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When it comes to evasion, Alexei Kudrin, deputy prime minister in charge of the diamond sector, could take a lesson from the French bard, Jean Racine.

According to the tale told by Madame de Sieving, Louis XIV once appointed Racine as his royal historian, only to rebuke him for failing to do enough to learn more about warfare. Once, when the king told Racine he should go a little out of his way to watch a battle from the front line, Racine replied that was exactly what he had intended to do, only his new uniform hadn’t been delivered from the tailor’s in time.

That’s the point about evasiveness. If you don’t keep your wits about you, you tend to look guilty.

In Kudrin’s recent public statement about the future of the diamond-mining company, Almazy Rossii-Sakha (Alrosa), it’s clear there is a battle under way. Kudrin, however, is trying to hide which uniform he’s wearing, which side he’s on. And in the Russian diamond business, that generally points to a guilty interest.

According to Kudrin, he proposes to convert the closed joint-stock company structure of Alrosa into an open shareholding concern, increase the federal stake and then offer the shares for privatization. On the face of it, this looks like the staple recipe that Kudrin’s patron, Anatoly Chubais, pioneered not so long ago. It is also not news. The policy of converting state enterprises into open stockholding companies was announced months ago.

But for a company like Alrosa, given a secret charter by then-President Boris Yeltsin in defiance of the Russian parliament and of Russian law at the time and then milked as the Republic of Sakha’s only cash cow (Yeltsin’s payoff for the Sakha president’s political support), you might say it’s about time for a change, that it appears to offer transparency and accountability where there has been nothing but
murk.

But consider carefully, and ask, who would have an interest in buying Alrosa shares? Certainly no foreign investors or international mining companies or Russian-Israelis. That is because the terms of current Russian law explicitly ban foreigners from owning 51 percent of any company that mines Russian diamonds. This provision was quietly inserted into law by the Alrosa management and the Sakha government to preserve what they consider to be their natural monopoly on all Russian territory, even in Arkhangelsk, at the opposite end of Russia.

Since no foreigner can legally acquire a majority of Alrosa, no foreigner would be so stupid as to want to acquire a minority stake. The reason for that has been amply demonstrated by Alisher Usmanov and Vagit Alekperov, the two partners who stole the Verkhotina diamond-mining license from Archangel Diamond Corporation of Canada after the Canadians discovered more diamonds on their territory than the Russians were expecting. What Usmanov & Co. have taught potential foreign investors in the Russian diamond industry is that a minority shareholding obliges them to pay all the costs of the mining project in exchange for the right to watch the Russians take all the profits. Incidentally, if Kudrin were serious about opening up the sector to foreign investment, he might start with Usmanov and Alekperov. But I suppose that’s another battle for which Kudrin is still waiting for his uniform to arrive.

So, if foreigners are excluded from the Alrosa privatization, who does Kudrin have in mind? As LUKoil’s chief executive, Alekperov has said he isn’t interested in diamonds, and prefers Usmanov to manage that type of asset. Usmanov himself says he prefers steel – if Gazprom allows him to keep the Oskol steelmaking plant – but he hasn’t relaxed his hold over the Arkhangelsk diamonds nonetheless. This isn’t the record of a credible investor, so Kudrin must be thinking there will be other Russians who would want to buy into Alrosa.

Perhaps Kudrin’s recent appointee as the chief operating executive at Alrosa, German Kuznetsov, knows who these Russians might be, and perhaps he includes himself among them. Kuznetsov is Kudrin’s protege – as he once was Chubais’ – in running the diamond sector. When he lost his job at Gokhran in 1999, the Kremlin thought Valery Rudakov might be better suited to the task of reforming the business. Kudrin got rid of Rudakov last month and has put Kuznetsov back in uniform.

One of Kuznetsov’s first moves was to halt Alrosa’s access to foreign lending, on the ground that the collateral and security arrangements to prevent a loan default created the risk of secret diversion of the company’s cash flow. This is a joke Racine might have liked to spin out, but we don’t have the time.

The immediate effect is to force Alrosa to depend on Russian banks for working capital and short-term credit. But very few Russian banks are interested in taking the risk. They reason that the Sakha economy has been so long the private preserve of Mikhail Nikolayev (president until last December, now senator) and Vyacheslav Shtirov (Alrosa’s chief executive and now Sakha president), there is no way of pricing the risk of default and no way of compelling Alrosa, Sakha’s front-office and cash-box combined, to pay. So few of the aspiring national commercial banks are ready to do business with Alrosa.

If that’s the case, who among them, or among the old and new oligarchs, would be candidates for Kudrin’s giveaway – I’m sorry, privatization?

Vladimir Potanin, controlling shareholder of Norilsk Nickel, Russia’s largest mining company, has always had a soft spot for Kudrin. His old property Uneximbank once held a large amount of Alrosa debt and admitted to having an interest in converting that to equity when the government agreed to divest itself of its closed shares. Nowadays, Potanin likes to speak of concentrating his investment on core businesses, except when the federal government obliges him to spend in one direction (bread and agribusiness) or another (the Hermitage Museum of St. Petersburg).

It’s difficult to imagine Kudrin devising a plan, let alone the Kremlin agreeing, to unite the largest precious-metals mining company with the largest gem-mining company in a single corporation. But, in the name of saving the state interest, crazier ideas have been contrived before.

But why speculate airily about the battle lines for reconstruction of the Sakha economy and the diamond sector? All Kudrin has to do is to acknowledge that, since he’s the man with the political responsibility, he should put on his uniform and take a position at the front line. At least that should help to identify who is really fighting this battle and with what hope for reward.

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