controversy around the opportunity to use Arab capital [Dubai World Ports] for infrastructure projects in the United States and what decisions its port and other infrastructure authorities made. We know that a special commission has been established, where secret services are represented, and so on. In this sense, I think that our law is even more liberal than in some other countries. We will follow this road and will not create any barriers to investment.

Against exaggeration

“What President Medvedev formulated in the agenda which he proposed is still absolutely relevant now and in the near future. It is nothing extraordinary, of course.”

Against the London Times

“Richard Beeston: Thank you Prime Minister. Richard Beeston, The Times, London. Last week we talked about the past, about Russian history and especially about the turbulent 20th century which was fatal for many Russians. I am amazed that with seven years to the centenary of the Bolshevik Revolution, Vladimir Lenin is still lying on display in the Mausoleum in Red Square, with guards standing around him. Don’t you think its a good idea to finally bury him before this event, to help Russia turn a new page? Thank you.

Vladimir Putin: Are you from Great Britain?

Richard Beeston: Yes.

Vladimir Putin: Then I have a question for you. Was Cromwell better or worse than Stalin?

Richard Beeston: Probably just as bad. But he is not displayed on Trafalgar Square, but somewhere in Westminster, at the back.

Vladimir Putin: But there are monuments to him all over Britain, everything in its season. When time comes, the Russian people will decide what to do. History is something that avoids hassle. Next question please.”

For Cromwell’s head

Beeston’s published report omits entirely the story of Cromwell, the exhumation of his corpse and its execution in public, three years after his death, following the restoration of the British monarchy; and the subsequent public display over another 150 years of Cromwell’s severed head.*

Beeston’s newspaper report of the Sochi meeting focused instead on London’s fear of the future. “The prospect of Mr Putin remaining in power for the next 14 years – continuing as Prime Minister for two years and then as President for up to 12 years – horrified the Russian opposition,” according to Beeston. He added that so far as the British establishment is concerned, Medvedev as the alternative isn’t up to it, physically or politically. “The contrast with his diminutive political partner – President Medvedev – has been glaring. President Medvedev seemed to spend his summer anchored behind his desk in the Kremlin struggling to cope with one crisis after another.”

The Nabucco opera – the fat lady has sung
 

Asked by a Turkish expert to say whether the proposed gas pipeline projects to cross the Black Sea, Russia’s South Stream and the European Union’s Nabucco, are rivals, Putin replied: “Nabucco’s biggest problem is lack of guaranteed gas supply. The pipeline does not have guaranteed gas sources, and I don’t know if it can find any…There is one more problem in the region the territorial dispute between Turkmenistan and Azerbaijan over the delimitation of the Caspian Sea. In my opinion, building a pipeline under these circumstances, this unsettled dispute, will be difficult, to put it mildly, if not impossible.

“These problems may prevent the implementation of the Nabucco project, although theoretically it is possible to build that pipeline, provided the concerned companies invest billions of dollars in it without signing preliminary contract. Good luck and Godspeed to them; I see nothing dramatic in that possibility.”

* Want to know how really civilized people treat the corpses of the winners of their civil wars – check this out:

By John Helmer in Moscow

The promoters of United Company Rusal at Bloomberg have kicked off a new marketing campaign for Oleg Deripaska’s heavily indebted aluminium company, disclosing this week that “Rusal is planning Russia’s first offering of bonds in China, spurred by McDonald’s Corp.’s debut sale in yuan.” A roadshow to test whether the Chinese taste for McDonald’s will carry over to an appetite for Deripaska risk products is planned with investors and banks in about a fortnight’s time. Yuriy Humber, Bloomberg’s ace reporter on Rusal’s affairs, found a source in Frankfurt, Germany, who says: “For Hong Kong-based investors, this issue will be a great diversification play with significant yield pick-up compared to the majority of local bonds.”

McDonald’s has a current market capitalization of $80 billion and a net debt of $10.6 billion. Rusal’s market cap is $16 billion, and its net debt is $12.2 billion. McDonald’s revenues, earnings and profits dwarf Rusal’s by magnitudes of 2 to 3.

An influential European investment fund manager, who has been a target of Rusal pitches in past roadshows, suggests that although there was Russian government backing for Rusal’s restricted share sale in Hong Kong last January, the politics in Beijing of supporting a yuan-denominated bond on Deripaska’s behalf have yet to be tested. “I am puzzled that they are issuing yuan bonds, and they are unlikely to be cheap,” the source said. “The bonds will have to be priced attractively to attract sufficient demand.”

That’s market talk for raising the interest rate or coupon cost of the proposed Rusal bonds, so that they may end up costing the company as much, if not more than its current bank loans. The charge to Rusal, according to the source, “will depend on the structure of the bonds, and particularly where the bonds will rank relative to the bank debt. But the bonds will almost certainly be lower ranking in the event of default than the bank debt. Therefore, the bond holders would demand a high yield to compensate. One mitigating factor may be that Rusal’s bank debt was restructured at the height of the financial crisis and market bank and bond debt yields have generally fallen since then.”

As he approaches Forbidden City for favour, the big test facing Deripaska is whether he can afford the price of admission. “If I were lending money to Rusal,” says the European fund source, “I would demand a junk bond type of yield because of where it would rank among creditors, i.e. just above equity holders.”

Even if that price is unusually high, there may be a reward for Deripaska if he pulls off his kow-tow. “I don’t think this issue is just about the yield which Rusal might have to pay on these bonds,” said the source familiar with the matter. “If the issue is $500 million, it would still be small relative to the size of Rusal’s debt. It is more about the high profile Rusal expects to obtain by being one of the first issuers of yuan-denominated bonds.”

With arranging by Standard Chartered Bank, McDonald’s Corporation sold 200 million yuan (US$29.5 million) of 3-percent notes, with a three-year term, on August 20. The Hong Kong market bond sale was the first by an international non-financial corporation to raise Chinese money since Beijing allowed such foreign debt issues in February. McDonald’s said the purpose of the money-raising was to pay for another 170 or so restaurants in China, to add to the 1,100 it already operates.

Rusal has already had a signal failure with Chinese investors when it sought strategic equity investment from them in 2008. The subsequent approval of the Hong Kong market regulator and the stock exchange listing committee was a close run thing: the small share listing in January came with unusual restrictions on the marketing of the shares; special waivers and qualifiers attached to the prospectus; and the guarantees of several anchor share-buyers, who included the Russian state banks and Nathaniel Rothschild. A Wall Street Journal reporter called the share offer “about as enticing as an invitation to invest in Bernie Madoff’s boys’ latest venture”.

If Deripaska’s success in selling unsecured Rusal equity since January is measured by the downward share price trajectory – minus 25% at the close of Hong Kong trading today — the risk of a bond sale to a bigger market will be gauged by the price to be offered in the weeks to come.

While the Hong Kong institutions are at their counting-frames on that one, there have been mixed political signals from other parts of the world on the creditworthiness of Rusal risk.

The good news is in Jamaica, where in July the Mining Minister James Robertson presided at a ceremony to reopen Rusal’s Ewarton alumina refinery at half-capacity. This followed two years of close-down and the loss of 2,000 jobs. Robertson said publicly he is looking to Rusal to produce new investments in Jamaica. “With the restart, the retooling of these plants, we are looking at at least US$1/2 billion worth of investments,” he was reported as saying in the Jamaican press.

A few days later, according to a Jamaican source, Robertson was flown on a private visit to Australia, where he was given a tour of the Queensland Alumina Refinery, which is part-owned by Rusal. He was hosted there by John Hannagan, the Rusal Australia chairman and a well-known lobbyist for the aluminium industry in that country. Robertson hasn’t responded to questions about the purpose of his Australian trip, and who paid for it. Queensland Alumina confirms that Robertson was taken to the refinery on August 10 “by two members of Rusal, John Hannagan and Geoff Blatch”. Blatch, QAL said, is general manager of Rusal Australia, based in Brisbane. The refinery source said the purpose of Robertson’s visit to Australia was to meet with Rusal.

Hannagan, who is the principal of a small publications relations firm in Melbourne, said he would not respond to questions about the purpose of Robertson’s trip, who had paid for it, and what Australian government or Queensland state officials Robertson may have met. “Sorry, the questioning is quite odd. I’ve got nothing to add”, he said by telephone. Regarding whether Rusal had paid for Robertson, Hannagan said that asking the question and publishing the non-response is “an inappropriate and unacceptable standard of journalism”.

The position of Rusal in Australia has been threatened by the results of the national parliamentary elections which returned a hung parliament on August 20; no party holds a majority of seats to wield power. In subsequent negotiations with several independent members of the new parliament and with the Australian Greens party, outgoing prime minister Julia Gillard has secured a one-vote majority in parliament to continue governing. The future of Rusal in Queensland, which had been discussed with the Australians when Deripaska visited the country in April, before the election was called, now depends on the leader of the Greens, Senator Bob Brown. His attempts to question Gillard and her ministers on their contacts with Deripaska have so far been rebuffed by Gillard’s ministers.

One of the issues which Deripaska is believed to have discussed with the Australian government, and its lead mining company, BHP Billiton, is their backing for a new system of pricing global alumina trades, particularly to China. For Rusal, the hope is that with backing from Canberra, it can extract a higher sales price out of Chinese buyers. According to a financial report and commentary issued by Rusal on August 31, “we anticipate that the market will introduce an alumina index, which will track spot price sales, and we expect this could happen next year. Currently, other global aluminium and alumina producers support a new pricing index for alumina.”

As told to Bloomberg by Rusal’s investment director, Oleg Mukhamedshin, China is “going to be one of the largest markets for Rusal. We need to grow our presence on this market.” Again, the price at which Rusal may conduct its business with China is in the balance.

In the west African republic of Guinea, where about 20% of Rusal’s bauxite assets are located, including the biggest bauxite reserve in Rusal’s current portfolio, the news has not been positive. There the Chinese have their own ambitions to mine bauxite and produce alumina for shipment back to their aluminium smelters.

According to Guinean sources, there has been a renewal of Rusal’s campaign against Guinea’s Mining Minister, Mahmoud Thiam. Thiam has led his government’s efforts to revoke Rusal’s operating concession for the Friguia alumina refinery, and to claim up to a billion dollars in proposed fines and compensation for alleged violations of the company’s concession agreements. Thiam has also warned Rusal that it faces revocation of the Dian-Dian bauxite mining concession. Rusal’s Hong Kong Stock Exchange prospectus reported Dian Dian’s importance to the company. “The Dian Dian deposit is located 350 km north of Conakry in the Boke province, and is a unique deposit containing around 1 billion tonnes of bauxite ore with a high aluminium content and insignificant amounts of hazardous impurities.”

Negotiations between Thiam and Rusal have been going on for more than a year without resolution of these conflicts. In June, following a flying visit to Guinea himself, Deripaska announced that “our negotiations were held in a friendly and constructive atmosphere, which enabled us to reach a number of specific decisions.” The election of a new Guinean president and of a new parliament are still pending. However, the friendliness appears to have deteriorated. According to sources in Conakry this week, the company has attempted to start a local media campaign against Thiam, and encouraged Guinean reporters to participate. Thiam declined to comment.

By John Helmer in Moscow

Even in ignominy or retirement, a big boy’s toys are worth playing with.

Uralkali is Russia’s dominant producer of potash fertilizer and will soon merge with Silvinit to become the national potash champion, according to a government scheme first reported here on June 15. At the time, the head of investor relations for Uralkali, Anna Batarina, called this report disreputable nonsense.

As far as potash champions go, it remains to be seen whether the Canadian government will allow BHP Billiton, an Australian-managed international, to buy out the Canadian champion, Potash Corporation; whether Potash Corp will apply for rescue by the Chinese champion, Sinochem; and whether the reigning Belarus champion, Belaruskali, will stay entirely under the control of President Alexander Lukashenko, or will be shared with either the Russians or the Chinese.
 

The making and remaking of these potash champions will recast the global trading scheme for potash, which has been dominated until now by the Canadians through Canpotex, and by Uralkali and the Belarussians through the Belarusian Potash Corporation (BPC). Exactly how the Chinese will reorganize the terms of trade won’t be clear for a few more months. But reorganize them they are bound to attempt, for China dominates potash consumption in the world, followed by India and Brazil; naturally, they aren’t in favour of price gouging at their expense.

In the short run, the remaking of the Russian potash champion will make small fortunes for the arbitrageurs, Suleiman Kerimov, Alexander Nesis, and Filaret Galchev, who were assigned by Deputy Prime Minister Igor Sechin the task of seeing the founding and controlling shareholder of Uralkali, Dmitry Rybolovlev, out of the potash arena, and paying him out of this particular fight game forever.

The full terms of this deal, and the final shape of the shareholding of the Uralkali-Silvinit combination, have yet to be fully decided and disclosed. But some details of the exit price Rybolovlev paid to leave Uralkali appeared in the small print of the company’s audited financial report for the first half of the year, issued on Friday.

There was, for example, the repayment of a €50 million loan which Rybolovlev took from the company in September 2009. Why he took such a relatively small amount out of the company at such a high interest rate, and what he needed the money for at the time, remain mysteries. There is no telling whether Rybolovlev intended to repay the sum until July, after he had sold his control stake in the company to Sechin’s troika. According to the company report, “the loan was provided at an interest rate of Euro Libor + 4% for 1 year. The loan was fully repaid on 2 July 2010….On 2 July 2010 the loan issued to Mr. Dmitry Rybolovlev, the Chairman of the Board of Directors, together with the accrued interest, was fully repaid.”

The company’s new shareholders and management also proved to be obstinate on price when Rybolovlev asked to fly away in the Falcon and Airbus business jets he had earlier fitted out. The financial note says that “on 19 July 2010 the [Uralkali] Group sold the entire share capital of Sophar Property Holding Inc. for net proceeds of RR 3,948 [million] (US$ 129,600,000). The main identifiable assets of this subsidiary consisted of two corporate business jets. The profit on disposal reported on the sale was RR 14 [million] (US$ 469,823).”

A year earlier, when Rybolovlev’s future at Uralkali looked like blue sky, the company’s financial report for the six months to June 30, 2009, had reported: “On 27 January 2009, the Group acquired a 100% stake in the share capital of Sophar Property Holding Inc., the only identifiable asset of which as of the date of acquisition was a contract for the purchase of a corporate business jet. The total purchase consideration for the acquired subsidiary of RR 753 [million](US$ 23,196,232) was equal to the net fair value of this contract. At 30 June 2009, the Group paid in cash RR 462 [million]; the outstanding amount of RR 291 [million] was included in other payables.” In other words, Rybolovev had arranged for Uralkali to start paying for his new toy on an instalment plan. How much more Sophar’s aircraft-buying on Rybolovlev’s behalf was to cost Uralkali was not reported then – or later.

Depending on models and fittings, Falcon jets range from $25 to $35 million apiece. Uralkali’s accounting disclosures suggest that Rybolovlev’s second plane, the Airbus A319-113X (CJ), at about $100 million, was expensive even by Russian oligarch standards.

With extra fuel tanks for long-range flying, and special fittings inside (see image), Rybolovlev’s aircraft made its maiden flight on January 14 of this year, a year after Sophar had been bought by Uralkali. Six days later, the plane took off again from an airport in Hamburg; landed in Zurich to collect someone; took off again for Stansted in the UK; and then returned to Basel, in Switzerland, where the cabin interiors were decorated.

The aircraft had been in the air for less than six months when Rybolovlev’s control of Uralkali crashed.

By John Helmer in Moscow

Runaway inflation and unemployment rates are the conventional killers of campaigns for reelection in the democracies, such as the US and the UK. But in the autocracies, the rising price of bread (or rice), leading to hoarding, usually does the trick.

Joseph Stalin wasn’t mistaken to suspect that popular Communist Party rivals like Nikolai Bukharin might be plotting his downfall if he allowed them to exploit the wave of resentment, protest, rebellion and grain hoarding that came during 1928 in the wake of Stalin’s forced collectivization of farming, and the punitive measures he ordered to seize grain and punish growers, hoarders, speculators, kulaks.

More than 80 years later the trauma of those events, and the effect they had on Stalin’s decision to start the terror purges of 1937 and 1938, remain lessons no Russian politician, let alone a Chekist, would overlook. And so the most dramatic effect of this summer’s extreme weather conditions turns out to be a spate of warnings, threats, and police raids ordered against alleged hoarders and speculators in the domestic grain market. Here’s Dmitry Medvedev, for example, uncovering plots and playing old Joe to the limit: “People are buying up this buckwheat from big retailers in the evenings, using sacks to fill up their trucks, and then selling it in small shops and markets,” Medvedev announced at a session of officials on the Volga the day before yesterday.

“Those who are involved in hiking up prices, those involved in earning unjustified profits, should be dealt with by prosecutors, by the police, by the anti-monopoly and tariff services…. The speculators need to be caught… The situation should be kept under control by the government and regional leaders… If the situation changes I will take the decision to ensure our citizens have quality and affordable food… This is a priority for the state.”

Noone at his table, none across the country, has so far dared to ask the President to explain what as a lawyer and legislator he means by an “unjustified profit”. If he made the attempt, that might have revolutionary implications for those oligarchs whose relief from bankruptcy Medvedev has championed since the start of the crisis two years ago. About one of them, Oleg Deripaska, Prime Minister Vladimir Putin warned on Tuesday against trying to extract more profit than he is entitled to from the coffers of Russia’s largest mining company, Norilsk Nickel.

A newly published book from the US on Bukharin’s fatal conflict with Stalin, and the cruel end to which he and his wife, Anna Larina, were subjected, invites continuing questions about the meaning of the price of bread in Russian politics. Paul Gregory’s book, Politics, Murder and Love in Stalin’s Kremlin*, draws on documents not previously available to earlier historians sympathetic to Bukharin. These include evidence that Bukharin was tortured before he signed the confession which was the principal piece of evidence against him in the show trial of March 1938.

The fresh publication also reveals that Stalin personally doctored Bukharin’s last statement at his trial on March 12, 1938, removing all trace of the mockery Bukharin made of the trumped-up charges, his confession of guilt, and the death sentence that followed. Crossed out in Stalin’s hand was Bukharin’s declamation: “I accept responsibility even for those crimes about which I did not know or about which I did not have the slightest idea.”

In the latest opinion poll reported by a regional branch of the Russian Communist Party, the sentiment remains in line with Lenin and Stalin. Bukharin, if he’s remembered at all, is lumped in with post-revolutionary “traitors”, such as Leon Trotsky and the White Army commander, Admiral Alexander Kolchak. Even if the Communist Party doesn’t count in Russian government any longer, the sentiment against Bukharin clearly remains the official, the governing consensus. And when it comes to dealing with the price of bread in the year before national parliamentary elections are held, followed by the new presidential poll, it is obvious why.

After a week of contradictory signals from the Kremlin failed to plug speculative rises in the price of bread – and the grain price has jumped 40% in the international markets because of the withdrawal of Russian supplies from export – Putin told a session of his cabinet yesterday: “Another issue that directly concerns the stability of the food market [is this]. To protect our consumers we have introduced a temporary ban on wheat exports for the period until January 1, 2011. And what do we see now? We see that the grain is being held in anticipation of some further steps. In order not to create unnecessary anxiety, to ensure a stable and predictable business environment for all market participants, I should note that the abolition of the grain exports ban we can consider only after the next crops have been harvested and there is clarity on the grain balance. Zigzagging should not be allowed here. Our producers and sellers of grain should work quietly on the basis of objective conditions and focus on the needs of the domestic market.”

This is stronger language than Putin expressed two days earlier when he told a meeting of workers at Norilsk: “With us, it would seem, even export potential still remains…we do not know what situation we will have in agriculture in the next year….Let’s see what will happen in the market. I repeat: no objective reasons for price hikes are there.”

The classic Russian bogey of profiteering has now become the political challenge that Bukharin represented to Stalin in 1938. Only now there is no doctrine with which to combat it ideologically. Medvedev’s call for police methods is an obvious throwback, as Kremlin confidence in market regulation evaporates.
 

Putin is more subtle. He has also come up with, in classic Russian style, a brand-new terminological enemy – the zigzaggers. Finally, supply and demand are to get their rightful share of the blame in the post-communist society, after a spot of hot weather.

Still, until there is a government decree signed by Putin to extend the grain export ban, there is no reason to believe that he is doing more than jawboning against inflation. Until December 31, there is no legal requirement that the prime ministry order an extension of the ban. A source at the Russian Grain Union says the prime minister is acting with the best intentions: “I believe that Putin decided to extend the ban in order to form a clear picture of the grain stocks Russia has; and to cool down the [grain] companies, giving them a straight message that currently they should forget about exports. What Putin usually says is very real, and there is no doubt he will keep the ban as long as he thinks is necessary.”

How long that might objectively be is something the modern Russian grain market should be capable of discussing. But Razgulyai, one of several grain producers and traders listed on the Moscow stock exchange (MTS), declines to respond to questions. Its share price is down 9% over the past month.

Razgulyai claims to be the third leading grain market operator in Russia. It has reported hefty losses for the past two years – Rb6.2 billion ($248 million) in 2008, Rb1.6 billion in 2009 ($60 million). Igor Potapenko, the chief executive and board chairman, controls the group with a 47% shareholding, according to company reports; and directs the flow of its trading profits through companies in Cyprus, British Virgin Islands, and the Netherlands.

At page 53 of the auditors’ notes, prepared by KPMG for Razgulyai’s 2009 financial report, there is this note on transfer pricing: “The Group structured some of its operations through transfer-pricing arrangements, including arrangements between Group entities and arrangements of Group entities with related parties, thereby decreasing its overall tax liability. In management’s opinion, the Group is in substantial compliance with the tax laws of the Russian Federation and other countries, where foreign Group companies are registered. However, relevant tax authorities could take different positions…”

An additional note appears to raise doubt about the legality of the way in which Potapenko has taken control of the operating and producing assets in the grain and sugar sectors. “A significant part of the assets of the Group was acquired,” reads note 31 of the 2009 financial report, page 54, “as a result of bankruptcy procedures. The carrying amount of the assets of such subsidiaries as at 31 December 2009 amounted to RUR 10,970 million [$344 million].” Elsewhere in the report it is made clear that this figure represents almost one-quarter of the group’s entire asset value.

Because of the takeover tactics under Russian bankruptcy law, the auditor’s report goes on, “this fact creates uncertainty with respect to the title to such assets, which potentially may be subject to challenge by former legal owners of these assets or their stakeholders…. However, management believes that the likelihood of such challenge being successful is less than probable.”

This is complicated stuff. Easier to point the finger of historical blame at Bukharin; and for Medvedev to tell Russians to believe in the evil of buckwheat baggers running their trucks in the dark of night.

* Published by the Hoover Institution Press, Stanford, California, in 2010. From his prison cell in the Lubyanka, Bukharin wrote a letter to Stalin in which, remembering a remark Stalin had earlier made to him about political intrigue, he asked: “my god, was I a child and a fool?”

By John Helmer in Moscow

An order of the Russian Government has this week lifted last month’s total ban on grain exports, but stopped well short of Prime Minister Vladimir Putin’s forecast that significant export shipments of Russian grain may be allowed later in the season.

Putin said on Tuesday that Russia retains the capacity to continue exporting grain, once the uncertainties over how much this year’s harvest will bring in, and how much has been planted for the next harvest, have been resolved. In a meeting with workers of Norilsk Nickel, the country’s largest mining company, Putin said that this season’s drought-hit harvest is likely to come in at 60 million tonnes; that is down 30% from last year. For confidence in meeting domestic consumption and fodder requirements, he noted that 78 million tonnes are required.

According to Putin, there is a state cereal reserve of 9.5 million tonnes, and another 21 million tonnes of grain stored on the farms, making a total grain availability of about 90 million tonnes. “With us, it would seem, even export potential still remains,” Putin said, while conceding that a government order to release grain for exports depends on resolving the problem that “we do not know what situation we will have in agriculture in the next year.”

The prime minister added that Russia’s export capacity for grain has risen to 20 million tonnes in recent years. He said the stocking situation and supply-demand estimates should deter price increases for local grain and bread sales, but warned that if speculation persists, the government’s anti-trust agency, the Federal Antimonopoly Service, will intervene to stop it. “Let’s see what will happen in the market,” Putin told the workers. ” I repeat: no objective reasons for price hikes are there.”

The current grain export ban is in effect from August 15 to December 31, and applies to both unmilled grain and flour. However, an amendment introduced this week – reported by a government news agency, but not yet published — allows shipments of grain for humanitarian aid, if Russia has signed aid treaties with recipient countries. Smaller volumes of grain are also allowed for shipment to Russian diplomatic, technical or military missions abroad.

Alexander Korbut, the vice president of the Russian Grain Union, told Fairplay: “The humanitarian obligations that Russia took should be fulfilled, and that’s why the ban had to be partly lifted. Putin was right when he referred [on Tuesday] to the results of the harvesting campaign. Only when the campaign is over and all the grain is counted, can a further decision on exports be taken. So the matter will be discussed again no sooner than the end of September.”

Russia is the third largest grain exporter in the world, trailing Canada and the US, but ahead of both in the Egyptian market — until this season’s weather catastrophe.

Because Putin announced the ban on August 5, but it did not take effect until August 15, Russian traders rushed to ship as much grain as they could in the 9-day interval. Russian Customs figures, just released, show that from August 1 to 14, 1.6 million tonnes of grain (mostly wheat, and a little barley) were loaded and shipped; this volume compares to just 749,000 tonnes shipped in the same period of 2009. Altogether, from July 1, when the new shipment season commenced, until the ban took effect, Russia exported 3.6 million tonnes — that is 1.5 million tonnes more than last year.

For the season to June 30, 2011, the Grain Union says it had been planning to ship 24 million tonnes, but that was before the July heatwave struck, and before drought restricted planting of the new season’s crops, especially in southwestern Russia.

Still, industry sources in Moscow are speculating that the humanitarian aid proviso may be a loophole to allow up to 3 million tonnes of grain exports to be shipped before the ban reaches its deadline — and at substantially higher price and cost to the state budget than prevailed before the ban was introduced.

Alexei Bezborodov, a leading shipping analyst in Moscow, told Fairplay: “Russia sends humanitarian aid to Cuba, North Korea, possibly Vietnam and Yemen. I believe the OZK [United Grain Company] will apply for exports to Egypt, too.” OZK is the newly established state grain trading organization, with the ambition to compete against rival state or producer marketers in the global trade such as the Canadian Wheat Board and the Australian Wheat Board.

Dmitry Teibash, OZK’s spokesman, was asked how long he expects the Russian export ban to remain in place. “I’d rather not give any forecast — it’s the government’s task,” he replied. He was unavailable to answer a follow-up question regarding OZK’s plans to ship cargoes of humanitarian wheat, or their destinations.

* Ancient Arabian proverb — If the camel once gets his nose in the tent, his body will soon follow.

By John Helmer in Moscow

Oleg Deripaska is preparing a series of presentations to institutional investors next week in Boston and New York, chaperoned by one of his largest creditor banks, BNP Paribas. Rarely has so unconvincing a lamb been led to market by so well-known a wolf; or such an odd couple asked to be believed for the sincerity of their hand-holding.

The prospectus released by United Company Rusal to the Hong Kong Stock Exchange on December 31 reveals that BNP Paribas’s affiliated banks are owed more than $415 million by Rusal; no other international bank appears to be owed a larger sum by Rusal than that.

In addition, there is more than $80 million which BNP Paris claims from another of Deripaska’s companies, but about which there has been a “dispute” and a “repayment shortfall” in connection with Deripaska’s abortive effort to take a stake in the North American auto parts firm, Magna. Less vaguely expressed, Deripaska appears to be in default to BNP Paribas on that one.

Then there are all the ways in which BNP Paribas has arranged to make fees out of managing Rusal’s billion-dollar debts to the syndicate of international lenders which BNP chairs and coordinates. BNP is listed as the bank in charge of enforcing the security of Rusal’s loan agreements with the syndicate. It is one of the principals in the “cornerstone placing agreements”, according to which the first listing of Rusal shares on January 27 was guaranteed. BNP’s motive is clear – it not only has Rusal debts to collect for itself, and for the larger syndicate, but it also holds additional fee warrants, claims and rights to Rusal shares whose price it wants badly to boost.

The purpose of BNP’s exercise in the US is to convince US investment fund managers and analysts of institutions holding Norilsk Nickel shares that they should vote in favour of Deripaska’s hostile takeover attempt against Norilsk Nickel. On October 21, at a planned extraordinary shareholder meeting called by Rusal, they are being asked to reverse their near-unanimous vote against this scheme when the annual general shareholders meeting of Norilsk Nickel was held on June 29.

Additional presentations for the same purpose are planned by Rusal, BNP and another of its creditor banks and promoters, Credit Suisse, in London. The proposition that the Norilsk Nickel minority shareholders should embrace Deripaska’s hostile takeover effort has already been rejected in the open marketplace, and by none other than Rusal shareholders, since the company first started selling its shares in Hong Kong seven months ago. The vote of no-confidence is reflected in this share price chart:

What interviews with the fund managers in London, Hong Kong, and the US reveal is the churn rate, which isn’t disclosed in this highly volatile price line – that is the amount of short-term share buying and selling which is driven by wagers on the movement of the price of commodity aluminium. The unusually high churn rate for Rusal reported by these market experts means that few, if any, of the original January and February shareholders remain committed to the company and its chief executive, apart from those who have no choice – the Russian government banks VEB and Sberbank, which is securing the state monopoly of aluminium from bankruptcy; Nathaniel Rothschild and his father Jacob; and the other cornerstone investors – Robert Kuok, John Paulson, Li Ka-shing, and the Libyan Investment Authority.

So what has Deripaska to say now that might convince a market that has been deeply skeptical of Deripaska risk on its own, let alone adding it to Norilsk Nickel’s future?

Before anyone dares to answer that question outside the Boston and New York meeting-rooms, Rusal has engaged its old standby, the London libel law firm of Schillings, to threaten independent institutional analysts from publishing anything Deripaska considers unfavourable. Schillings has even begun applying its English strong-arm tactics against American institutions.

One of these recently received a warning letter after it had published a report on the Rusal takeover attempt. The report had speculated that Rusal might be told by the Kremlin to abandon the attempt against Norilsk Nickel, and sell out its 25% stake in the company. When the institution’s report cited investment community sentiment and institutional shareholders and their analysts as believing this might be a welcome development, and that Rusal’s exit from Norilsk Nickel would be positive for the latter’s share price, Schillings cried false, misleading and inaccurate reporting. Schillings then opened its Savile Row waistcoat to reveal a little English dagger, terming its right to sue Americans in the English courts “expressly reserved”.

That this Schillings threat isn’t taken seriously across the Atlantic reflects the rather bigger blade which threatens Deripaska — this week it was put on open display by the two most powerful decision-makers in Russia, Prime Minister Vladimir Putin and Deputy Prime Minister in charge of resource concessions, Igor Sechin. The occasion was their state visit to the plant, town, workers, and management of Norilsk Nickel.

When Deripaska’s aircraft had trouble getting airport clearance to land for this meeting, he decried his rival Norilsk Nickel shareholder, Vladimir Potanin, for a dirty trick. But land Deripaska eventually did – with this advance signal for all to see that it is the Kremlin which is running Norilsk Nickel, and that even local air-controllers aren’t afraid that Deripaska may become their boss.

For those fund managers who are about to receive visits from BNP and Rusal, it is no novelty to understand that in the management of Russia’s natural resource, mining and metal companies, the oligarchs with shareholding control are temporary concessionaires, with limited operating, earnings, tax and capital gains rights; and that it is the state which dictates terms and the sharing-out of rewards. Exactly how the sharing of these concession rewards has been arranged, including the debt bailouts Rusal and Norilsk Nickel received during the 2008 crisis, is widely understood in oligarch circles, but unprintable in a family newspaper. The operative rule, however, is that those officials who supervise the concessionaires swear to have no purpose but the welfare of the market, the workforce, and the Russian commonwealth – and no desire to intervene when the concessionaires fight each other. That is why Sechin, seated to Putin’s right during their meeting with shareholders and management, said: “The main shareholders will reconcile their positions. We don’t interfere in corporate processes. That’s the shareholders’ business.”

Understanding why the no-intervention disclaimers must be made, it follows that the methods of Kremlinology are required to decipher the real meaning of the intervention which Putin and Sechin have decided towards Deripaska and Potanin. Accordingly, Tuesday’s display indicates that timing and circumstance are not going as well for Deripaska as he will claim next week in North America.
 

At his session with Norilsk Nickel workers, Putin was peppered with concerns about the Pikalevo analogy. This refers to June last year, when residents of the Leningrad region town of Pikalevo protested at the collapse of their livelihoods at the hands of the Deripaska group, which dominates the town’s alumina refinery. The trouble was settled by Putin appearing on national television to give Deripaska his marching orders. Since then Deripaska has clawed back much larger financial favours from the prime ministry, and dismissed the affair as a show for television.

This time round Putin has been at pains to distinguish Deripaska’s conduct and the problems at Pikalevo from the takeover conflict at Norilsk Nickel. But the insistence of the questioning on the Pikalevo point was a round-1 win for the state official running Norilsk Nickel, Vladimir Strzhalkovsky, who has been publicly attacking Deripaska’s competence and ethics for months now. According to the transcript published by the prime ministry, the question for Putin was that since shareholders like Deripaska (explicitly named) have as their main purpose “to fill their own pockets, many people in Norilsk are worried about the current conflict between the main shareholders of Norilsk Nickel. I would like to ask you: Do you think how our employees are protected from the possible adverse effects of this conflict? And I hope that it will not be a Pikalevo scenario – I hope, and am confident in this. But can we count on the support of the Government of the country?”

Putin’s reply started with an explanation of how the conflict at Pikalevo was not comparable to the shareholder fight at Norilsk. But he implied that he agreed with the charge against Deripaska of filling his own pocket. “With regard to the [shareholder] conflict – yes, we see that it’s there. I tell you frankly: today it has not even been discussed. And in accordance with the law, we would not be there to intervene. But I’m on to something that has drawn attention.” At this point Putin referred to the proportion of profit which Norilsk Nickel and its international peers have distributed as dividends to shareholders. “Kazakhmys”, he said, “distributed 6.6%, Rio Tinto in my opinion, 18%; BHP, 38% plus something. The shareholders of Norilsk Nickel distributed as dividends 50% of the profits – the largest allocation [in the peer group]. I think that’s enough. You see, an order of magnitude greater than all the rest!” Implicit in this remark was condemnation by the prime minister of the attempt by Deripaska to get Norilsk Nickel to pay out in dividends more than it had earned last year – about 115%. That had been blocked by the unanimous opposition of the minority shareholders, Potanin, the management, and the board elected in June.

In short, Putin told the workers he expects to see reinvestment of profits for social purposes, and will not allow Rusal to extract cash from Norilsk Nickel if that would work to “the detriment of the company”. He also assured the workers that he had made his will plain to the shareholders. “Today we talked to them and about the resettlement program, and about environmental issues, and so on. I must give credit to shareholders, they are not greedy, not mean, not argumentative — all at once they agreed.”

Remarks by Putin during the management and shareholder session also suggested a win on points for Strzhalkovsky against Deripaska. Discussing the proposals from government ministries to raise more tax from Norilsk Nickel through a duty on nickel and copper exports, greater spending on environmental protection measures, and higher social benefits, Putin implied that the state wants to curb its payouts to the oligarchs’ profit line, and to increase budget revenues at their expense. Some Moscow brokerage analysts reacted that this might be negative for the share price. Others noted that the proposed tax would amount to less than 6% of prospective earnings — insignificant for the company’s financial performance.

But Putin’s emphasis on fiscal probity also implies his reluctance to endorse the large state bank loans which Deripaska would require, if he is make good on his takeover bid for Norilsk Nickel; or the cash stripping from Norilsk Nickel to pay down Rusal’s debts if Deripaska were to be allowed to take control. A Troika Dialog analyst, who has actively championed Rusal in recent reports, expressed his disappointment that “nothing groundbreaking was said during the meetings”; by that he meant “that UC RUSAL would lose more than others should the current status quo be maintained.”

The London news in the run-up to the October 21 shareholder vote at Norilsk Nickel isn’t going to Deripaska’s benefit either. The UK High Court will resume for the Michaelmas term on October 1, and a few days later, a hearing has been scheduled to decide when Deripaska goes on trial to defend the shareholding that currently gives him control of Rusal. The accumulation of new evidence files in court, and the judge’s ruling on the trial schedule, mark the progress Mikhail Chernoy (Michael Cherney), Deripaska’s former patron and shareholding partner, is making to adjudicate the suit for his share of Rusal, and of the dividends and profits Deripaska has taken for himself since the two men signed their trustee and shareholding agreement in March of 2001. The sum of Chernoy’s claim is more than $4 billion. That’s more than half the value of Deripaska’s stake in the company.

By John Helmer in Moscow

Russia’s Finance Minister Alexei Kudrin, who also chairs the supervisory board of state diamond miner Alrosa, is considering selling rough diamonds from the state stockpile more than a year earlier than has been forecast by the stockpile agency, Gokhran. It is unclear whether Kudrin is trying to lower the price of the rough to be included in a sale of part of the stock Gokhran bought in 2009 from Alrosa for about $1.2 billion, or stampede the stockpile managers into doing what they have so far refused to do. Moscow sources agree that Kudrin is trying to secure the diamond disposals from Gokhran because Alrosa is running out of mine supplies to meet its buyer contract obligations, especially to the Indians.

Russian wire services report that Kudrin said on Saturday in Yakutsk, the capital of the Sakha region: “We are being asked to begin selling diamonds from the reserve we acquired last year. We are now considering these offers.” He claimed that the world market has “woken up” and prices for gems have recovered, adding that this “completely justif[ies]” the government’s decision to support Alrosa with government diamond purchases last year. Kudrin didn’t say who is asking to buy.

Although Gokhran officials rank below Kudrin at the Finance Ministry, they have retorted to the minister’s proposal by saying they have no intention of selling last year’s stock before 2012. Vyacheslav Ivanov, a Gokhran spokesman, told PolishedPrices.com: “The diamonds we purchased from Alrosa are now being sorted and evaluated. The amount is very big, and the process will take a lot of time. We will begin selling that material no sooner than in 2012. To tell the truth, we are short of sorters; many of them went to work for Alrosa.” Last March, the head of Gokhran, Nikolai Rybkin, said: “As for diamonds bought in 2008-2009, we shall not sell them during this or the following year. It is a great amount since we never bought in such quantities, and we have to do a long work to sort and evaluate them. They will probably reach the market in 2012 or 2013.”

Ararat Evoyan, head of the Russian Diamond Manufacturers Association, believes Alrosa has been shorting sales of rough to the domestic cutters in order to sell to export markets, and that Kudrin is trying to prise open the stockpile to meet domestic demand. He is not confident Kudrin will succeed. “Alrosa signed many long-term export contracts, but lately their stocks have been diminishing. Alrosa wants to stick to their export agreements, but this is creating a shortage on the home market, and this is why Alrosa suggested that Gokhran sell rough from their stocks, satisfying the home market demand. I would not guarantee that Gokhran will do that, first of all because nobody outside Gokhran knows how much rough they keep; and because they have their own rules and procedures, so it could take time before Gokhran starts selling.”

An influential Moscow diamantaire told PolishedPrices.com the pressure on the stockpile reflects the traditional reluctance Alrosa shows for selling to domestic cutters like Kristall and Ruis Diamonds (Lev Leviev). The source believes that Alrosa is having trouble filling the long-term contracts former Alrosa chief executive Sergei Vybornov arranged with Indian buyers. According to a recent Alrosa report for the first quarter of this year, “in Q I 2010 ALROSA signed three-year supply agreements with Indian diamond companies Rosy Blue, Diamond India Ltd and Ratilal Becharlal & Sons to the total of $490 million.”

A source with Ruis Diamonds said: “there are some talks going on around possible Gokhran sales. In order to sell rough from Gokhran, a governmental ruling is required, and as far as I know, such a ruling is being prepared, but it hasn’t been signed yet. It is a question of whether it will be signed at all. The government will first check if there is enough money in the budget to figure out if diamond sales are required. There is also a technical issue. Before Gokhran can sell Alrosa’a rough, they will have to sort all the lots they bought, and Gokhran experiences a serious lack of sorters. It can take years before the state fund can start sales.”

In July, during a speech to the World Diamond Congress in Moscow, Alrosa’s current chief executive, Fyodor Andreyev, admitted nothing about Alrosa’s contract problems, but claimed that sales of Gokhran stones may be necessary to counteract a new price bubble forming in the international market, as supplies fail to meet demand. According to Andreyev, Alrosa and the state stockpile agency Gokhran are now considering the sale out of Gokhran stocks of “$500 million to $800 million worth of rough…by the end of the year in order to stop supporting the speculative demand from the market.”

Andreyev’s spokesman Andrei Polyakov told PolishedPrices.com: “The initiative [to sell Gokhran stocks] belongs to the state, and namely to the Ministry of Finance. It is not only to support the cutters, but, more importantly, to satisfy the demand of the world diamond polishing companies. As of yet the volume of rough that can be sold by the state fund, as well as the selling mechanism, have not been determined.”

He acknowledges that Gokhran is digging in its heels in resistance. “It is an overall trend that demand surpasses supply, there is nothing new to it. We understand that the state would like to save and increase stocks of valuable materials, and we respect the state’s decisions. But certainly we hold a constant dialogue with Gokhran and the Ministry of Finance, and we openly express our views and forecasts. It is still a question what steps Minfin [Ministry of Finance] will take, but we believe that for the state there is no obstacle to selling some surplus rough.” Polyakov declined to predict whether domestic or foreign manufacturers would be allowed to buy if Gokhran is compelled to sell.

In production reports issued to date, Alrosa has admitted that mine output of diamonds this year is down on last year’s level. In the first quarter, the company says it produced 8.6 million carats; this was 7% below the 9.2 million carats produced in the first quarter of 2009. In the second quarter, output was 8 million carats, down 2% on the year earlier. For the first half of this year, production is thus lagging the year earlier by 800,000 carats.

By the numbers, the authorities care about stray dogs as much as people.

Moscow City Hall has allocated $190 per month for every stray dog that is housed in its animal shelters this year — the same amount that Prime Minister Vladimir Putin has deemed as Russia’s minimum living wage in 2010.

In addition, millions of dollars have been earmarked to construct animal shelters and to neuter strays.

But despite the cash windfall, few shelters are opening, and there has been no decrease in the 30,000 stray dogs that City Hall and animal rights activists say are roaming the streets.

Mayor Yury Luzhkov says the problem has grown so acute that hundreds of strays might need to be put to sleep.

“In good facilities, a dog can live up to 15 years,” Luzhkov said on city-controlled TV Center television last month. “We cannot take care of dogs for such a long period of time. No city budget could survive such a heavy burden.”

But animal rights activists and a former City Duma deputy say the real burden on the city budget is that money earmarked for the animals has disappeared into a black hole.

Indeed, a review of official documents obtained by The Moscow Times found that stray dogs are part of a lucrative — and extremely murky — business that has helped enrich a relative of at least one senior city official. The review also suggests that poor planning and a lack of due diligence are costing the city dearly.

Moscow’s existing 11 animal shelters can house up to 11,000 stray dogs and cats, and four additional facilities are to be built soon to care for a total of 18,000 animals, city officials said.

Luzhkov, in his televised remarks, said city authorities would spend more than $25 million to feed the dogs in shelters this year — a sum that puts the monthly expenses per dog on par with the country’s 2010 minimum living wage of 5,790 rubles ($190).

When the new shelters are built this year, the authorities will spend a total of $33 million a year feeding dogs, Luzhkov said.

The numbers mentioned by Luzhkov represent a sharp drop from the $99 million that the city earmarked for taking care of stray animals last year. That figure was mentioned in a letter sent by Luzhkov’s deputy Pyotr Biryukov to Sergei Mitrokhin, who at the time was a City Duma deputy with the opposition Yabloko party.

Mitrokhin, who lost his seat in October elections widely denounced as rigged, said he had written to Biryukov as he sought to track the “huge” funds that City Hall was spending on strays.

“Nobody has provided an answer,” Mitrokhin told The Moscow Times.

A Missing Shelter

Part of the answer might be found in a 2008 tender that City Hall held for a new dog shelter in the settlement of Severny, north of Moscow.

The tender was won by UniversStroiLyux, a construction company that has bid in several tenders to build shelters in recent years and, according to the SPARK-Interfax database of companies, is owned by Alexei Biryukov, a brother of Deputy Mayor Pyotr Biryukov.

UniversStroiLyux won the Severny tender with a bid of $2.3 million in September 2008
, according to documents from the Moscow tender committee obtained by The Moscow Times.

But 18 months later, no animal shelter has been built in Severny — even though City Hall has paid 35 million rubles to a company called Profit Project to create blueprints for the shelter, according to tender documents.

Severny authorities said protests from local residents had helped block the shelter’s construction. Residents balked at the plan to build a shelter for 6,000 dogs on a five-hectare plot just 500 meters away from residential buildings, said Alexander Orlov, a Severny official.

“Can you imagine 6,000 dogs barking into the night?” he said.

The new plan is to build a facility for 2,000 dogs, and new blueprints need to be drawn up, he said.

UniversStroiLyux, for its part, accepted the money allocated for the Severny shelter and later returned part of it, said Natalya Sokolova, an official with City Hall’s communal department, which deals with the construction of dog shelters. She declined to say how much money had been returned, saying the matter was under audit.

An UniversStroiLyux official, Yury Sichev, declined to comment on the Severny shelter other than to say his company was no longer involved in it. He said dog shelters were a minor part of the company’s work.

“For us it is just a side business,” he said.

Even as a side business, UniversStroiLyux has run into a series of problems over its use of city funds to build the dog shelters, said Tatyana Pavlova, former head of the City Hall’s department for flora and fauna who left the position for a private veterinarian practice in 2006.

She said $2 million was returned to the city from various dog shelter projects after the city’s financial control office conducted an investigation into the tenders for the shelters. She cited a letter she received from the city’s financial control office in January.
 No one has been punished in the case, she said.

UniversStroiLyux has built three dog shelters, Sichev said, including one in Moscow’s Southern Administrative District where Pyotr Biryukov served as prefect before being appointed deputy mayor in charge of the city’s communal sector in 2007.

Russian law does not prohibit relatives of government officials from taking part in tenders organized by government agencies.

Repeated attempts to arrange an interview with Pyotr Biryukov were unsuccessful this week. A spokesman for his brother, Alexei Biryukov, said Thursday that the businessman was on vacation and unavailable for comment.

Apart from dog shelters, UniversStroiLyux’s projects have included the construction of a replica of the wooden palace of 17th-century Tsar Alexei Mikhailovich in Kolomenskoye, also in the Southern Administrative District. The palace’s price tag was $26 million when it started in 2005, but the city department in charge of construction informed Luzhkov that it needed an extra $6 million to complete the project. In June 2009, Luzhkov refused to sign off on the additional funds, Rossiiskaya Gazeta reported at the time.

A Neutering Mystery

Critics of City Hall say another possible answer to the puzzle of how city funds have been spent on strays can be found in counting the number of strays, which has remained stable at about 30,000 dogs for the past decade.

Moscow authorities say the number has not changed — despite costly efforts to neuter dogs and keep them in shelters — because new strays wander into the city from the surrounding Moscow region and the remaining non-neutered female dogs are extremely fertile.

But critics like Pavlova, the former city official who now runs a veterinary clinic, said the city’s efforts to sterilize dogs have been haphazard at best.

Pavlova established a neutering program for City Hall that opened with Luzhkov’s blessing in 2001 but was subsequently shut down by Pyotr Biryukov. The program envisioned releasing neutered dogs back into the streets.

“It was probably not an ideal solution, but we were not looking for one. We were trying to save the dogs by the existing means,” Pavlova said.

She said the program had some pluses, including the fact that the neutered stray dogs defended their territories from aggressive newcomers.

Although supported by animal lovers and rights activists, Pavlova’s program faced criticism from some top city officials, inсluding Moscow’s chief sanitary doctor, Nikolai Filatov, who in 2004 warned Luzhkov that returning neutered dogs to the streets could pose a danger to people if the dogs contracted and spread rabies.

Sokolova, from the city government, said her department was still neutering dogs but most existing shelters were filled. She said that under the program, the city has to neuter all caught dogs, even sick ones.

As Luzhkov suggested last month, city authorities seem to have found a cheaper solution to control the stray dog population — putting them to sleep. Under a decree signed by Biryukov in June, a copy of which was obtained by The Moscow Times, officials running dog shelters will receive the right to put down animals deemed sick or “unruly and aggressive.” The decision would be made by a commission of shelter staff, headed by the shelter’s chief veterinarian.

Pavlova plans to challenge Biryukov’s decree in court and is currently preparing papers to file the lawsuit. She said renowned rock singer Andrei Makarevich and several other prominent pet lovers would join her as plaintiffs in the case.

Under current municipal law, stray dogs can be kept in shelters at the city’s expense for up to six months and, if not collected by their owners or adopted by new families, then they become the property of the city. The law does not allow for them to be put to sleep.

Animal rights activists are furious about Biryukov’s decree. “This is an illegal decision, and this document smells like the slaughter of animals,” said Konstantin Sabinin, an activist with Vita, an animal rights group. “They have too many animals in the shelters, so they need to get rid of them to make room for new ones.”

He said that instead of fighting financing woes by putting dogs to death, City Hall should be trying to control private dog breeders who work without licenses and be demanding that the owners of house pets neuter them to help control the population.

“They are just working from the wrong end,” he said.

While Muscovites are avid pet lovers, few visit shelters to adopt dogs, said Sergei Kruchina, a professor at the Timiryazev Agricultural Academy who runs a small private shelter for stray dogs. “We don’t have a culture for adopting dogs from shelters,” he said.

In 2009, Muscovites adopted only 400 cats and dogs from shelters, Luzhkov said.

Kruchina built his shelter, which houses 35 animals, with the help of donations from businessmen and international grants. He spends $150 per month on every dog — savings from the $190 earmarked by City Hall. Kruchina said the money comes from private donations and operations to neuter dogs performed at the shelter’s clinic.

Some of his dogs have lived at the shelter for several years. “They are too aggressive, and no one wants to take them home,” Kruchina said. “But if you set them free, they might be killed.”