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MOSCOW (Mineweb.com) — It was a year ago when the President of the Sakha republic in fareastem Siberia, Vyacheslav Shtirov, was summoned to :the Kremlin for a meeting with President Vladimir Putin. That was not a jolly exchange of seasonal cheer; and because certain New Year promises that were made then have not been kept, Putin is considering flying east to drop down Shtirov’s chimney for Christmas.

Actually, according to the Russian tradition, Dyed Moroz (“Father Frost”, aka Saint Nicholas, Santa Claus) uses the front-door when he makes his annual visit to children, as he is always accompanied by Snegourochka (“Snow Girl”). It can happen that she is late. Then Dyed Moroz is obliged to ask the children to call out aloud to summon her. Those who can shout the loudest are motivated by the idea of catching the old duffer’s attention, and if they are lucky, first pick at his bag of Christmas rewards. Once Snegourochka arrives, Dyed Moroz reviews who has been on his best behaviour for the past year. Asked who has been naughty, the children naturally scream their noes, and again, those who cry loudest hope to be rewarded first and best.

Putin is less impressed by no-screaming. Recently, Shtirov launched a local political initiative, gathering signatures of Sakha residents who say they want Shtirov to be appointed by Putin to a new term in office. Shtirov’s first term expires in 2006. He had been elected as the Kremlin’s candidate to replace the republic’s godfather, Mikhail Nikolaev, after the latter crossed Putin by trying to arrange local support to run for a third term, which wasn’t altogether legal at the time, and worse – it wasn’t what the Kremlin wanted.

For more than a decade, Nikolaev had arranged with former President Boris Yeltsin that, in return for supporting him against parliament, throwing the region behind him on presidential election day, and sharing such diamond revenues as Yeltsin needed or wanted, Nikolaev could run the republic, and manage its assets exactly as he saw fit. Since Sakha’s principal assets are its diamond-mines, and the cashflow of Alrosa – the largest producer of diamonds in the world after De Beers – Nikolaev naturally saw to it that his trusties controlled the company. Shtirov was one of them – first a republic administrator, then prime minister in Yakutsk, and finally chief executive of Alrosa.

Putin did not suffer from Yeltsin’s political insecurities. Believing he was safer if he put an end to these regional satrapies, and retrieved control of the cash that gave the satraps their power, he ordered Nikolaev to give up the presidency, and seated him, with a conditional immunity from prosecution, in the Federation Council, the upper chamber of the federal parliament. Shtirov was told he was to vacate his seat at Alrosa, and become Nikolaev’s successor as president of the republic. But there was a condition. Shtirov was to understand that he was the federal government’s custodian of the diamond assets, and that he was to return them to federal government control.

Shtirov is a bigger, burlier man than Nikolaev. But what he lacks in the agility of his former patron, he makes up for in stubbornness. As the years of his term have rolled towards its conclusion, Shtirov has done as little as possible to divest the republic’s asset, and return them to Moscow’s charge. He is also much tougher than the man Putin put officially in charge of the return of assets – Finance Minister Alexei Kudrin.

When Shtirov used to take the De Beers management out on fishing expeditions, he would always surprise with his fisherman’s good humour.Kudrin is about as charming as the fish. A protege of Anatoly Chubais from St.Petersburg, he rose through federal government ranks with the skills of a chartered accountant, and, by comparison with Chubais, Mikhail Kasyanov, and other predecessors at the federal treasury, slower fingers. Putin thought he could trust Kudrin to take charge of Sakha, Alrosa, and the diamond cash. But in the contest between Kudrin’s fingers and Shtirov’s feet, it is the latter which have been winning.

Kudrin has pressed Shtirov to sign one protocol of obligations after another, returning assets Nikolaev had squirreled away from Moscow’s control, in order to add them to the capital of Alrosa, and the federal revenue base. Shtirov has procrastinated with his signature, and then dug in his heels against implementation. The federal shareholding in Alrosa should already have reached 51%, according to the plans drafted by Kudrin’s subordinates in the federal Finance Ministry. But even as chairman of the Alrosa board, clearly out¬ranking Shtirov, Kudrin hasn’t been able to extract compliance from Shtirov, or the transfer of the assets.

In fact, Kudrin’s desk is now so stacked with orders from his superiors that he cannot discharge, he too is in danger of receiving a visit from an unwelcome visitor down his chimney. The failure of both Shtirov and Kudrin to bring the $2 billion annual revenue of Alrosa under the Kremlin control Putin wants would already have been the end of them, if $2 billion in diamond revenues could match the size of the sums Russia’s principal mineable resources currently fetch. Shtirov has thought that the sum was small enough to be overlooked, while he played his waiting-game.

A year ago, on December 28, 2004, Putin gave Shtirov his marching orders. After a proposed meeting of the two men in the Kremlin was recently called off, sources close to Putin indicate that he’s prepared to spend Orthodox Christmas in Sakha. According to Shtirov’s office in Yakutsk, and Nikolaev’s office in Moscow, there is no information about this possibility, and no confirmation that it will happen.

The Kremlin pressure continues to build up on Alrosa, and for Alexander Nichiporuk, the first chief executive of the company appointed by Moscow, not by Yakutsk, this is a severe testing time. For if Shtirov can defy the Kremlin, and Kudrin proves too weak to implement his orders, how can Nichiporuk pilot the company into next year’s enormous challenges?

Last week, at the traditional end-of-year press conference at Alrosa headquarters in Moscow, Nichiporuk did the best he could to emphasize the positive. Alrosa and its affiliated companies have lifted the value of their production this year by 17% to reach Rb72 billion ($2.5 billion). Cost of production rose slightly less fast at 15% to Rb53 billion ($1.8 billion), and profit after tax was Rb14.9 billion ($520 million). Total investment for 2005 was Rb14 billion ($486 million). This is to be cut to Rb12.3 billion for 2006.

Among the positives in addition to the balance-sheet, Nichiporuk cited the completion of the company’s social investment plan; expansion of diamond exploration in both western Sakha and northwestern Russia; and the launching of new ore-processing plants at Alrosa’s mining operations in Angola.

If he was discreet about the internal troubles brewing at home, Nichiporuk was forthright about the unprecedented external pressure Alrosa is facing on its export marketing system. He confirmed that the European Commission (EC) in Brussels has proposed a total ban on diamond trading between Alrosa and De Beers, to start in 2009. He added, however, that this is still to be negotiated, and is far from decided. “The idea is to cancel trading between the two named companies to create competition and avoid monopolization,” Nichiporuk acknowledged, after spokesmen for the EC have tried denying what the EC has formally communicated to both Alrosa and De Beers. “The background is that, even if one company [Alrosa] is not under EU jurisdiction and another [De Beers’s Diamond Trading Company] only by half, since the trading is happening on EU territory, the [EU] can apply the rules.” Referring to the changeover this year of commissioners and staffs at the EC headquarters in Brussels, Nichiporuk added: “We had a good understanding with the previous commissioner on that issue, and no discussions with the new one.”

At this point, the unprecedented attempt by the EC to order the two companies, the two largest producers of diamonds in the world, to cease trading with one another at the end of 2008, has produced no comment from De Beers, and no stated willingness by either side to threaten a legal challenge to the ban in court. In 2005, according to Nichiporuk, Alrosa has supplied $680 million worth of rough to the DTC, representing 45% of total export value. He said that the value of exports allowed by Alrosa’s multi-year export quota is 20% higher than actual value shipped this year.

In 2004, Alrosa warned that an EC decision forcing “an overly rapid or extensive reduction or termination of our sales to De Beers could have an adverse impact on our sales.” Negotiators for Alrosa and De Beers are now discussing in Brussels, not only the cut-off and the deadline, but also the value for trade allowable in the years that remain before the cutoff takes effect. The trade agreement between Alrosa and De Beers, which the EC is reviewing, was signed at the end of 2001 and anticipated five years of sales at an average of $800 million per annum. Internal pressure among Alrosa’s senior management, and from the federal government, to break out of these terms has curtailed this level of annual shipments by roughly 15% since the signing. If the EC goes ahead with the trade ban, the current value of shipments to De Beers may decline to $600 million in 2006, and then around $500 million per annum in 2007 and 2008. By then, roughly 25% of Alrosa’s rough production, or less, would go to De Beers. What has been an effort-free trading partnership for the Nikolaev-Shtirov regime is now a major management challenge for the federal managers. The deadlines imposed by the EC are naturally increasing the impatience Nichiporuk and the Kremlin feel towards Shtirov’s attempts to prevent the reorganization of shareholding control.

According to Nichiporuk, forward planning by the company anticipates the total elimination of annual diamond export quotas, issued by the federal government and signed by the Kremlin, which have caused repeated delays in shipment of rough from the new Nyurba mine in Yakutia. In addition, Nichiporuk said, the company plans to allocate up to 65% of its rough output each year to a stable list of sightholders, and the remainder to auctions and tender sales. Independent selling outlets will be multiplied, adding Israel and Dubai to the one already in operation in Antwerp. With international demand for rough expected to remain high, and supply short for the foreseeable future, Alrosa should be able to create an effective, independent marketing system in the time that is left. Putin, however, is unwilling to cede the benefits of the new scheme to the old gang in Yakutsk.

Nichiporuk must therefore demonstrate fresh loyalty, and imagination, onshore and abroad.

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