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In 1708 George Friedrich Handel was just starting out on his brilliant career as a composer, when he spent a fortunate year in Rome. Fortunate because a wealthy Roman commissioned him to compose music for regular performance on Sundays at the patron’s home.

One of the most beautiful pieces Handel wrote at the time – one of the most beautiful he wrote during his entire life – was a cantata called Tra Le Fiamme (Amid the Flames). The songs are about unreasonable ambition and passionate love, and it includes a memorable line of warning to all:

“To those who are not born as birds, flying is a miracle, and falling comes naturally.”

The owner of Norilsk Nickel, Vladimir Potanin, would like to be known himself as a man of culture; and if composing music is beyond him, he has been putting money where his talents might otherwise be. He’s bought a well-known painting for the Hermitage Museum, and he’s sponsored the St. Petersburg opera in Los Angeles. His property, Norilsk Nickel, is trying to be magnanimous with its money, and more worthily, it is trying to be transparent.

Now, transparency is to shareholding corporations like walking is to bipeds, and flying is to birds. Which is why Handel’s fine line ought to be a warning to those in charge of Norilsk Nickel – if it can’t fly, it is bound to fall.

The release of the company’s annual report and financial statements for 2001 last month led me to raise questions about some of the disclosures, and about what remains hidden in the corporate accounts. My questions in turn led Norilsk Nickel to criticize me for writing a piece that was “riddled with factual errors and fantastical allegations.” The one error that was identified was that I had referred to secret loans,” when, according to the company’s head of investor relations, Sergei Polikarpov, there was just one loan from the state. That loan, Mr. Polikarpov said, “is not and never has been a secret, its terms are.”

Let’s see if, as explanations go, that will fly.

According to Norilsk Nickel, the value of the loan repaid in 2001 and 2002 was 26.3 billion rubles, or a little less than $900 million. According to the company, the loan was to fund the execution of the state program of fuel, food and other deliveries to the northern region where Norilsk is located. A state budget obligation in Soviet days, performed regularly by Norilsk Nickel as a state enterprise – and no secret at all. Nor was this function a secret when the Russian state budget was unable to pay it outright. But if the state budget owed Norilsk Nickel for carrying out budget functions, Norilsk Nickel also owed the state budget for unpaid taxes. The latter evidently exceeded the former, and when the company reached an agreement in the mid-1990s to resolve its budget obligations, the difference should have been settled.

But a senior government source has told me the money was loaned to Norilsk Nickel for quite another reason. According to him, the loan was an advance against production of precious metal – principally, palladium – and was similar to the loans to gold producers which the Finance Ministry’s precious metals agency Gokhran regularly made in those days. That too was no secret.

What was, and still is secret, is the palladium and platinum which Norilsk Nickel produces. Part of the reason for the secrecy is that Norilsk Nickel is the largest producer of palladium in the world, and with a handful of South African companies, it is the international market-maker in the metal. What I suggested about Norilsk Nickel’s disclosure that it had repaid nearly $900 million in palladium was that this was a form of tax on the windfall profit between what Norilsk Nickel was declaring to the government, and the speculatively high price its palladium was fetching in the international spot markets.

According to my senior government source, the repayment in metal was the usual way in which Gokhran advances were repaid. What he omitted to explain was why the palladium was delivered, according to Norilsk Nickel’s financial report, in the years 2001 and 2002. Gokhran gold loans are usually repayable in metal at the end of the mining season in which they are paid. Does this mean that Norilsk Nickel has been transferring palladium to Gokhran’s stockpile ever since 1994? Does it mean that Norilsk Nickel should have been making the transfer, but didn’t, at least until Valery Rudakov took over as head of Gokhran in December 1999, and until he was forced to retire in June 2002?

Because the state stockpile of precious metals and diamonds is covered with secrecy, the volume of the palladium transferred by Norilsk Nickel can’t be disclosed. Depending on the metal price that was used in the payback, it could have been as little as 1.4 million ounces, or as much as 4.5 million ounces. For several years, Norilsk Nickel has firmly denied that any transfer of its palladium to the state stockpile was taking place, and that it was selling all it produced on the open market. Whatever the number, the disclosure has firmly dispensed with that claim, and also with the notion – common among Western precious metals analysts – that the state stockpile of palladium was dwindling rapidly.

There are many other questions that arise out of Norilsk Nickel’s attempt to be transparent in its accounts. Its nickel report, for example, claims to show that $1.3 billion was earned in revenues from the export of nickel in 2001.

According to the price given in the report as the average realized export price, the revenue total represents 235,000 metric tons. But the company report also claims that only 182,000 tons were exported, out of just 223,000 tons produced. That was a year in which Norilsk Nickel had been keen to boost the nickel price by convincing the market it was cutting its exports substantially.

So how did it manage to export more metal than it produced? To be precise, 53,000 tons more nickel, earning almost $300 million. The answer is guesswork.

But in the marketplace it is believed that Norilsk Nickel had shipped a large volume of nickel abroad for stocking, before the metal was sold. Thus, nickel produced in 2000 wasn’t sold or logged as an export sale until a year later.

Hiding this nickel, trade sources believe, was a sound corporate tactic for holding up the nickel price. But was it legal, according to Russian customs and Central Bank regulations? Did Norilsk Nickel hide $300 million from its 2000 accounts, in order to disclose it the following year? And if that happened last year, what may be in hiding this year, which we can’t expect to know about until 2003 or possibly even later?

Norilsk Nickel is hardly the only major Russian corporation that may be suspected of hiding large export flows for one reason or another. It is happening in oil and in aluminum, and in other resource exports as well.

But ask the international bankers who lend money against the collateral of these resources, and they will tell you this: if large volumes of output are being hidden, then they represent the risk that, if sold, they could upset the demand-supply equilibrium, and push down the metal price. That in turn will diminish the value of the collateral which secures repayment of the Russian loans. Thus, hiding threatens the credit on which Russian exporters depend.

Understanding this, and answering commonsense questions, are how companies like Norilsk Nickel learn to walk, and perhaps then to fly.

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