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By John Helmer, Moscow

A new type of warfare is being tested in Ukraine. The strategem was first publicly disclosed on February 23, when Zbigniew Brzezinski — the wannabe Secretary of State if the Democratic Party wins the 2016 presidential election — proposed a billion-dollar levy on each of ten Ukrainian oligarchs. Brzezinski didn’t identify them by name, but suggested they were “principal beneficiaries of the country’s stunningly widespread corruption”. Another $10 billion, according to Brzezinski’s scheme, should be “matched” by the deposed president, Viktor Yanukovich, and his family.

Swiss sources reveal that the Swiss government and banks are under pressure right now to extend their freeze of the Yanukovich bank accounts to other Ukrainians on a US Government target list. Brzezinski’s proposal used the term “persuade” for his billion-dollar levy. The US Treasury has conveyed to the Swiss, as well as to banks of the European Union (EU), the targeting of as many Ukrainians as the new government in Kiev wants to threaten, especially if their business is concentrated in the eastern half of the country.

According to the advisory issued on February 25 by the Financial Crimes Enforcement Network (FinCen) of the US Treasury, the objective is “enhanced scrutiny” for “private banking accounts held by or on behalf of senior foreign political figures and to monitor transactions that could potentially represent misappropriated or diverted state assets, the proceeds of bribery or other illegal payments, or other public corruption proceeds.”

The operative targeting term, “senior foreign political figure”, is defined in the small print so broadly as to include, potentially, every major Ukrainian business figure with “corporation, business, or other entity that has been formed by, or of the benefit of, any such individual [or]…a person who is widely and publicly known (or is actually known by the relevant covered financial institution) to be a close associate of such individual.” The Treasury agents were working so swiftly to issue their international bank order, noone noticed that their document misspells Yanukovich’s name – twice.

The lists of names which the Swiss, Austrian and Liechtenstein governments acknowledge receiving, and which on February 26 they turned into freeze orders for account holders in their jurisdictions, have not been officially published. Ukrainian media have reported what they claim to be a 20-name list. Those identified are all ex-ministers or officials of the ousted government.

The wording of the FinCen notice is broad enough to apply to the officials appointed to ministerial posts since Arseny Yatseniuk announced his transitional government on February 26. It also applies to the leaders of the Ukrainian opposition including Vitaly Klitscho, the US candidate for president; Yulia Tymoshenko, his principal rival; and Oleg Tyagnibok, whose Svoboda party currently controls six of 16 portfolios in the new government. They include the deputy prime minister, minister of defence, and the Prosecutor-General. It is from the last of these that the international banks are getting their US-endorsed proscription lists.

The wording of the Treasury notice also applies to Victor Pinchuk, whose father-in-law is the Ukraine’s ex-president Leonid Kuchma. Evidence of their alleged political corruption has been presented in a proceeding under way in the UK High Court. The diversion of the proceeds to Bill and Hillary Clinton, and to several Washington think-tanks and lobbyists, has been reported here.

It is too early to know how much money the list-of-20 account holders have been keeping in the frozen accounts. Ukrainian sources believe the total, excluding the Yanukovich family, would come to less than $10 billion. Including the Yanukovich fortune, sources estimate the freeze may cover between $15 billion and $20 billion. If implemented, along with Brzezinski’s billion-dollar levy, the fund-raising would still fall well short of the $35 billion in sovereign debt officials in Kiev are reportedly now negotiating for cover from the International Monetary Fund (IMF). That number doesn’t cover commercial Ukrainian debt to the state and to domestic and foreign institutions.

Since Ukraine and Russia are in a state of war, according to the government in Kiev, is it possible that Russian assets in Ukraine may be targeted by officials to fund the Ukrainian side? When regime change is effected by war, the reallocation of assets is called reparations by the winners; looting by the losers.

The obvious Russian asset targets at present, those which play a strategic role in the Ukrainian economy and also generate the most cash, are the two telecommunications companies – Vimpelcom, owned by Mikhail Fridman, and MTS, owned by Vladimir Yevtushenkov. The former’s mobile telephone brand Kyivstar currently holds a 47% market share of the Ukrainian market; MTS holds 37.5%. Fridman also holds an indirect position in the Life brand of the Astelit group, which has a 12.5% market share. Life is owned by Rinat Akhmetov’s domestic holding SCM; and by Turkcell of Turkey, which is heavily indebted to Fridman.

Vimpelcom’s market capitalization, now under pressure on the stock market, is about $17 billion. MTS is worth roughly the same. The Ukrainian operations contribute 7% to Vimpelcom’s consolidated group revenues, 8% of its earnings. MTS’s Ukrainian operations contribute 11% of revenues, 12% of earnings. If the government in Kiev were to follow the precedent recently pursued in Uzbekistan towards MTS, the possibility exists of renationalization, followed by an auction of the assets to US and EU bidders. Telecommunication sector sources in Moscow acknowledge this possibility, although the companies will not comment. At present, they represent about $2 billion in potential stakes in the current conflict.

It’s difficult, however, to run a country, let alone a presidential election or a demonstration in a city square, without mobile telephones. There is therefore no overt sign that the men in Kiev intend to attack Vimpelcom or MTS. According to one Ukrainian source, “Fridman comes from Lviv. He will find a way to preserve Vimpelcom against these threats.” In Moscow sources close to MTS say they do not believe the US or EU would countenance expropriation.

So far statements published by US Government officials have threatened sanctions against Russian banks, as well as what Secretary of State, John Kerry, has called “asset freezes, isolation with respect to trade and investment”. In addition to the two telecommunications companies, the potential Russian targets include the banks with most exposure in Ukraine – state-owned Sberbank and VTB, Fridman’s Alfa Bank – and the energy companies, Gazprom, Rosneft and LUKoil. The last two own oil refineries and petrol outlets. As vulnerable as Ukrainian consumers are to the supply of Russian gas and petroleum, economic warfare against Russia isn’t likely to attack these assets, not at least in the short run.

Among the Russian-owned mining and metal assets in Ukraine, Roman Abramovich’s Evraz owns a complex of iron-ore mines, coke batteries, and the Dniepropetrovsk Iron & Steel Works. In a 2007 transaction Evraz paid $1.7 billion in cash, along with a 10% shareholding in Evraz, for deal value of about $3 billion. In the currently depressed steel market, the assets are worth considerably less. If Evraz were to be expropriated, however, the impact on the Evraz steelmills in Russia would be small, because the largest consumers of the iron-ore from the Sukha Balka mines, south of Dniepropetrovsk, are Evraz’s Ukrainian steelmaking operations. In 2013 Sukha Balka produced almost 3 million tonnes of ore, up 14% on the year before. An independent valuation of Sukha Balka put it at $103 million in 2010.

At Nikolaev the alumina refinery belonging to Russia’s aluminium monopoly, United Company Rusal, is a more valuable asset. It is also one whose place is important in Rusal’s production chain for aluminium in Russia, especially the two largest aluminium smelters which it supplies with feedstock, Krasnoyarsk and Bratsk.

On January 23, when Oleg Deripaska (image left), Rusal’s chief executive and control shareholder, was asked to comment on the situation in Ukraine, he was relaxed about the location of his assets in “the safe zone in the south”.

In addition to the Nikolaev Alumina Refinery (NGZ), Rusal owns the Zaporozhye complex (ZALK) which produces both alumina and aluminium. Since the end of 2011, however, Zaporozhye has produced nothing. By contrast, output of alumina at Nikolaev has been steadily growing, offsetting production cuts at Rusal alumina plants elsewhere.

Nikolaev has been designed to process bauxite from Rusal’s mines in the west African republic of Guinea. If there is an interruption of Nikolaev’s production, Rusal would have a problem of what to do with its Guinean bauxite, its characteristics aren’t suitable for other Rusal alumina refineries in Sardinia and Ireland. “If NGZ is closed temporarily, or nationalized,” according to a Rusal source, “then Rusal has nowhere to ship the Conakry bauxite to. If NGZ alumina supply to the Russian smelters is cut off, Rusal’s first supply alternative would be Australia — Kwinana and Bunbury — then Jamaica, and maybe even Brazil, as the company was buying limited alumina quantities from Brazil in the past. Shipments of bauxite from Rusal’s mining operation in Guyana must be mixed with the Guinean bauxite at Nikolaev.” According to Rusal’s latest production report, the Guyana output of bauxite in 2013 was 1.4 million tonnes, down 13% from 2012.

Another Rusal source suggests that if Rusal lost control of NGZ, “the alternative option would be to revive and increase alumina production in Sardinia and Ireland. But in that case, more bauxite will have to be bought from the market, and the cost of alumina will jump.”

A source in Conakry reports that reopening Rusal’s alumina refinery at Friguia is impossible. “The city has been in a state of emergency these past days – one dead already, and the population threatens to kill any uniformed individual they encounter.” A Moscow source adds that since Rusal halted the Friguia plant in April of 2012, equipment has been stolen or damaged. Restarting the plant would take up to eighteen months, the source estimates.

In Rusal’s initial public offering (IPO) prospectus of December 31, 2009, the company acknowledged that its assets in Ukraine were vulnerable to expropriation. “The political environment in Ukraine in recent years has been particularly unstable, with frequent changes of government. Private enterprises, including the Group’s businesses, can be affected by these political changes. The Group acquired the Nikolaev alumina refinery in a privatisation that was challenged in the past, and the Zaporozhye aluminium complex in a privatisation that is currently being challenged…Political change in Ukraine could result in a revival or intensification of such challenges.” (page 46).

Under pressure from Kiev, Rusal added in the prospectus, the company renegotiated the terms of its privatization of NGZ. “In March 2000, the Group acquired a 30% interest in Nikolaev alumina refinery in an auction. In accordance with the original agreement with the State Property Fund of Ukraine, the Group was obligated to construct a primary aluminium plant with a production capacity at a minimum level of 100,000 metric tonnes. In August 2004, the Group re-negotiated the terms of the agreement with the State Property Fund of Ukraine. In accordance with the revised agreement, the Group is obliged to increase the production capacity of Nikolaev alumina refinery by up to 1,600 thousand metric tonnes per year. The revised agreement nullifies the requirement stipulated in the original agreement to construct a primary aluminium plant.”

In 2013 output at NGZ was still below the agreement level at 1,494,000 tonnes.

Following the drop in aluminium prices and loss of trade in 2008 and 2009, Rusal reported that it was writing down the value of NGZ by $98 million to $334 million. At that valuation it represents just over 3% of Rusal’s estimated book value.

A spokesman for Rusal said yesterday the current situation in Ukraine “has not affected [NGZ] at all.” Local reports indicate demonstrations for and against the Kiev government at Nikolaev, as well as at nearby Kherson and Odessa. Road traffic between Kherson and Nikolaev has also been reported to have been interrupted over the weekend. According to the Rusal spokesman, the movement of cargoes by road and rail, and from the port, “has not changed at all. Everything is still functioning normally.”

A source close to Rusal says the Ukrainian plant might run into temporary interruption, but expropriation, renationalization, or resale is unlikely. “There is no obvious buyer. If Rusal were to lose NGZ, the refinery could not operate without Guinean bauxite. Alternative supplies might be available from Alcoa [which also mines bauxite in Guinea], but I don’t think Alcoa would be interested to buy NGZ even for a single dollar.”

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