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In the snow, Russian peasants still say, the law is like a sleigh. A clever judge can steer it either way.

Vladimir Potanin, the controlling shareholder of Norilsk Nickel (NorNickel), Russia’s largest mining company, ought to know. In a decade of acquiring the assets that comprise his Moscow-based, multi-billion dollar holding Interros, he has had his share of success in the courts fighting off legal challenges to his takeovers. His methods, which were accepted by ex-President Boris Yeltsin, and the size of his wealth, combined with his political clout, have led Potanin to be publicly dubbed one of Russia’s oligarchs.

According to a filing last year with the US Federal Trade Commission to support a takeover bid for Stillwater Mining, NorNickel disclosed that Potanin and Mikhail Prokhorov, his partner and CEO of NorNickel, held joint and equal stakes amounting to about 57% of the company. A January 2004 report by Renaissance Capital indicates that 62% of the company’s shares are held by Interros; 4% by NorNickel employees; and 34% by institutional shareholders. The free float was estimated at 34%. There is currently no state shareholding, which was acquired by Potanin in 1995 for $170.1 million. Sales by NorNickel last year were $4.9 billion. The market capitalization of the company as of April 30 was $12.8 billion.

Last week, Potanin also got the message that he might be on the receiving end of Kremlin investigation. A powerful rumor swept Moscow and international markets that he had been called for questioning by the Procurator-General, the federal law enforcement arm of President Vladimir Putin. Rumors about the Russian oligarchs are common; but formal investigations of their business activities by the prosecutors are rare. The Moscow market believes that there can never be smoke from the latter, without someone in the Kremlin stoking the fire.

In two days of share trading, Norilsk Nickel lost more than two billion dollars in market capitalization. In the past two weeks, following the global downturn in metals prices, it has shed $4.5 billion. Whatever is happening, Potanin and Prokhorov are decidedly poorer.

The federal prosecutors first issued a refusal to confirm or deny the rumor. Then one of the prosecutors told me in carefully chosen words that “currently we don’t have information that Potanin has been in our office.” That left open a map of other geographical possibilities for the get-together – and it left an ominous warning for Potanin, as well as Prokhorov and NorNickel.

Not that this was the first warning they have received. In February, President Putin intervened to halt the implementation of a law, which he had earlier signed into effect. If implemented, it would allow NorNickel to declassify hitherto state secret data on reserves, production, sales and stocks of platinum group metals.

This data release, promised for early this year, is one of the requirements for NorNickel and its two controlling shareholders to offer the company shares on western stock exchanges, or for Potanin to swap his shares for another internationally listed company. Declassification had been lobbied by NorNickel for years. But state opposition to opening up the company to foreign buyers blocked the legislative move. It was then rushed through parliament by Deputy Prime Minister Alexei Kudrin, and signed by Putin last November. But the president was preoccupied at the time with parliamentary and presidential elections; he changed his mind when he learned what was at stake.

Kudrin was demoted in the cabinet reshuffle a few weeks ago.

When the law was suspended, Potanin was warned that a major cash-out transaction that would transfer sizeable wealth in NorNickel to foreign hands – in return for the offshore enrichment of Potanin – would not be permitted.

Potanin apparently didn’t listen. Nor did he pay attention to a second warning, also in February, that blocked the planned issue of a $1 billion convertible bond by Interros. That move would have allowed Potanin to take the cash, and leave in the hands of foreign bondholders the right to claim NorNickel shares.

Undeterred, Potanin and his dealmaker, Leonid Rozhetskin, deputy chairman of NorNickel, got the idea of buying into Gold Fields, using mostly borrowed funds; and then later – they told banking associates in Moscow — to merge their gold assets in NorNickel into a majority takeover of Gold Fields shares.

The first deal was a boon for Anglo American PLC, which had been looking to sell its Gold Fields stake for months. In five days Potanin had agreed, and in fourteen Anglo had its cash. Unbeknownst to Gold Fields, it was about to become a hostage in Potanin’s power play with the Kremlin.

Citibank, lender of $800 million to fund most of the April transaction, is also a hostage of sorts. If the Kremlin’s shadow falls on Potanin, it is unlikely another bank would agree to join a lending syndicate after Citibank’s six-month deadline is reached. Citibank would have to demand its money back. Potanin would have no alternative but to sell out of Gold Fields, quickly. Over the next month, the prosecutors do not have to say any more to make credible their warning that Potanin may not be permitted a cash-out deal.

Framing a charge-sheet against Potanin, and then compiling a multi-count indictment isn’t necessary for this warning to stick. Besides, there simply aren’t enough staff to prepare such documents, so heavily are they already committed to the prosecution and upcoming trials of the two leading Yukos oil company shareholders in prison since last year – Platon Lebedev and Mikhail Khodorkovsky. They are in prison, because they attempted to cash out a stake of about 40% in Yukos by selling it to ExxonMobil or ChevronTexaco. President Putin warned them not to; they ignored the warnings. The charges against them, and against Yukos, are different. They relate to a myriad of shareholding and cash transfers, tax avoidance schemes, fraud, and forgery. Independent legal assessment of the indictments suggests the two men are likely to be convicted.

Since February, Potanin has been courting the same fate. The rumor that he has met it doesn’t require much substantiation, in order to have the effect that high-ranking officials and advisors to the President, and possibly Putin himself, want to produce. The question for Potanin, therefore, is whether he should reconsider the Gold Fields deal, or proceed with the planned acquisition, and call Putin’s bluff.

Potanin began by reassuring Gold Fields at meetings last week with CEO Ian Cockerill in Moscow. Next, Potanin must pacify Citibank, lender of the lion’s share of NorNickel’s payment to Anglo American. Questions about the security of the deal, and the lack of government approval (which Potanin had sought, and received, when he took over Stillwater Mining in the US last year) have made it difficult for Citibank to find other banks willing to take over the $800 million loan when it expires in September.

The NorNickel oligarch’s biggest concern right now is to find out what Putin is really thinking, and whether last week’s rumor and reports were started to test Putin’s will, or Potanin’s nerves. In this game, as in last year’s Kremlin attack on Lebedev and Khodorkovsky, there is no telling what Putin intends until after he has moved, and the oligarch’s assets are in danger. The Gold Fields transaction may thus be no more than the trigger. What is near-certain is that Potanin’s control of NorNickel may be about to change.

That some of Putin’s advisors want this to happen was signaled by Vladimir Litvinenko, Rector of the St. Petersburg State Mining Institute, and an advisor to the president on resource policy. He recently said he favors giving the state a “golden share” in NorNickel. He has yet to elaborate on that. But if the precedent of Yukos’s fate is any guide, that could presage the filing of billion-dollar tax claims against NorNickel or other Potanin companies, and criminal charges against him, and possibly Prokhorov too. To save himself and pay NorNickel’s bills, Potanin may agree to sell at least part of his stake to the government. The transfer of a 17% shareholding in NorNickel, currently worth about $2.2 billion, would be enough to deprive Potanin and Prokhorov of majority control of the company, and allow the Kremlin to dictate new management strategy.

It is the market’s understanding of this vulnerability that has given last week’s rumor of trouble for Potanin legs to run. Whatever Potanin says or does next, time will tell whether Putin has already made up his mind; and whether NorNickel’s resale of its stake in Gold Fields will be either necessary, or sufficient, to satisfy the President.

There are many shadows on the snow right now. An investigation leading to a tax claim or an indictment would be curtains for Potanin, though not for Gold Fields. On their recent visit to Moscow, Gold Fields thought they were meeting the man in charge of their fate. But in reality they missed him. Putin may not mind the Russian government being an indirect stakeholder in Gold Fields; he is unlikely to want a takeover.

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