By John Helmer in Moscow
Norway is one of those countries, inhabited by one of those peoples, which have exercised some of the greatest comedians in the English language – to little avail.
John Cleese once explained his assignment on behalf of the Norwegian Tourist Board, as he stepped out of a wet summer fjord wearing a business suit and snow-shoes. He said the only way to interest tourists in Norway was to make them laugh at the place. Much earlier, Saki had told the tale of a rich Londoner who paid a group of kidnappers, not to return his wife, but to keep her as reliably away from him as he thought possible — on a Norwegian island, above the Arctic Circle.
When Norwegians insist on their superiority in business ethics, English readers shouldn’t think of a case for comedy, nor is the Norwegian approach a devious bluff. Nonetheless, when the aluminium production unit of Norsk Hydro, one of the largest of the Norwegian state’s conglomerates, announced recently that it has formed a partnership with the Tajikistan Aluminium Plant (Talco), somebody must have stumbled. For Talco, previously known as TadAZ, is the only aluminium producer in the world to have been adjudged recently by three different judges of the UK High Court, plus the International Court of Arbitration in London, to be a corrupt organization, a forger, fraudster, and all-round wrongdoer.
Mineweb has already reported in detail on this litigation, focusing primarily on the role of Russian Aluminium (Rusal), which had been funding the Talco litigation, according to rulings of the High Court bench. This story is about the new twist to the aluminium business which the Norwegians and Talco have been arranging behind Rusal’s back.
Ruling on a lawsuit which the Tajik company had itself initiated, Justice Morrison of the UK High Court, Queens Bench Division, wrote in an opinion dated May 18, 2006, that Talco/TadAZ “are not the victims of fraud, they have been the perpetrators of it in this litigation…. [Talco] has been involved in deliberate attempts to mislead the [Arbitration] Tribunal and have committed acts which in this jurisdiction are serious crimes [forgery and attempting to gain a pecuniary advantage by fraud]”?
Morrison was ruling after the International Court of Arbitration in London had issued a judgement the previous November that Talco had violated its aluminium delivery contracts with Hydro, and should repay Hydro $145 million, plus charges and costs. Talco appealed, and attempted to have the High Court keep its ruling secret. Both applications were rejected by the court.
In April 2006, Justice Morrison had reaffirmed the earlier findings of fact by the Arbitration Court, and a parallel High Court ruling by Justice Blackburn that Talco had conspired with Rusal for the corrupt purpose of ousting from the smelter a rival Tajik group, and skimming off profits of the smelter operation “for the benefit of unnamed persons”.
In July 2006 the High Court ruled that Rusal should face trial for alleged fraud and racketeering in its takeover tactics at Talco. This decision was the first ever to oblige the Russian company to submit to the jurisdiction of a reputable foreign court. It was issued by Justice Cresswell of the High Court.
In October 2006 Justice Morrison ruled against further claims by Talco and its lawyers, and formally accused Talco of “wrongdoing”. The judge added: “[Talco’s] approach to litigation demonstrates a contempt for the normal constraints which control parties’ conduct in highly charged adversarial proceedings”. Morrison has added, also in a public document:: “in short, Tajik [Talco] and those behind them cannot be trusted”.
A year ago, Hydro confirmed to Mineweb that it had won the arbitral award, and was seeking enforcement of the $150 million payment. Hydro told shareholders the same thing. But this week Hydro executives refuse to say what has become of the money in the eight months since Hydro signed the December agreement. Sources close to the negotiations in Dushanbe, the Tajik capital, have told Mineweb that Hydro has agreed not to enforce the cash award. Instead, it has signed a partnership agreement with Talco for much more value, in metal.
According to the press release issued by Talco and Hydro, and posted on the latter’s website, “Hydro and Tajik Aluminium Plant of Tajikistan have entered into new commercial arrangements. These incorporate a final resolution of the recent Award of the London Court of International Arbitration, which related to the supply of alumina and aluminium between the parties in the latter half of 2004.As part of the arrangements, TadAZ will deliver to Hydro between 120,000 and 200,000 tonnes of primary aluminium per year over a four year period and Hydro will supply 150,000 tonnes of alumina to TadAZ. Hydro will also provide technical assistance to TadAZ, with a view to improving the efficiency of the smelter and its environmental and health and safety performance, as well as corporate and social responsibility issues. Both TadAZ and Hydro believe that with this agreement they will be able to receive further support from these institutions.
“We are pleased to have resolved our differences with TadAZ and to have reached a positive new commercial arrangement with TadAZ,” said Torstein Dale Sjøtveit, Executive Vice President of Hydro’s Aluminium Metal business area.”We see this as a mutually beneficial agreement, where Hydro will receive the primary aluminium needed for our remelting operations and at the same time give assistance to TadAZ regarding operational issues. Hydro is committed to supporting TadAZ to increase their efficiency and production for the benefit of the Republic of Tajikistan,” commented Simon Storesund, Senior Vice President of Hydro.”
At present, Hydro has a 5% share of the global market in primary aluminium; that’s 1.8 million tonnes out of 34 million tonnes. This is bigger than most international producers; but the Norwegians trail behind the Alcan-Rio Tinto combination (4.3 million tonnes), United Company Rusal (3.9 million tonnes), and Alcoa (3.6 million tonnes). Hydro is a vertically integrated producer, with its own bauxite and alumina feedstock at sites around the world. According to the most recent investor presentation from Hydro, dated July 2007, last year the Norwegian company held equity stakes in 2.2 million tonnes of bauxite from Brazil and Jamaica; this amounted to one-quarter of Hydro’s requirement for the year.
Hydro says it isn’t planning a significant increase in its bauxite mining output in the foreseeable future. But it is planning to lift alumina output from 1.9 million tonnes in 2006 – 55% of the feedstock required for smelting – to 2.8 million tonnes in 2010. At that point, Hydro expects to control 71% of its alumina supply requirement. Hydro will still be buying alumina on the open market to meet the smelter requirements it already has. Seven months after signing supply and offtake agreements with Talco, Hydro did not include in its investor presentation an explanation of why it proposes to supply alumina to Tajikistan.
If Norsk Hydro’s claims are to be believed, it intends its agreement with Talco to produce and deliver between 120,000 and 200,000 tonnes of primary aluminium over four years. Even that wording is unclear, however, and the Hydro executive now in charge, Simon Storesund, refuses to provide clarification. Storesund told Mineweb: “Hydro will assist Talco in improving the efficiency of its smelter, reduce emissions and improve the working conditions. Hydro’s contribution will primarily be in the delivery of know-how and consultancy services.” But when asked to say what the total amount of alumina Talco’s smelter will require for production over the next four years, what total tonnage of aluminium will be produced, and what arrangements are being made for inputs and outputs not directly under control of the Talco-Hydro partnership, Storesund claimed: “We do not have precise information and would suggest that you ask Talco for these details.”
Talco publishes a website, which identifies a telephone number in Dushanbe, the Tajik capital, for contact with the company. Mineweb has repeatedly called this, plus six other telephone numbers for the company secured from different sources. These either do not ring, or if they ring, they are not answered. Talco’s press releases and website postings do not provide comprehensive production or financial details. Also, Hydro refuses to provide a working telephone number for Talco. “When it comes to telephone registers we are not the experts,” Tor Steinum, a senior vice president of Hydro, told Mineweb. .
Talco metal trades at a discount to the London Metal Exchange (LME) daily cash fix, but the most this metal would be worth to Hydro at the current LME price would be between $300 million and $500 million. That is more than double Talco’s debt to Hydro.
However, comparing the Talco tonnage to Hydro’s 1,799,000 tonnes of primary aluminium output in 2006, the Talco deal represents less than 3% of annual physical volume. Comparing the Talco metal value to Kroner68.4 billion ($12 billion) in Hydro’s aluminium sales revenues for 2006, the deal amounts to about 1% of revenue for the Norwegian company.
Since the UK arbitration ruling and the High Court judgements were all issued last year before Hydro executives made their deal with Talco, they knew Talco’s reputation, and they knew the risks they were running to convert a past-due debt of $150 million into a long-term business relationship with the Tajik government’s prime revenue-generating enterprise, Talco. In July 2006, Hydro had announced it was participating in a survey of corporate ethical risks in their relationships with suppliers; the survey was conducted by Achilles, a Norway-based management group. Why then is Hydro now pressing ahead with a business in Tajikistan which it refuses to answers questions about; which it has not disclosed in its most recent investor presentation; and which flies in the face of UK judicial rulings?
Hydro’s in-house legal counsel, Odd Ivar Biller, refused to respond to emailed questions about his litigation against Talco in London, and the terms of settlement of the $150 million London award. If he has decided against enforcement of Talco’s arbitral obligations to Hydro by seizing metal in the marketplace, or by lodging claims against Talco’s international bank accounts, he isn’t saying why. Nor is Biller, whose official job title is “Executive Vice President, Legal and Corporate Social Responsibility”, ready to argue the responsibility his corporation has undertaken in a long-term business relationship with a company condemned for ethical and legal violations in the UK courts.
By telephone at Biller’s office in Oslo, his secretary refused to identify herself by name, and then cut the telephone line.
Storesund was asked by Mineweb to confirm the calculations for the Hydro-Talco deal, reported above. He replied: “you are correct that our primary production is approx. 1.8 mill tons. Hydro is obviously paying a price which is very close to the LME price for the metal delivered by Talco. The Talco tonnage represents approx. 3.5% of the total tonnage Hydro is handling. At the same time it represents approx. 10-15% of our remelt ingot needs.” He avoided responding to the financial calculation.
Storesund also refused to explain why no presentation to investors by Hydro this year has mentioned the Talco deal of last December. He claimed also: “I do not know whether the settlement contract was mentioned in our Annual Report or not.”
Hydro might be stumbling into Tajikistan for lack, or loss, of executive direction at the top in Oslo. On August 5, the board chairman of Norsk Hydro, Jan Reinaas, was forced to resign his post, after he clashed with the Norwegian government over the latter’s order to halt lucrative stock options schemes; these had resulted in payouts of almost $37 million to Hydro executives, months after the government, which owns 44% of the company, said it should stop.
As a conglomerate, Hydro itself is undergoing structural change, starting from the announcement last December that Statoil will take over Hydro’s oil and energy business, creating an expanded company, of which the government in Oslo plans to own 67%. That will leave the current Hydro management in charge of the aluminium business. Hydro shareholders will gain Statoil shares (amounting to 32.7% of the enlarged company), while their Hydro shares will based on the aluminium assets. Just how far Hydro management has put these assets at commercial risk by the Talco deal Hydro shareholders can’t know, because they haven’t been briefed on the details.
And why would Hydro take commercial risks with Talco, a court-confirmed defaulter? The answer appears to be that Hydro has moved into Tajikistan for political, not commercial reasons; and that the Norwegian government, Hydro’s controlling shareholder, has reasons for the move it doesn’t want to share with Hydro’s other shareholders.
Their Tajik partner, President Emomali Rakhmonov, is not so reticent, for he is publicly touting the return of Hydro to the aluminium plant as a major step in the direction of ousting Russian influence from Tajikistan, and replacing Russian investment with US and European commitments. Last December, when Talco and Hydro signed, Sherali Kabirov, Talco’s Deputy Director, announced: “TadAZ regards Hydro as an important strategic partner in the aluminium industry. Hydro’s commitment to its relationship with TadAZ demonstrates TadAZ’s ability to trade successfully with international counterparties.”
In July 2007, according to Rahmon’s chief prosecutor, Bobojon Bobkhonov, in a statement reported by a Tajik government newspaper, the agreement between Talco and Hydro “is in compliance with all international standards, is a transparent and open document, a sign of increased confidence that the international business community has in this country.” Never mind that Talco and Hydro have refused to provide a text of this agreement, nor answer questions about it. According to Bobkhonov, in a statement issued on July 13, published by Asia-Plus, the chief prosecutor claimed that “all rulings handed down at the High Court in London have been in favor of TadAZ.”
Bobkhonov has also ordered the London lawfirm of Herbert Smith to sue Rusal for fraud in its management of the smelter, just as Bobkhonov, and Rusal, had earlier sued in the same court the previous management, headed by Avaz Nazarov. Then, after High Court Justice Steele threw the new suit out, Rahmon told Bobkhonov to refile the claim in the British Virgin Islands; there the case alleging Russian corruption of the Tajik aluminium sector remains to be adjudicated.
A World Bank report dated June 2004, entitled “Case Study – Tajik Aluminium Plant – TADAZ”, implied that if Talco has been a fish, the rot starts at the head. The Bank report noted “the company is not governed by a Board of Directors or any other type of executive committee. Instead, it is under the sole command of its director, who reports only to the Tajik President at a monthly meeting”. The arrangement is exceptional in Tajikistan, the Bank report noted, and only one other state enterprise, Vostok Redmet, a precious metals producer, is organized on the same lines. The Bank thus confirmed that throughout the period in which Talco now accuses both the Nazarov group and Rusal of fraud, Rahmon himself was in direct control of the plant every month.
The story of Vostok Redmet, Tajikistan’s most important mining company, will be told in the next episode.
The World Bank’s three-year old case study also reported “more than 98 percent [of the plant’s aluminium] is exported to a limited number of customers incorporated overseas, under exclusive contractual agreements. The ownership of these companies is unclear.” The litigation record in the UK has now established what the World Bank claimed not to know – that before December 2004 the tolling companies offshore were controlled by Nazarov and Hydro, and that after December 2004 they were controlled by Rusal. The one continuity the Bank acknowledged was that both schemes of offshore tolling were directed by Rahmon.
Storesund of Hydro has hinted in a remark to Mineweb that Rahmon still does, this time through a trading company registered in the British Virgin Islands called Talco Management Ltd (TML). Referring to the aluminium produced by Talco, but not delivered to Hydro, Storesund said: “We assume that the metal not delivered to Hydro is sold to our competitors, but we are not familiar with the details. We believe that the metal is brought to the market by a company Talco Management Limited.”
Last Christmas Talco publicly announced a call for tender bids for “procurement of supply to TadAZ of raw materials (in required volumes and types) and electricity during the contract term.” The notice also acknowledged that the winning bidder would arrange tolling contracts, and that “the toller will be required to pay tax on the products of processing on the customs territory of the republic of Tajikistan.” The winner of this tender was subsequently announced as Talco Management Limited (TML).
According to Talco’s website, the tender was an open one, but TML itself is a closed book.
World Bank officials refuse to say if they believe TML is controlled by Rahmon and his associates, just as Talco itself is directed by Rahmon. But in 2004, the Bank report had proposed removing Rahmon from Talco’s line of command. “The [Tajik] Government should create a unit to monitor [TadAZ’s] quarterly financial flows, debt and arrears, as well as financial and other performance targets. In addition, the unit should oversee governance arrangements, including appointment of Directors and the publication of regular financial information, audited financial statements and company charters.”
Asked to verify what the World Bank has done subsequently, Bank officials in Washington will not answer, except to say the Bank is “cognizant of the governance and corruption risks in Tajikistan and we continue to help the Government address these risks in all sectors. We take very seriously any allegations of corruption because it can deny valuable development assistance from reaching the poor who need it most.”
Just how big the political stakes may have become in Tajikistan since Rahmon began his anti-Russian campaign is acknowledged by sources in Moscow, and by two recent BBC and local Tajik reports of recent military visitors to Dushanbe. US Admiral William Fallon was reported in Dushanbe on June 19; he is head of the US Central Command, headquarters for US military operations in Kuwait, Afghanistan, Iraq, and Iran. Fallon met President Rahmon.
Between June 18 and 21, also according to a Tajik press report, General Sir Michael Jackson spent three days in Dushanbe, meeting the Tajik ministers of foreign affairs, finance, and trade, plus Hasan Saduloev, a senior bank chairman, and kinsman of President Rahmon. Jackson retired as chief of the UK general staff last December. On his visit to Tajikistan, Jackson claimed to be conducting business on behalf of the Saddleback Gold Corporation, a junior prospector. Exactly whose saddle Jackson was in, and which way he was riding, will be reported in the next episode.
Such high-level military interest in Tajikistan from NATO commanders is no surprise in Moscow, or in Beijing, where China is calculating its own interests as Tajikistan’s largest creditor. As a member of the NATO alliance, Norway may very well approve Rahmon’s change of strategic direction.
However, it is odd for Norsk Hydro, now merging with Statoil, to be contemplating anti-Russian strategy in Tajikistan, while at the same time publicly bidding for the Kremlin to award it substantial contracts, even equity stakes, in the Shtokman gasfield project, the world’s largest undeveloped gas reserve. The value of that project to Norway dwarfs the value of Hydro as a going concern worldwide, let alone the value of Talco.
Tajikistan’s most important industrial plant and the country’s leading exporter, TadAZ changed its Russian acronym to the more westernized version, Talco, in line with the nationwide campaign this year to de-Russianize Tajikistan’s names. When TadAZ became Talco, Rakhmonov became Rahmon.
The Talco smelter currently produces almost 400,000 tonnes of aluminium per annum. At the current international market price, that is worth about $1.1 billion. But the plant’s recorded value of exports is less than $200 million. Even so, it is the dominant industrial enterprise of the country, the largest employer in the economy, accounting for 35% of Tajikistan’s electricity consumption, 48% of its export revenues, and a large part of the Tajik treasury’s tax collection.
Tajikistan has a great many mineral resources potentially available to be mined, but bauxite isn’t one of them. It thus cannot supply alumina, the product refined from bauxite, which is the feedstock for Talco’s aluminium smelting line. This didn’t matter when central planners in Moscow arranged to rail the alumina in from neighbouring Kazakh and other Soviet refineries. But when the Soviet Union stopped, Talco had no cash or working capital to buy its feedstock. At first, it wrote barter contracts, exchanging raw material inputs for output of metal. Rahmon then introduced what are called tolling contracts.
According to a Tajik press report from the December 2006 press conference in Dushanbe, which followed the meetings Hydro’s Storesund and Sjotveit had with President Rahmon, “henceforth company Hydro Aluminium and ТаdAZ become partners in the manufacture of aluminium. Thus, the head of Hydro has emphasized the importance of transparency in all activity, having named this as one of the defining factors of support by the World Bank and the European Bank for Reconstruction and Development”.
Transparency clearly isn’t what the Norwegians want from a series of transactions too minuscule to amount, in Hydro terms, to a partnership that would justify disclosure to Hydro shareholders. If Anglo-American political strategy is underwriting Hydro’s aluminium business, and General Jackson’s Saddleback Gold Corporation, then the future for Tajikistan’s mineral and metal sector should prove to be quite a saga. Stay tuned.