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When there is trouble, Russians hide and hoard whatever they can. And since there has always been trouble in Russia, Russians are the world’s biggest hoarders.

In the 1930s, one of the legendary heroes manufactured by Kremlin propagandists was Pavlik Morozov, a young Pioneer who denounced his own father, a peasant landowner, for hoarding grain during a period of famine. The fact that the doughty Pavlik was killed by his angry family only added to the heroic luster with which his act against hoarding was endowed throughout the Soviet Union.

Nowadays, the hoarders have become the heroes, whether they are ordinary Russians who keep their savings hidden awav in dollars, or men like Vladimir Potanin, the controlling shareholder of Norilsk Nickel. Potanin’s company is Russia’s largest mining group, and the world’s largest producer of nickel and palladium.

Potanin has been telling the world that he wants there to be no secrets about his company, so that lenders, bond buyers, and eventually shareholders will trust him enough to give the company money. That ought to apply to cash on hand, as well as inventories and stockpiles. Testing his truthfulness is what Potanin obliges the marketplace to do.

This week Norilsk Nickel made its first big disclosure in this direction, releasing what it calls its first annual accounts prepared to international accounting standards. Deloitte & Touche is cited as having “reviewed” the accounts, but Deloitte & Touche officials explain this means only what it says. They reviewed the company’s statements, but they didn’t audit them, nor will Deloitte & Touche warrant that what they contain is the truth.

One of the first numbers to jump out of the accounts for 2001 is that while production of metals grew, so did inventories, whose value as of December 31 is given as 48.9 billion rubles ($1.6 billion). Another number of comparable interest is described as outstanding loans on that date of 37.6 billion rubles ($1.2 billion). And then there is a third and a fourth number, reflecting what the company claims is the repayment of secret loans it has received from the state amounting to 22.7 billion rubles ($780 million) in 2001, and 3.6 billion rubles ($114 million) this year. According to the company’s statement, the secret loans were repaid in the form of metal transferred to the state. Perhaps – we aren’t told – Norilsk Nickel intends to repay the balance of its indebtedness to the state in the same way.

If that were to happen, then Norilsk Nickel’s management needs the state stockpile, and state secrecy, a great deal more than you would think, if you believed the company’s version of what it told Prime Minister Mikhail Kasyanov in July. At that time, according to the company’s press claims, it wanted to dismantle the elaborate system of state regulation, stockpiling, export quotas, and secrecy. Kasyanov had agreed in principle, Norilsk Nickel also claimed.

Exactly why loans of state funds to an erstwhile private company – it was a state enterprise when the loans reportedly began in 1994 -should be covered by the state secrecy laws is not explained, and Deloitte & Touche, the likely auditor of the 2002 results, doesn’t have an answer.

It is understood that in the early 1990s, before Norilsk Nickel was handed over to Potanin, it was obliged to conduct annual supply operations to provide the remote Arctic territories in which the company works with fuel, food, and the necessary supplies for living through the long winter period.

That social welfare function was subsidized by the federal government throughout the 1990s. Why the government also loaned Norilsk Nickel money, at the same time as the government was claiming the company owed enormous tax arrears, is something that has yet to be explained.

Still, what appears to be happening now is that Norilsk Nickel is paying the federal government in palladium, the precious metal which is covered by state secrecy. Very large amounts of palladium in fact, if you figure that the price at which the metal is valued before its transfer is either the low and secret cost of production, or a fraction of the international market price.

In February, palladium hit a spot-market high of $1,100 per troy ounce, and then started to fall. It is currently just under $330, and, as Norilsk Nickel marketing executives acknowledge, global demand for the metal is so weak they cannot sign long-term purchase contracts with all their regular clients.

On the one hand then, Norilsk Nickel is producing more palladium, but isn’t able to sell it. So a stockpile of the metal has been accumulating. The best estimates of its size at present put this at about 2 million ounces. If that were transferred to the Finance Ministry at the London price, it would be worth $456 million. That is just one-third of what Norilsk Nickel says it still owes to all its creditors, not only to the Finance Ministry.

On the other hand, if the statements released this week mean what they say, the state stockpile of palladium has been growing by sizeable transfers from the company in repayment of the debts that were secret until now. As Norilsk Nickel has been denying for two years that it was transferring palladium to the state stockpile, insisting that every ounce of palladium had been sold, Potanin’s latest disclosures amount to a sharp reversal. Now we know that the company’s most precious asset has been transferred in secret to the state. Instead of calling that a loan repayment, it may be more accurate to call that the Potanin tax.

It is understandable that the Norilsk Nickel management is trying to escape from this tax. In a good palladium market, Potanin and his shareholder group might be better off settling for cash. In the present market, the Finance Ministry is doing them a favour to take the metal, and to cover the transactions, past, present and future, in state secrecy.

The question that minority shareholders, banks, and potential investors in Norilsk Nickel must begin to ask now is how much of an impact the Potanin tax will have on the future of the company’s ability to service its debts, generate profits, and distribute dividends to all its stakeholders.

A related question is whether the Potanin tax is the price the Putin administration has demanded for not reversing the illegal loans-for-shares scheme through which Potanin took Norilsk Nickel in the first place. If that is so, then it is not only palladium’s future, but Potanin’s, that must cast doubt on the company’s financial statements. Where is Pavlik Morozov, now that we need him?

Norilsk Nickel responds

John Helmer’s “Dances with the bears” is the writer’s opinion, which may not necessarily reflect that of this newspaper. This week’s opinion article contains references to a number of facts and statistics about Norilsk Nickel. The Journal, with the permission of Mr. Helmer, sent a copy of this article to Norilsk Nickel. The company responded promptly.

This is the full text of Norilsk Nickel’s response. Mr. Helmer will respond next week.

To the editor of The Russia Journal

Dear Sirs,

The article is so riddled with factual errors and fantastical allegations that I feel compelled to bring them to the attention of the investing public.

Norilsk Nickel has published its annual accounts, prepared in accordance with international accounting standards, for every year since 1999. Mr. Helmer’s article erroneously states that the company released its first annual accounts prepared to international standards. For the current year 2002, the company will prepare fully audited international accounts.

In August of this year, Norilsk Nickel repaid a loan to the Russian government in the form of metal deliveries in lieu of cash. This loan was granted in 1994 to what was then the state company Norilsk Nickel. The loan has been reflected in the company’s Russian accounts since 1994 and in the company’s international standards accounts since 1999, when such accounts were first produced. The terms of the loan are subject to Russian state secrecy laws, while the existence of the loan, its size and applicable interest rate is public information and has been reflected in the company’s accounts at all times. In that sense, Mr. Helmer’s reference to “secret loans” appears to be deliberately misleading: the loan is not and never has been a secret. Its terms are. In fact, the company took steps this year to repay this loan early (before maturity), precisely because Norilsk Nickel did not want to continue holding on its balance sheet a material liability, the terms of which could not be fully disclosed to the investing public by reason of the application of Soviet-era secrecy legislation.

Further, Mr. Helmer’s use of the plural form “loans” is not just misleading, it’s dead wrong. The company received just one loan from the state in 1994 which was repaid in full in August 2002. No, Norilsk Nickel does not intend to repay the “balance of its indebtedness to the state in the same way,” as the article suggests, because Norilsk Nickel has no other indebtedness to the state, as is plainly evident from the company’s publicly available (for example, from the company’s Web site) international accounts.

While I wholly disagree with the fantastical conclusions that Mr. Helmer advances in his article, my purpose is only to point out that, to the extent that Mr. Helmer purports to derive his conclusions from facts stated in his article, his facts are simply dead wrong.

I am pleased, however, with Mr. Helmer’s concern for the well-being of our shareholders. On that score, I am delighted to say that earlier this year Norilsk Nickel announced a dividend policy of returning 20-25 percent of the company’s profits, in accordance with international accounting standards, to all shareholders in the form of cash dividend payments. This year the company has declared a dividend payment of 23 rubles ($0.74) per share, which was the highest dividend yield of any blue chip Russian corporate.

Sergei Polikarpov,
Head of Investor Relations,
Norilsk Nickel.

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