By John Helmer
EBRD says bauxite and aluminium loans innocent until proven guilty
MOSCOW (Mineweb.com) — The European Bank for Reconstruction and Development (EBRD), a London-based lender for resource development in Russia and Central Asia, is covering up allegations of corruption in a Russian-directed takeover of an aluminium smelter in Tajikistan, the largest in Central Asia, and Tajikistan’s principal enterprise. EBRD officials are emphatic that there is nothing for them to investigate in the text of an arbitration ruling issued last November in London, or in parallel and subsequent court proceedings in the UK High Court. To understand why the EBRD insists on ignoring the possibility that its own loan agreements are being violated, it is necessary to reconstruct what has happened, and what is at stake for the global aluminium industry and its creditors.
On June 25, Olivier Descamps, the EBRD executive in charge of Central Asia and “early transition countries”, was in Tajikistan on a visit. Descamps has been at the EBRD for more than a decade, but in his new post for only a short while. Accordingly, the bank says, Descamps was making his first trip to familiarize himself with the country, and some of its main assets. On June 26, a Sunday, when a colleague says there was little else for him to do, Descamps also visited the biggest asset in the country, and its largest export earner, Tajikistan Aluminium Plant (TadAZ).
The day before, on June 25 an aircraft brought a delegation from Norway to Tajikistan. This included Norway’s Ambassador to Russia and Tajikistan, Oywind Nordsletten, and senior executives of one of Norway’s largest companies, Norsk Hydro. The ambassador told Mineweb through a spokesman that the delegation met, among others, with President Emomali Rahmonov.
According to an interview with Jean-Patrick Marquet, an EBRD resource banker, and Fernand Pillonel, the EBRD station chief in Tajikistan, they have heard that Norsk Hydro met with Tajikistan’s President on June 26. “The two missions were a coincidence — these things happen”, Pillonel told Mineweb. He and Marquet claim not to know that the World Bank and the Norwegian government — a member of the EBRD — also participated in the meeting. Nor, they say, have they learned anything since about the meeting’s outcome.
Last November in London, Norsk Hydro won an arbitration ruling, awarding $145 million against TadAZ. Norsk Hydro’s aluminium division had been the offtaker and partner of companies associated with Avaz Nazarov, who had been managing TadAZ. When the latter’s contracts were cancelled, and personnel evicted, TadAZ stopped supplying finished aluminium to Hydro, and revoked Hydro’s contracts, halting delivery of about 80,000 tons of metal.
That action triggered the arbitration provisions of the contracts, and the Norwegian company took its claims to London. There the case, covered by confidentiality provisions, turned into a highly sensitive review of how TadAZ had been taken over by companies associated with Russian Aluminium (Rusal), and with its owner Oleg Deripaska. Marquet and Pillonel say they know of the arbitration case, and its outcome. “I’m not sure Rusal was involved,” Marquet claims.
As Mineweb has reported before, with the involvement of senior Tajik officials, TadAZ was taken over by the Rusal group, the world’s third largest aluminium producer, in December 2004. Since May of 2005, these circumstances have been the focus of High Court proceedings in London, where TadAZ, backed by Rusal, is charging fraud against Nazarov and his companies. The Nazarov group has charged Rusal with corruption in the takeover of the plant, and of massive fraud.
TadAZ, which sought the jurisdiction of the High Court in London in order to attack Nazarov, claims it is not subject to UK jurisdiction in the Norsk Hydro arbitration claim.
In a series of preliminary rulings the High Court has found in favour of Nazarov, penalized TadAZ, issued a default judgement against the brother-in-law of the Tajik president, and hinted that it believes Rusal is the chief conspirator in the TadAZ takeover, the mastermind and paymaster of TadAZ’s London litigation. Rusal owner Deripaska, who owns two homes in England, has issued a detailed denial that he spends enough time in the UK to enter the jurisdiction of the English courts.
Rusal, a Russian holding with hundreds of affiliated companies worldwide, has asked the High Court to deny that it has jurisdiction over Rusal. From June 19 to July 4, Judge Cresswell of the High Court heard testimony on the jurisdiction issue. The charges themselves cannot be decided until, and unless, the court decides to take jurisdiction. Marquet, the EBRD banker, told Mineweb he knows what has been alleged against Rusal in the TadAZ takeover, and he is “aware of what the judge [in the Nazarov case] said”. But, he is emphatic, “these are purely allegations as of today.”
Norsk Hydro has confirmed winning the $145 million award in arbitration. “Hydro is confident that the award of the arbitration court will be upheld,” spokesman Thomass Knutzen told Mineweb.
In its appeal against the Norsk Hydro ruling, TadAZ has also sought to keep the High Court proceedings as secret as the November ruling. Were the proceedings to be open, then a good deal of what the arbitration decided in its ruling about Rusal would become public. Court circulars reveal that the case was scheduled to come on for hearing late in June, but it was adjourned for several months by agreement between Norsk Hydro and TadAZ. That agreement came just days after the Norwegian visit to Rahmonov. Apparently, Rahmonov, who faces re-election in November, and Hydro, which wants to resume its metal supply relationship with TadAZ, have a common interest in letting sleeping dogs lie, at least until November.
According to Knutzen of Hydro, also attending the Norwegian meeting with Rahmonov in Dushanbe, the Tajik capital, on June 26, was a representative of the World Bank.
Strangely, the World Bank told Mineweb it was not there at all. “Neither the Bank nor IFC [World Bank affiliated International Finance Corporation] participated in the afore-mentioned meetings,” the Tajikistan office of the Bank said. Less interesting than the appearance of concealment by the World Bank is why it would lie, especially since, according to the Bank statement, “the World Bank does not have a program for TadAZ at the moment,” and hasn’t had one since June 2004 – when Nazarov, not Rusal, was in charge.
It probably has nothing to do with the matter, and is just another concidence, that the EBRD and the IFC agreed last January to act as co-lenders to a Russian bauxite mining project, half-owned by Rusal. In order to make that loan, the IFC conducted with EBRD what Marquet now claims was “extensive due diligence” on Rusal’s corporate practices.
On January 17 last, just two months after Norsk Hydro won its claim against TadAZ, the EBRD and IFC officially announced the completion of their review of Rusal. Subject to a set of legal covenants and an 18-month timetable of management promises, which Rusal had signed, the EBRD and IFC said they would implement their loan to the Komi aluminium project. That deal was described as a nine-year loan of $45 million from each of the multilateral banks, with “the remaining $30 million portion of each organisation’s $75 million facility… syndicated to international banks under an A/B loan structure. The term of the syndicated portion will be seven years.” The plan, according to the announcement, is “to increase annual bauxite output at SUAL’s Middle-Timan mine, situated 250 km south of the Arctic Circle, to 6 million tonnes from the current 1 million tonnes over the next four years.
According to the statement issued by Rusal at the time, “the [EBRD and IFC] decision to disburse the loans is based on the disclosure of ownership by RUSAL and provides for commitments to greater transparency, good corporate governance and high business standards on the part of the company. Compliance with these commitments is stipulated in legal documentation with the IFC and EBRD.”
The dossier EBRD’s lawyers gathered from Rusal remains secret, and EBRD officials will not discuss the details. Marquet also told Mineweb he refuses to identify the chief legal counsel of Rusal, who participated in the negotiations on corporate governance. The EBRD’s agreement with Rusal on transparency apparently doesn’t extend to the identity of the person responsible for legal compliance. Rusal also refuses to identify the chief legal counsel by name. When Marquet was asked if Konstantin Olifir had been Rusal’s legal representative, he said the name “doesn’t ring a bell.”
Olifir has been identified by another legal advisor as Rusal’s counsel. But he is no longer in his job, and Rusal refuses to identify who has replaced him. Asked if Olifir had been replaced, following the intensification of Rusal’s legal troubles in London, Rusal’s legal office referred the question to Rusal spokesman Vera Kurochkina; she repeatedly refused to respond. When asked if EBRD’s agreement with Rusal allows concealment of the chief compliance officer’s identity, an EBRD source warned Mineweb against asking such questions.
The EBRD is sensitive to sharp embarrassment on Rusal’s account. According to Marquet, the agreement with Rusal on corporate governance of last January was “comprehensive”. But he was foggy on what investigation the EBRD had done of the court records in the TadAZ case. He claimed EBRD knows nothing about the Norsk Hydro ruling, except what it has read in the media. Whether EBRD had an obligation to investigate more thoroughly, before signing its Rusal deal, is one question. Whether it failed to do so before Descamps flew out on his maiden visit, is another. If the EBRD’s dossier is as empty as the answers Marquet has given, and if the IFC failed to know what Norsk Hydro had testified to in the TadAZ takeover, before flying to meet President Rahmonov on June 26, then the signs point to an unusual state of naivety at both banks.
In this harsh world, embarrassment is often in store for the innocent. Sources in London have told Mineweb that fresh legal claims are pending there against Rusal or Deripaska in more than one unrelated case. One of the claims has been publicly aired by Mikhail Chernoy, the founder of an aluminium trading group which started Deripaska off in his business.
Chernoy, a Russian who lives in Israel, has publicly alleged that Deripaska owes him several billion dollars for his stake in the founding company of Rusal. Deripaska has said that Chernoy was paid out years ago. Chernoy claims he was paid $250 million, but is owed the difference between that amount and the value of what he says is his 20% stake in Rusal. Deripaska’s Moscow holding, Base Element, recently put a value of $7.26 billion on Rusal’s assets. That would assign an estimate of $1.48 billion to Chernoy’s claim, less the initial payment.
Fighting Chernoy in open court, or settling with him out of court, could be equally acute embarrassments for the EBRD. According to its press release on January 17, the EBRD and IFC confirmed that their lending relationship with Rusal was contingent on “full disclosure of ownership by RUSAL’s and Basic Element’s owner Oleg Deripaska, and additionally provides for detailed commitments to greater transparency, good corporate governance and high business standards, covering RUSAL and Basic Element. Compliance with these commitments is covenanted in legal documentation with the EBRD and IFC. In particular, the EBRD and IFC welcome the adoption by RUSAL of an action plan over an 18-month timetable covering significant corporate ownership disclosure, the publication of financial information and specific steps aimed at improving corporate governance…” A payoff for Chernoy is likely to contradict the ownership disclosure from Deripaska which EBRD wishes to be true. A violation of the disclosure agreement would start the legal dominoes falling towards the Komi aluminium loan.
EBRD officials believe they and their institution have no fiduciary duty to investigate the allegations in Nazarov’s case against TadAZ, nor to look beyond newspaper reporting of the Norsk Hydro case. At least, not yet — “until such time as there is a court ruling”, Marquet concedes. Until then, the World Bank’s attempt to deny its attendance at the meeting with Rahmonov on June 26, and the EBRD’s “concidental” appearance at TadAZ and in Dushanbe, are attempts to prevent the dominoes falling towards much larger loans the EBRD and World Bank would like to hand out to beneficiaries in Tajikistan.
According to public documents, last November 25, 17 days after EBRD executives might have raised a red flag about the Norsk Hydro case, the bank’s board of directors approved what it called its new Tajik strategy for 2006-2007. To date, the bank has committed Euro29.2 million to Tajikistan, including an outstanding loan of almost $2 million to Orienbank of Tajikistan; Orienbank happens to be a defendant in the Nazarov claim against TadAZ in the High Court. According to the counter-claim and testimony in that case, there was “close cooperation between Orienbank and Rusal in the carrying out of the conspiracy.” Already, the court has issued a default judgement against the bank’s president, Khasan Saduloev — coincidentally, brother-in-law of Rahmonov, Tajikistan’s President.
Last July — at the same time lawyers for TadAZ were pleading their case against Nazarov in the High Court in London — the World Bank agreed on a Partnership Strategy for Tajikistan for 2006-2009. This promises new loans over the next four years of about $120 million. Credits and grants to Tajikistan from the bank already total almost $400 million. According to the Bank’s latest loan program, “the Bank will work with the Government to…reduce corruption by giving special emphasis to measures that increase transparency of resource use.” If that was what the World Bank representative went to meet Rahmonov to discuss, why did the Bank deny he was there?
The answer rests on what happens if the London courts bring down verdicts that confirm the charges against Rusal. That, admits Marquet of EBRD, “could certainly affect our relationship with Rusal.”
EBRD says bauxite and aluminium loans innocent until proven guilty