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By John Helmer in Moscow

No sooner had De Beers and Archangel Diamond Corporation (ADC) revived last Friday, September 4, their US litigation plan of attack against LUKoil and its senior management, headed by Vagit Alekperov, than Alekperov issued an unprecedented statement saying he is thinking of selling out of diamonds altogether.

Until now,Alekperov has insisted, both privately and publicly, that he would never sell the mining rights to the deposit at Verkhotina, in the Russian northwestern region of Arkhangelsk. According to US court documents, Alekperov, together with his one-time friend and business partner, Alisher Usmanov, was responsible for the takeover of the mining licence in 1998, two years after its discovery, through Arkhangelskgeoldobycha (AGD), a regional state geology organization, which was privatized and ultimately taken over by LUKoil.

On Saturday, September 5, a LUKoil spokesman told PolishedPrices.com, Alekperov told a Russian reporter in Usinsk (Komi republic) that AGD is “being prepared for possible sale”. The Russian wire service Interfax carried the report today. Asked to clarify what Alekperov meant, his spokesman said Alekperov was referring to the Grib diamond deposit.”According to the conditions envisioned by the license,” the source said, “LUKoil will finish building infrastructure there — roads, electricity, concentration plant, etc. — and in addition, the company will drill extraction wells of large diametre. The company will also conduct additional explorations at the deposit. The plan is to set up [diamond] extraction; but just in case, the project will be prepared for possible selling.”

“The asset costs a considerable sum. But our company never said this asset is strategic,” Alekperov was quoted as saying.

Alekperov appears to be referring to LUKoil strategy, not Russian law, and to ADC’s costs, not LUKoil’s. For the diamond deposit does come under the Russian statute of 2008 and regulations for strategic mineral deposits. An earlier statute prohibits foreign miners from taking more than 50% of the equity in a Russian diamond mining venture, or operational control of a Russian diamond find.

In a mystifying reinterpretation of what has happened, Alekperov’s spokesman claims that LUKoil and De Beers, along with its affiliate Archangel Diamond Corporation (ADC), “envisioned mutual extraction of diamonds at the AGD site in terms of a joint venture. But FAS [the Federal Antimonopoly Service] prohibited the transaction, saying they don’t want a foreign company to mine Russian diamonds. Thus, the agreement was nullified.”

In fact, the joint mining venture between LUKoil, De Beers and ADC was approved by Prime Minister Vladimir Putin and the Control Commission for Strategic Resources in October 2007. Alekperov did not sell; rather, De Beers undertook to pay LUKoil $225 million for a 49% stake in the venture. Estimates of the value of the asset range from almost $10 billion in recoverable diamond value to more than $1.2 billion in losses claimed in court by ADC.

When the Putin commission agreed last October to the joint venture, a rider was attached to the government approval, requiring cutting and polishing in Russia of the diamonds mined at Grib. But FAS officials subsequently denied they had anything to do with originating this condition, as the FAS, they said, lacked the expertise to draft it. FAS has subsequently deflected all questions about the deal rider with the comment that they came from elsewhere in the government. Also, LUKoil refused to clarify for itself, or its joint venture partner, what the condition required. After an inconclusive delay of several months, De Beers announced in January of this year that it was abandoning the project. It is unclear to this day whether Alekperov had played a role behind the scenes in ousting De Beers. He has always conveyed the impression that he regarded the diamond project as more a personal venture than a business of LUKoil.

Last week, ADC agreed to a financing scheme that will enable it to attack LUKoil in the Colorado state court for what the court papers charge as a “scheme of fraud, breach of express and implied contract, civil conspiracy, intentional interference with contract, breach of fiduciary duty, and unjust enrichment”. If the US court grants jurisdiction for the case to proceed to trial, Alekperov and Usmanov will be sought for questioning by ADC’s lawyers.

Alekperov’s spokesman was asked to comment. He responded with an acknowledgement that “the litigation is back.” But he conceded how sensitive Alekperov is to the potential new US liability. According to his spokesman, “Alekperov never did, nor ever will testify in an American court. LUKoil has a team of lawyers who will participate in the legal process.”

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