By John Helmer, Moscow
The old saw about how to make a small fortune can be adapted in Vitaly Mashitsky’s case, but you must still start with a large fortune — he’ll take care of the rest.
In a surprise to the amber industry of Kaliningrad, where about 95% of the world’s supply of amber is located, Mashitsky was appointed chairman of the board of the Kaliningrad Amber Combine (KYaK) late last month. The appointment was made by the state holding Russian Technologies (Rostec), which took over the combine in 2013, after bankruptcy, maladministration and bad business modelling left the enterprise unable to pay its debts, invest in modern mining, manufacturing or marketing, keep its workers, or attract serious capital. Rostec is run by Sergei Chemezov, a lifelong friend of Mashitsky’s, who has been pitching himself in Kaliningrad as the powerful lobbyist the region needs in Moscow. With his backing, Mashitsky began meeting senior figures in Kaliningrad and in the amber industry in recent days.
This month Mashitsky has also launched a selfie campaign in the Moscow press, publicizing his arrival as the new tsar of amber, and promising to replace black marketeers with billions of roubles in stable investment and employment for Kaliningrad. An amber industry observer in Kaliningrad, who had never heard of Mashitsky before last month, is skeptical. “Exactly what will follow down the track is not clear yet. We are just witnesses to what is happening.”
With a population of less than half a million, and roughly 25 kilometres east to west, 10 kilometres north to south, Kaliningrad is an unlikely place to be the world’s storehouse of amber. An exclave captured from Germany in World War II, Kaliningrad (Königsberg) is of special interest to the US and its Baltic neighbours – Poland, Lithuania, and across the water, Denmark and Sweden — because it is the Russian military’s forward firing platform for nuclear missiles – in the event the US installs anti-missile systems like the Patriot in the neighbourhood. The threat of such an exchange was warm between 2007 and 2009, then it cooled . In the present conflict over eastern Ukraine, and following the Polish government’s decision  to deploy Patriot, Kaliningrad is becoming much hotter.
That’s also why there has been surprising new interest on the part of the US Government outlet Radio Free Europe/Radio Svoboda in the amber jewellery department of the luxury goods market, and in the pollution impacts of alluvial mining for amber. Much of the reporting which is now appearing on the US radio and its website  is being picked up from SCOOP. That’s not the Evelyn Waugh comedy about wartime inventions by London reporters. Today’s SCOOP is an investigative journalism centre in Denmark, paid for by the Danish, Norwegian and Swedish foreign ministries, and George Soros.
The stakes in amber, according to Nikolai Tsukanov (below), the current governor and a native of the oblast, amount to an annual turnover of at least $1 billion, maybe double that amount, most of which is earned outside of Kaliningrad in Lithuania, Poland, and increasingly in China.
Baltic amber is described in the textbooks as fossilized lumps of conifer sap, roughly 40 million years old, which oozed out of forests overtaken by the Baltic Sea. Russian reports identify roughly 95% of the entire global resource of the precious stuff buried in the Kaliningrad oblast’s sandy soils.
Although amber can be found elsewhere, its concentration in Russian Kaliningrad, and its value as a precious gemstone, make it an obvious candidate for cartel organization to maintain the balance between supply and demand, and keep price as high as the market will tolerate. In short, KYaK, and the Russian government behind it, ought to be even more interested in regulating the amber market as De Beers and Alrosa used to be for the diamond market.
Instead, what’s been happening is a bit more, er African. That’s to say, legions of diggers selling to smugglers in a fast free-for-all taxed by gangsters, many of them wearing police uniforms. The evidence of illegal mining and illegal trafficking has been unearthed in this 2013 SCOOP report  by Nikita Kuzmin. He found that in 2011, 342 tonnes of amber had been mined officially, but 422 tonnes, 23% more, were exported. He also discovered that the price of the amber which crossed the border was significantly cheaper – from 23% to 54% — than the official price at KYaK’s warehouse. Part of the difference stemmed from discounted sales out of the amber stockpile being kept by KYaK; part from goods smuggled straight from the sandpit. “In our country,” reports Kuzmin, “alongside the legal extraction of 340 tonnes, people illegally mine roughly 150 tonnes.”
Source: https://meduza.io 
It was a local sergeant of police named Victor Bogdan (below, left) who played the Cecil Rhodes and Ernest Oppenheimer parts in the amber story. Starting in about 2004 he introduced badly needed organization among the diggers and traders, financed stockpiling, and arranged price regulation as well as protection from extortion. Bogdan’s scheme required restricting KYaK to upstream mining, while he created something like the De Beers Central Selling Organization, through which the raw amber was marketed and traded. Bogdan gave this the name Amber Plus LLC. He had the Oppenheimer ambition, too, planning to go downstream into jewellery production with Amber Yulvilirprom, and upstream to KYaK, plus a plan for a second mining enterprise.
For the processors and jewellery manufacturers of amber in Kaliningrad, Bogdan was welcome because, being the local boy he was, he guaranteed the pipeline of raw amber they depended on. Without Bogdan, the temptation for the diggers and smugglers was to move the amber quickly across the border, leaving the domestic industry with too little supply at too high a price. By 2012, the Kremlin had been persuaded that consolidation of the amber was too lucrative to be left to a freebooter like Bogdan, and too cartel-like to be privatized.
On August 10, 2012, President Vladimir Putin signed a decree entitled “On the modernization of the amber industry in Russia,” ordering the transformation of the KYaK from a unitary state enterprise under the federal Finance Ministry into a shareholding company wholly owned by Rostec. The Kremlin scheme has taken three years to implement. In the process conditions for the amber processors of Kaliningrad have grown much worse.
The Bogdan (above, left) business model naturally attracted individuals more administratively or politically powerful than he was. Tsukanov, who became governor in 2010, wasn’t quite powerful enough; he needed a Moscow ally to promote Kaliningrad during a period when its military value to the Kremlin was dwindling. That’s Chemezov (above, right), who doubles as Russia’s principal arms exporter and salesman for the military.
They are the asset consolidators, and as they drove Bogdan out of the amber business, they have made it appear that his stockpiling and other forms of price regulation were more criminal than their takeover tactics. Here’s a sample  of how the Russian press treated the story once Bogdan was obliged to flee for safety to Poland.
The Rostec takeover was announced  in January 2014. That followed by a year the decision  by the Kremlin to intensify its efforts to stop illegal mining of amber. In April 2014 Bogdan was arrested in Gdansk, Poland, on Russian charges of embezzling VAT refunds from his amber exports. The bill was a modest Rb350 million ($10 million). Bogdan’s amber stocks were far more valuable, but too legal for an indictment.
Bogdan countered with the charge that the case was politically motivated, fabricated by political and business competitors in Kaliningrad and Moscow. The Polish court ignored him, and it has ordered his extradition. He is appealing and is free on bail.
Without Bogdan, both the domestic and export businesses were badly disrupted. Tsukanov and his allies knew how to put Bogdan out of business, but they didn’t know what or who to put in his place, and revive the money-making. The amber processors of Lithuania complained  loudly they were unable to buy raw amber from KYaK and that 10,000 Lithuanians were in danger of losing their jobs. A like number of Poles were also grumpy at Bogdan’s fate.
Bogdan balanced supply and demand with a version of the De Beers system of preferred buyers and informal bidding – called “sights” by De Beers. Sergei Goryainov, a diamond industry expert at Rough&Polished, reported the then chief executive of the plant, Konstantin Stefankov (right), as saying a cartel arrangement with vertical integration of the industry from mining to jewellery manufacture and marketing, ought to be the Russian strategy. “Many actors in the market would wish to use this instrument.,” Stefankov acknowledged. But his model for amber trading was more competitive than Tsukanov and the Kremlin have come up with. “As far as the economic situation is concerned, discussion of Amber Exchange Market, where such idea could partially be realized, arises quite regularly. It is difficult to say how long it will take to realize this idea, here it is important to carefully work out the project. By the way, in summer of 2009 during the meeting with the regional administration, it was proposed to organize an exchange market on the territory of the Kaliningrad Amber Plant.”
Between stopping the Bogdan system, and introducing open auction sales or a vertically integrated mine to jewellery business, the amber manufacturers have experienced an unpleasant squeeze. A vast new volume of amber started flowing to China. The Chinese then began trading in raw amber and selling it back to Russian, Polish and Lithuanian manufacturers. Of course, the price had sky-rocketed, and the profitability of the Bogdan days had evaporated.
Insiders say that in 2013 and 2014 Chemezov and Rostec were responsible for the export surge of raw amber to China. “Something is going wrong,” says a Russian manufacturer in Kaliningrad this week. “With regard to the trading schemes, these have been closed down, and closed shut with the arrival of Rostec. Before [with Bogdan], we all knew how they worked. Before, meetings were held under the supervision of the governor.” The source asks not to be identified. He, like other manufacturers represented by the Amber Union, are more fearful now of Chemezov than they were with Bogdan.
“Now no one knows where the amber goes, or how much. In recent years there’s been a very large deficit in raw materials. But now those wishing to buy [amber] are much more numerous than before. The number of black diggers has increased significantly; the number of black market traders has increased many times. There is now a serious distortion of the market. I was stunned by my last trip to China. Earlier in Hong Kong it was unusual to see 5 to 10 companies – they would be from Lithuania, Poland, China. Now at just one trade show there were 36 Chinese companies trading in amber. It isn’t normal.”
“It has never been this bad in the industry,” according to Vasily Simonov (right). Speaking for publication last week, the head of the Amber Union, representing  roughly 150 small manufacturing companies, added: “They give enough [amber] to keep us from dying of starvation.” The Union has written to Putin about the problems of the industry, and this was followed by a public protest in June 2014 of several hundred amber industry workers. Simonov has told reporters it’s now “impossible to carry on for long without some kind of informal protection scheme. Some tell us that one night of digging near the amber plant quarry costs $1,000, and one month at a ‘good ditch’ costs up to €50,000.”
In Moscow the union and the protesters have been accused  of being political troublemakers in Bogdan’s pay. Mashitsky has attacked Bogdan as a “serious skeleton in the closet,” charging him with running a transfer pricing scheme. According to Mashitsky, this was “an unscrupulous circuit in both production and sale of amber. For example, some businesses of Viktor Bogdan were the exclusive customers of all the amber extracted by the combine [KYaK].. They themselves then resold amber for very different prices… selling all amber at the lowest non-market prices thus multiplied the losses annually. The equipment wore out; no investment was carried out; and all the profits went into the pockets of these so-called partners.”
An amber manufacturer in Kaliningrad says there have been changes for the better very recently. “They listen to us; they try to consult with us on how to do better. They visit and they are interested in whether the manufacturers are doing well. Now there is a process under way to ensure the production cycle with the required amount of raw material. This process has continued for the second month. Recently the commercial director visited us. I don’t know how it is going to go in future. Why Mashitsky? — we also cannot understand. This is known only to the person who put him there.”
At the Moscow diamond publication Rough&Polished Goryainov is also optimistic for the time being. “In 2006-2007, Alrosa discussed the topic of whether to take over this enterprise [KYaK]. I participated in this discussion, but the project did not materialize because of the fear of the impact of the criminal element. Nobody wanted to mess with it.”
“Everything about amber and the activities of this plant was extremely criminalized. The change of ownership may inspire some optimism, perhaps the new owner, even if he does not completely overcome this problem, at least will optimize the process. But regarding change in this direction I have deep doubts. Russia lacks the tradition of creating vertically integrated holdings including jewellery production. Faced with such competition [Poland, China], I am not sure we can move effectively. ”
Mashitsky was asked in Moscow yesterday how he explains the jump in Chinese buying and trading of amber since Rostec took over KYaK. He doesn’t answer. He also refuses to say whether he favours halting the Chinese trade by banning export of amber from Russia in its raw form without local processing.
Last week Mashitsky arranged an interview with Vedomosti in which he claimed that “all our processing in the country will die if along comes some money-bags from China or somewhere else to buy up all amber, and take all the jobs to their processors. Our task [is] to maintain and create jobs in Russia.”
The new chief executive of KYaK, Mikhail Zatsepin (right), is clearer on the business model  he is planning, or so he wants Kaliningraders to think. “Today, we mainly focus on selling amber to local processors. The previous [Bogdan] schemes inhibited the Kaliningrad processors from buying the raw amber directly from the plant. They were forced to use various schemes, including illegal ones, in order to get amber for work…. I may safely say that Kaliningrad producers will be supplied with the raw material on a priority basis.” Asked if this means Lithuanian and Polish processors will be shut out, Zatsepin added: “We see the solution of this problem in the establishment of joint ventures. Foreign manufacturers should establish enterprises in the Kaliningrad region together with partners from Russia; they will then be provided with the required amount of raw materials for production, and start easy operations. In other industries, this practice has proved itself, thus, we are confident in the benefit of such a form of participation in the amber
industry as well.”
Russian diamond industry veterans dispute this. “So-called joint ventures between foreigners and Russian firms”, comments one diamantaire, “have proved to be camouflage for smuggling of diamonds, particularly in Yakutia. And if they didn’t smuggle, they went broke.”
Kuzmin also expresses scepticism towards the attack on Bogdan and the proposed new scheme for local processing. “They have just changed the players, the scheme has stayed the same.”
From left to right: Rostec Deputy Director-General, Igor Zavyalov; Mashitsky, Zatsepin, and Tsukanov. Meeting release by the regional government on April 20 .
In controversial privatizations and transfer pricing schemes Mashitsky himself has past form. Mashitsky’s business history appears to start with Marc Rich, the American commodities trader, who used an eponymous company called Marco and a protégé called Alan Kestenbaum to obtain a Romanian aluminium production chain by low-priced privatizations. Mashitsky then “crossed swords” with Kestenbaum, according to the latter’s lawyer, and Kestenbaum ended up without the assets he thought he owned, and threatening Mashitsky with litigation. Alexander Krasner, another of Rich’s, Mashitsky’s and Kestenbaum’s business partners in Romania, ended up the same way.
For details of Mashitsky’s platinum mining project with Chemezov in Zimbabwe, read this . For the reluctance of the state bank VEB to finance it, click . Mashitsky out-manoeuvered Oleg Deripaska in the bidding for privatization of the Romanian government’s aluminium businesses, but in time they have proved to be lossmakers .
Mashitsky’s principal business is the Dutch-registered, London-listed Vimetco, which operates a small bauxite mine in Sierra Leone, and processes the bauxite into alumina and aluminium in Romania. It also operates aluminium and coal businesses in China. The control shareholder in Vimetco is Vi Holding. Mashitsky is chairman of the board , and his 32-year old son Pavel (right) a director, as well as deputy chief financial officer . With pay and benefits of $598,000 last year, the son is the best paid executive in the company.
The Vi in both company names represents Mashitsky senior’s first name. He won’t say what size shareholding he has in Vimetco. The Vimetco annual report  for 2014 reveals that Vi Holding holds 59.4% of Vimetco, and that Vi Holding is itself wholly owned by Maxon Limited, a Bermuda entity. Vimetco currently owes just over $200 million to Vi Holding. When the former couldn’t repay the loan in 2013, it was rescheduled to the period between 2018 and 2022. Irina Mashitsky (Machitski), Vitaly’s wife, is reported to own 3% of Vimetco. She describes  herself as an Israeli and a patron of the Tretyakov art gallery in Moscow. She, Pavel and other members of the family list themselves as living at addresses in west London.
Mashitsky described  himself last week in the Moscow press as the biggest Russian investor in China, with a sum he estimated at $3.3 billion. If that’s the price Mashitsky paid, he’s lost most of it. The latest financial report for Vimetco reveals the company has sold or written down a large part of its Chinese assets. Mashitsky’s coal business in China has dwindled as the coal price has collapsed, according to company documents. “The operational results were highly affected by the impairment of the coal mines in China in amount of USD 132 million as well as by the change in fair value of the derivatives embedded in an energy supply contract conducted by one of the Group subsidiaries, which generated a loss of USD 44 million during 2014, as compared to a gain of USD 35 million during 2013.” The small print in the Vimetco papers reveals that Mashitsky is obligated to come up with another $79.4 million in investment commitments already made to Chinese partners. There is also litigation with disgruntled Chinese stakeholders; they claim Mashitsky owes them more than $44 million.
Most of the security for Vimetco’s borrowings is accounted for in the annual report as shares in Chinese companies in which Mashitsky’s stake is less than a majority. What his net asset value is in China, according to Vimetco’s accountants, is a fraction of the number Mashitsky has announced in Moscow.
Vimetco has reported that at year-end it had lost $266 million, up 77% over 2013. Debts were reported to be $2.6 billion, and Ernst & Young, Vimetco’s auditor, reports the company is in breach of its bank loan covenants. Raiffeisen is the only bank lender identified in the 2014 report. The market capitalization of the company on the London Stock Exchange has sunk to £35.6 million ($57 million).
According to the company’s notice for next month’s Annual General Meeting , Vimetco is too broke to pay shareholder dividends. It’s also worried about who is to blame. Item 7 on the agenda for a shareholder vote is “Discharge from Liability…of the existing Members of the Board of Directors of Vimetco N.V. in respect of the duties performed during the year 2014.” The family can be expected to carry the vote to indemnify itself.
Vimetco’s spokesman is Ana-Maria Imbrea, who is based in Bucharest, Romania. Her email address isn’t working. In Moscow the spokesman for Vi Holding is Anatoly Shiryaev. He has arranged the recent Moscow media placements on Kaliningrad amber. Shiryaev explains that he relays questions to Mashitsky, who decides to answer if he wants to.
On Monday Mashitsky was asked for his view of the strategic options for Kaliningrad amber, and whether he prefers a De Beers-type sight system for fixing amber sales to customers, or an open auction system to set prices. It’s a question Mashitsky doesn’t want to answer.
In last week’s Moscow media, he said: “one can define my role as an entrepreneur, the organizer of business. Therefore, although I have a lot of experience in managing large companies in specific industries, for me it makes no difference what kind of businesses to organize. For specific tasks we engage narrow specialists and high-level experts, but how to organize everything for the enterprise to be a success on the market – this is our task and our expertise.”