By John Helmer in Moscow

Norway and UK probe Hydro’s aluminium operations with BVI cutout companies.

The High Court in London is considering a trial this year of claims to one of the largest missing aluminium smelter fortunes in the world. The missing money, estimated to be as high as $500 million per year, is disappearing from the Tajikistan Aluminium Plant (TadAZ Talco), whose principal trading partner is Hydro Aluminium, the state-controlled Norwegian aluminium producer.

The details of the UK court litigation, initiated by the smelter and its owner, the Tajik government, are accumulating in confidential records of preliminary and procedural hearings, which continue this month. The trial later in the year will expose the evidence publicly, and it is likely that Hydro will be summonsed to testify, not least of all because of admissions Hydro has publicly made to Mineweb that it has reassigned contracts signed a year ago with the smelter to a Caribbean cutout company with the same name as the smelter, Talco Management Limited (TML). “The arrangements” with the latter, Hydro spokesman Halvor Molland told Mineweb this week, “are an integral part of our settlement agreement with the Talco smelter.”

Hydro has sued Talco itself in London, and won two years ago; this is the “settlement agreement” to which Molland is referring. But since December 2006, Hydro has been Talco’s strategic partner, an association featured prominently on Talco’s website. Suspicion that the publicly announced terms of Hydro’s contracts with Talco are not the full story led the Norwegian government minister in charge of trade, Dag Terje Andersen, to call Hydro executives into his office recently to answer questions. Andersen implied he was less than satisfied.

Pitting the Norwegian government in conflict with the Tajikistan government, the UK court proceeding is expected to expose a pattern of commercial dealings that Norwegian officials have urged Hydro to stop. The details are also likely to expose the European Bank for Reconstruction and Development and the World Bank to questioning on why bankers in both institutions continue to support financing for the man who legally and practically dominates the smelter’s business dealings, and the litigation — the Tajikistan President Emomali Rahmon.

Talco, the most important industrial and trading enterprise in Tajikistan, is wholly owned by the Tajik government, but directly supervised by President Rahmon. As the World Bank reported in June 2004, “the company is not governed by a board of directors or any other type of executive committee. Instead, it is under the sole command of its director, who reports only to [the] the Tajik President at a monthly meeting.”

Pressure from the World Bank led, just two weeks ago, to a public announcement in which Talco claimed that “a supervisory board will also be set up at the will of the company.” Note the indefinite future tense. Talco’s release addresses the World Bank’s concerns by claiming the board “”will consist of representatives from public associations, government bodies and the company administration”. The body appears to be something less than advisory in function with “powers to participate in working out strategic plans for the development of TALCO, enhancing corporate management and providing full disclosure of management’s activities.”

Excluded from this disclosure statement are the presidential functions. Through his daughters, their husbands, his wife’s brother, and other kin, Rahmon also supervises the National Bank of Tajikistan, the Finance Ministry, and the leading commercial banking and trading institutions of the country. In a long-running feud with his countryman Avaz Nazarov–whose companies worked with the aluminium smelter until December 2004–Rahmon has been driving a campaign of lawsuits against Nazarov in the UK High Court.

Nazarov has counter-attacked, charging Talco and a Rahmon-linked company called CDH Investments, based in the British Virgin Islands, with unlawful conspiracy and theft. CDH had ousted Nazarov’s companies from the smelter’s business. Part of Nazarov’s claims has already been upheld in several High Court rulings. These not only found adversely against Talco and those behind it. They also pressured Oleg Deripaska’s Russian Aluminium company (Rusal) to settle its claims against Nazarov. That confidential settlement, reported by Mineweb last April, led Rahmon to order a fresh court filing, making corruption charges against Rusal. The High Court in London ruled against taking jurisdiction, and the case was moved to the British Virgin Islands.

Justice Morrison of the High Court’s Queens Bench Division wrote in a judgment dated May 18, 2006, that Talco/TadAZ “are not the victims of fraud, they have been the perpetrators of it in this litigation…. [Talco] has been involved in deliberate attempts to mislead the [Arbitration] Tribunal and have committed acts which in this jurisdiction are serious crimes.”

Despite this, Talco’s London lawyers Herbert Smith have persisted in claims against Nazarov. To defend his record, Nazarov is counter-claiming that he is being victimized by Talco and its controllers, because the latter allegedly operate corruptly, diverting vast profits from the production of aluminium out of Tajikistan to the benefit of a handful of wealthy individuals in Tajikistan. Rahmon’s persistence in attacking Nazarov through public accusations in Tajikistan and litigation in London reinforces published suspicion that that the finger of accusation relating to the smelter’s business points at him and his kin. Hints of the credibility of these charges have also appeared in reports on Talco by the World Bank in 2004, and in the most recent country report on Tajikistan by the International Monetary Fund (IMF), issued in April 2007.

According to the IMF, “Tajikistan does not mine the raw material for aluminum production, but rather relies on an export processing agreement with its foreign suppliers for its processing, export performance did not fully benefit from higher aluminum prices in 2006. According to the authorities, TadAZ receives a fixed pre-negotiated fee for the processing of alumina. This arrangement has been in effect since 2005, and in 2006 the fee was $410 per ton of aluminum. The details of the arrangement are not fully transparent.”

The High Court is being asked to clarify just who benefits from this non-transparency; how much of a benefit this represents; where it goes; and what arrangement Hydro’s contracts make it party to. Nazarov and his lawyers are bound by the confidentiality rules not to reveal or comment on what has been disclosed in the proceedings to date.

Hydro, however, has admitted in comments to Mineweb that it knows the smelter has assigned its contracts to front companies registered in the Caribbean. One of these, known as CDH, has been identified in earlier High Court proceedings, and appears to have been used as an offshore cutout for aluminium sales revenues, after Rusal and Rahmon agreed to oust Nazarov from the smelter management. Talco’s website identifies CDH as a “partnership …established at the end of 2004. According to the agreement CDH Investments Limited supplied alumina, oilcoke, pitch and other kind of technological raw materials and goods. Today the Company supplies auxiliary values according to the concluded agreement for purchase and sale.”

CDH appears to have drawn criticism from the World Bank, which has publicly criticized the Tajik government and the Talco management for “very limited” international accounting standards; inappropriate selection of auditors; and firing auditors after conflicts over their reports. In a reference to the cutout arrangement, the World Bank said “the company is heavily reliant on a single group of companies as a supplier of material, purchaser of finished goods, and provider of credit.”

What the World Bank omitted to mention was that only a small fraction of the smelter’s revenues is paid to the plant, and remains in Tajikistan. The IMF was less tongue-tied. In April of 2007 the IMF reported that Talco is receiving less than a quarter of the international benchmark price for its aluminium. Although neither international bank has referred to the High Court proceedings, bank officials have admitted to Mineweb that they are following the proceedings. The IMF disclosure confirmed testimony already given in High Court hearings that there has been a massively profitable diversion of metal revenues, since Nazarov was replaced by Rahmon’s nominees at the smelter.

There is other evidence. According to trading data issued by the Tajikistan National Bank, in 2006, tonnage of primary aluminium exported from Tajikistan was 408,861.9 tonnes. The export value listed for the year was $1.050 billion. This suggests a value per tonne of $2,568. But the IMF report indicates that Talco received just $410 per tonne – just 16% — with total receipts for the year of $168 million. So what does the export value figure mean?

Sources in Oslo and London believe the difference between Talco’s receipts and the declared value of the exported aluminium — $882 million – wound up with the offshore companies engaged by Rahmon to handle the trade. Subtracting what they paid for feedstock to produce the metal, plus the cost of transportation in and out of Tajikistan, reveals a windfall profit for the year of almost half a billion dollars.

As Mineweb has already reported, Hydro signed its alumina supply and aluminium offtake agreements with Talco in December 2006 with a flurry of official publicity in Dushanbe, the Tajik capital. Thus, the first year of the Hydro contracts has been 2007, and for this official Tajik trading figures are lagging. In terms of volume and price, the National Bank data available for the first, second, and third quarters of 2007 show that Talco imported 618,592 tonnes. This was just 2% more alumina by tonnage than the year before. But the value of the alumina was almost the same as in 2006 — $280.9 million, compared $278 million.

On the other, the trade data show that for a slightly larger volume of metal produced and exported, rising international pricing for aluminium caused the dollar value to jump 19% in the first quarter; 3% in the second. The implication is that aluminium was considerably more profitable in 2007 than it was in 2006. But who benefited? Talco refuses to respond to questions, and the IMF has yet to disclose the tolling fee for the year.

Experts engaged in trading Tajik aluminium estimate the cost of transportation of alumina inwards and aluminium outwards at $150 million per annum.

The purpose of the High Court case now pending in London is to determine whether Talco’s trading agents and def facto controllers, CDH and TML, are making more profit, while the smelter earns less.

In November, in a public speech, the leader of the Tajik Communist Party, Shodi Shabdolov, said Talco was paying just $40 million in annual tax to the state budget. The figure corresponds to the statutory corporate rate, but it is levied on Talco’s tolling fee, not on the value of the aluminium produced and exported. Shabdolov was critical of the trading schemes that provide “profits [to] purchasers and intermediaries rather than [to] the national budget.” The remarks were published on Tajikistan’s Asia-Plus news agency, before they quickly disappeared.

According to sources in Oslo and London, the smelter is losing more than $500 million in aluminium sale profits per year through these trading schemes. Overseeing them, the sources also allege, is a London-based firm called Alaska Metals, controlled by an Iranian, Ali Akhbar Mahdavi.

Alaska Metals operates a modest website, identifying itself as a private company formed in 1999 from a group of traders principally engaged in nonferrous metal business. Three London telephone numbers are given, but no names, and no physical address.

A source in the company told Mineweb that Mahdavi runs Alaska Metals, but he has refused to respond to requests for interview. The UK High Court files are more revealing. According to publicly available judgments, in 1998 Mahdavi arranged the sale of almost $6 million worth of lead ingots to an Iranian buyer, based on false documentation; took and spent the money; but did not deliver the metal. According to Justice Moore-Bick in the case of Niru v. Mahdavi et al., “for a seller [Mahdavi] which had presented a false bill of lading and had failed to dispatch any goods at all, this was indeed a brazen attempt to throw its buyer off balance in order to extricate itself from a difficult situation.” The lower court in 2002, and the appeals court in 2003, ruled that Mahdavi was liable to repay the money he had received, plus interest and costs.

Mahdavi, Mineweb has now learned, is a key figure currently representing President Rahmon in the global trade of Tajik aluminium. A report by Metal Bulletin, issued this past November, reports that Alaska Metals outbid other contenders for 240,000 tonnes of alumina, produced by Nalco of India, and believed to be intended for the Tajik smelter. “The winning bid was considerably ahead of the consensus of other bidders,” the report of the transaction claims.

Hydro has also confirmed to Mineweb that its December 2006 agreement provides that it will sell the Tajik plant 150,000 tonnes of alumina per annum, and buy up to 200,000 tonnes of aluminium metal produced by the plant. Hydro added in a statement for Mineweb that the alumina is delivered CIF Poti (a Georgian port on the Black Sea), and the metal to Hydro at a Baltic port on a FOB basis. According to Hydro spokesman Thomas Knutzen, “Hydro does not disclose the exact prices of such contracts but we can say that this is LME linked.” What Knutzen did not reveal is whether Hydro’s LME link contains the 10% over-market premium revealed in the Nalco deal with Alaska.

A source close to Talco told Mineweb that, for those aiming to maximize their profit from Talco, “there is no point in overcharging for alumina; they do not sell it to Talco — they simply convert it to aluminium. They would look for the cheapest sources [of feedstock]. Since their fixed cost for aluminium is simply the tolling fee for Talco, they are not interested in overcharging. Costs are – tolling fee to the plant, alumina, and transport. At the current market, they are making a killing! TadAZ is bled dry – that is clear. It has no revenues apart from the tolling fee, which is strictly controlled by [President] Rahmon. He regulates the fee to allow Talco to be kept afloat. If Talco was allowed to trade, as it was doing before Nazarov was ousted in 2004, the windfall profit from rising aluminium prices would have been Talco’s, and not Rahmon’s. At the 24% effective corporate tax rate, the Tajik state budget would have received $72 million, in addition to the $40 million Talco has to pay.”

The pressure on Hydro for greater disclosure of its Tajik dealings is also mounting in Oslo, where the company has been threatened by parliament members with a corruption investigation. An investigation by Oslo business journal N24 revealed that recently Hydro executives were summoned to the Ministry of Trade and Industry where they were questioned by the Minister of Trade Andersen. “We have had a conversation with Hydro and received the same answers as you in the press did,” Andersen told N24 reporter Trond Gram. “Hydro is the one who must answer further questions from the press on the case, and on that basis we will see if there will be any need to further investigate this case,” Andersen added.

In October, Hydro announced that it plans shortly to delist its shares from the New York Stock Exchange and end its reporting and compliance obligations to the US regulator, the US Securities and Exchange Commission. Delisting is also planned from stock exchanges in Paris, Frankfurt, Hamburg and Dusseldorf. When completed, Hydro will be traded and regulated in Oslo and London.

In a company statement, Hydro Chief Financial Officer John O. Ottestad said: “As a focused aluminium company, we are committed to reducing the complexity of our operations. The delisting and deregistration will enable us to simplify financial reporting processes, while maintaining the same high-quality financial reporting and disclosures. Corporate governance will not be affected…”

On December 27, Hydro announced that it had appointed a new head of communications, Inger Sethov. She was asked what relationship Hydro has with TML, and what the Norwegians know of the roles played to channel the smelter’s revenues and profits by TML and Alaska Metals. Sethov was unavailable to respond, her office told Mineweb this week. In her place, Halvor Molland, Vice President and Head of Communication for Hydro, said: “Hydro is buying aluminium from and selling alumina to Talco Management Limited on market based conditions. The arrangements are an integral part of our settlement agreement with the Talco smelter. Hydro does not have insight into Talco Management Limited’s contracts and dealings with other companies, and we are therefore unable to comment on these.”

The Hydro spokesman was also asked whether Hydro had reached a similar conclusion to the IMF’s report that “the details of the arrangement are not fully transparent.” Mallor told Mineweb: “The World Bank is aware of Hydro’s contracts with Talco Management Limited, and IMF’s comments which you have quoted should, thus, not be taken as a criticism of Hydro’s arrangements.”

The missing half billion dollars in annual aluminium earnings will sooner or later bring the Norwegians down, Nazarov intimated in an interview with Metal Bulletin in London in November, “Theirs is a temporary solution. It exists whilst the case is being litigated.” Referring to Rahmon as the stumbling block, Nazarov said “we are interested not only in coming back, but also in optimizing operations at [Talco] to turn it into the engine of economic development in Tajikistan to the benefit of all Tajiks…We are keen to provide a viable long-term solution, but we recognize there is a political dimension.”

Talco, TML and official spokesmen for Rahmon have not responded to questions. The company website provides production volumes, but financial data appear to be unaudited and incomplete, with nothing since the first quarter of 2007:

http://www.talco.tj/en/pages/8.html

http://www.talco.tj/spec/5.html

A press release, issued through the Tajik news agency Asia-Plus on December 21, defends the reassignment of sales contracts and the tolling operations of the offshore cutouts, claiming “the business strategy chosen by the TALCO has allowed it to considerably improve its financial indices. …The company’s top managers attribute this success to the introduction of a system of tolling operations… the tolling system, including processing of customers (own) [take-back] feedstock with further export of product of processing under customs control, is the most widespread type of operation in the world metallurgical business. It has replaced the old system of barter operations and it has become the only way to overcome the crisis…”

The company press release also responds to the parliamentary attack on Talco’s low tax payments. “In January-September 2007, TALCO transferred 133.7 million somonis (US$38.64 million) to the national budget. In 2007, the anticipated contribution of TALCO to the national budget will be 180 million somonis, which is 67 million somonis more than in 2004. Over the same nine-month period, TALCO’s external trade turnover amounted to US$1.473 billion, which was 115 per cent more than the January-September 2006 level or US$190 million more.”

President Rahmon has also revealed how sensitive he is to the possibility that fortunes are being spirited out of Tajikistan, if not by Caribbean companies, then by fortune-tellers, sorcerers, and witches. On December 12, the Tajik parliament passed a law, requested by the president, to outlaw such practices. “Those indulging in sorcery and fortune-telling shall be fined between 30 and 40 times the minimum monthly wage [equivalent to $170-$226],” the statute reads.

by John Helmer - Friday, January 11th, 2008