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MOSCOW (Mineweb.com) –Two things are known for certain about the conversation President Vladimir Putin had with Sakha region president Vyacheslav Shtirov in the Kremlin, at the end of December.

One is that Shtirov invited Putin to come to the region for fishing. The other is that Putin replied that now is not the time.

Maybe this was nothing but small talk; maybe Putin was thinking meteorologically of the region where the average daily temperature these days is minus-40 Celsius. . But whether there was a symbolic warning for Shtirov in Putin’s remark, no-one knows for sure. But time is certainly beginning to tell, and the clock is not ticking in Shtirov’s favour.

Alrosa, the world’s largest diamond-miner after De Beers, is now undergoing a revolutionary transformation at every level of its operations. This is being directed by the Kremlin, which has ordered federal ministries in Moscow to introduce new methods of supervision and control of the company. Shtirov has been told to stop delaying or obstructing this process with his fish tales. If he does not, he has been warned that Putin may oust him from power altogether.

Yury lonov, a KGB officer, was put in charge many months ago of the company’s legal affairs and cashflow security. Then a federal government appointee, Alexander Nichiporuk, was introduced to management, first as deputy CEO; in November, he was officially promoted to be the chief executive.

Through these two officials, as well as with external auditors and inspectors, the federal authorities have also begun a crackdown on Alrosa’s trading practices and marketing channels. Among the targets, they have aimed at the system of exports through the Sakha regional Committee for Precious Metals and Gemstones; Alrosa’s mining affiliates; and near-bankrupt diamond cutting establishments in Sakha and elsewhere, which Alrosa has kept supplied with diamonds. Preferential allocations of rough diamonds to favoured diamond-buyers, discounts, unrepaid credits, unusual service fees, and offshore banking schemes have all been exposed to federal inspection. If not for the first time, these schemes have been identified as multi-million dollar lossmakers, or worse.

In parallel, the federal authorities have been contemplating their own options to reorganize the unusual shareholding structure at Alrosa. This was created by a secret decree of President Boris Yeltsin in 1993, when he was desperate to secure the favour of regional governors, like Sakha president and Alrosa godfather, Mikhail Nikolaev. This decree, and others Yeltsin issued to award state property in the Sakha region to his satraps, have never been submitted to parliament for enactment, and in their existing form they may be unlawful. Abrogating the Alrosa charter, however, may undermine most of the state property transfers in the Sakha republic, including goldmines, coalmines, and oil prospects.

In its orginal form, Alrosa is a closed shareholding company, whose shares cannot be bought and sold, except between existing shareholders. These were the federal government, with an initial 32-percent bloc; the Sakha government with a similarly sized stake; the districts of the Sakha republic with 8 percent; a military veterans fund with 5 percent; and the balance held by individual company managers and workers.

Although the closed shareholding rule appears to be clear, there has been more than one loophole in the corporate charter, and these have encouraged both speculators and takeover schemers, hoping to capitalize on what they see as Alrosa’s eventual privatization by the state. The first of these schemes to be nipped in the bud was an attempt by a private entrepreneur to buy the 5-percent stake in Alrosa assigned to a military veterans organization. Instead, this shareholding was returned to the federal government, moving its stake up to 37-percent. With that, Shtirov’s place as chairman of Alrosa’s board of directors — technically called the Supervisory Board, since the company lacks a conventional open shareholding structure – was replaced by a federal government official, Finance Minister Alexei Kudrin.

Kudrin, however, has been easy for Shtirov to lull into a false sense of security; and to redirect away from the challenges to federal authority which Kudrin had been instructed by the Kremlin to counteract. While Kudrin looked askance, a trade began in Alrosa shares that has substantially cut the stake belonging to workers and managers.

To evade the closed shareholding rule, companies have been created with shares that have been gifted, rather than sold. Once established as shareholders, these companies can then legally buy other Alrosa shares. Through devices like this, for example, Renaissance Capital, a Moscow investment bank, has acquired an estimated 3-percent stake in Alrosa, paying between Rb4,000 to Rb5,000 per share (US$143-$179). Whether the institution was buying for its own account, or on behalf of other investors, is not known.

The Alrosa management is reluctant to discuss what has been happening to its shareholding. One very good reason is that the federal government has decided to accelerate its takeover of the majority stake in the company, and while it has yet to decide how to manage this, one option is to dilute the minorities. Instead of holding a stake estimated to be worth $150 million –assuming Alrosa’s capitalization is calculated at $5 billion — the 3 percent held by Renaissance Capital could thus be worth little more than was paid for it. The remaining workers and managers may find themselves comparably dispossessed, or with a much smaller premium than they had been anticipating. For them, it would thus be preferable that, if anyone is to lose money in the reorganization, it should be Shtirov’s administration and the Sakha regional government.

It was on account of the stakes involved in this process that documents were leaked a few days ago in the Russian press. These indicate some of the options which the federal authorities are currently considering for the reorganization of Alrosa’s shares. Most importantly, they indicate whom the leakers prefer to suffer the value loss, rather than themselves, when the Alrosa shares are surrendered to Moscow. For example, there was r\o reference in the press leak to dilution of the management and workers, or to the free floating shareholders.

Instead, documents were cited that indicate the possibility of converting Sakha regional property to federal government property, and adding to Alrosa’s capital the value of the royalty and rental payments this property can generate. Depending on what estimate is used for Alrosa’s capitalization – they range from $2 billion to $6 billion – this option could generate up to another billion dollars in capital value for the federal government’s share in the company.

A fight over this billion between Sakha and Moscow, between Shtirov and Putin, can be delayed. But there can be no doubt about the outcome. Putin’s recent message to Shtirov was that he has delayed for long enough.

It is also in the interests of the international diamond-mining community that Alrosa’s rustlers are rounded up, and the assets corralled as quickly as possible under federal authority. Once that is done, it will be much simpler for the Kremlin to decide how and when to privatize Alrosa’s shares. That is the payoff that investors like Renaissance Capital, or that miners like De Beers and BHP Billiton have been waiting for.

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