By John Helmer in Moscow

Uralkali (ticker URKA:RU), once Russia’s fastest-rising potash miner, continues to wait nervously under the Damocles Sword of a government ruling, which may put the company, or its controlling shareholder, Dmitry Rybolovlev, out of business. Still, Moscow investor sentiment firmed last week, lifting the miner’s London and Moscow-listed share price by 24% to $1.28, after seven months of steep decline. Current market capitalization of the company is $2.7 billion. At last June’s peak, it was $31 billion.

The Deputy Minister for Natural Resources, Semyon Levi, held a meeting last Thursday, February 12, in Moscow to review estimates of the bill for costs compensation and liabilities facing Uralkali from the subsidence and loss of Mine-1 at Berezniki, in the Perm region. The collapse and loss of the mine occurred in October 2006. revival of government claims against Uralkali began, apparently on the initiative of Deputy Prime Minister Igor Sechin, in October 2008.

Hints from Prime Minister Vladimir Putin, Sechin and others suggests they have in mind to dispose of Rybolovlev, and reorganize Uralkali under the control of Vyacheslav Kantor, who currently controls the nitrogen fertilizer producer and exporter, Acron. For reasons of either their personal security or comfort, both Rybolovlev and Kantor prefer to live in Geneva, and run their Russian operations from there.

This Russian scheming is taking place against a background of serious drought in northern China, affecting the wheat crop. Chinese press reports this month, and a report on February 13 by Merrill Lynch, suggest that the drought may cut China’s wheat production at harvest this year by 13%, compared to last year — or about 15 million tonnes. Henan, Hebei, and Shandong are the provinces hardest hit so far by the lack of rainfall. The winter crop (planted in August, harvested in May) is more important than the crop planted in the spring, and it is the one currently suffering from drought. If the spring rains fail next month, then the drought is likely to hurt both crops.
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by John Helmer - Monday, February 16th, 2009
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By John Helmer in Moscow

The Agatha Christie story of 1939 started with a title and a children’s rhyme that are no longer printable for their racist connotations. The story has ended up being called “And There Were None”. Everyone turns up dead — 9 murdered, 1 suicide. It is the biggest-selling of all Christie’s plots – about 100 million copies sold so far.

A year ago, there were 19 Russians with a fortune estimated by Forbes at $9 billion or more. That qualified them in the Forbes top-100 worldwide. At the top was Oleg Deripaska; at the bottom, Alisher Usmanov. In the middle were Vladimir Potanin, Mikhail Prokhorov, and Victor Vekselberg. These men are all stakeholders in Norilsk Nickel (MNOD:LI, GMKN:RU), Russia’s largest hard-rock mining company, and a world leader in production of nickel, copper, platinum group metals, and cobalt. They are also fighting fiercely among themselves for control of the company, whose market capitalization this week is just under $8 billion. At peak last year it was $60 billion.

Two of the Russian stakeholders are already facing the law courts of the US and the UK. The outcome of the litigation directly affects the Russians’ credit and risk reputations with their banks; covenants that have been signed, also with the banks; their fitness under UK company law to sit on London listed companies; and their freedom of movement under US, UK and European Union visa regulations.

Deripaska is currently before the UK Court of Appeal, attempting to overturn the High Court judgement of last July, requiring him to stand trial for the multi-billion dollar contract violation claim of former partner, Mikhail Chernoy. Deripaska denies the claim.
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by John Helmer - Thursday, February 5th, 2009
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By John Helmer in Moscow

Prime Minister Vladimir Putin has been reading his economic history.

He knows that the Smoot-Hawley Tariff Act (named after its sponsors, Congressman Willis Hawley and Senator Reed Smoot) was the American statute enacted on June 17, 1930, which raised US tariff barriers against more than 20,000 imported goods to record levels — over the objections of the then President Herbert Hoover, and most of the US economics profession of the time. After the enactment of Smoot-Hawley, other countries retaliated with their own increased tariffs on US goods, and American exports and imports plunged by more than half. The combined impact on international trade is generally thought to have turned the stock market collapse of 1929 into the Great Depression.

Speaking at Davos, a few days ago, Putin warned against Smoot-Hawley. “We must not revert to isolationism and unrestrained economic egotism. The leaders of the world’s largest economies agreed during the November 2008 G20 summit not to create barriers hindering global trade and capital flows. Russia shares these principles. Although additional protectionism will prove inevitable during the crisis-and we see it today, much to our regret-all of us must display a sense of proportion.”

In the question-and-answer session which followed, the Russian prime minister conceded: “True, we are increasing import duties of certain ready-made equipment to promote Russian manufacturers-but I don’t think we are extremists in this respect. We are also reducing and even abolishing import duties for technical equipment, especially of the kind Russia is not manufacturing, thus promoting Russian industrial advancement.”
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by John Helmer - Tuesday, February 3rd, 2009
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By John Helmer in Moscow

It’s just as normal, geologically speaking, for potash mines to subside and flood, as for high-profit businesses to be taken over, if the price is a bargain, commercially speaking. Deputy Prime Minister Igor Sechin deserves some credit for combining the two — reviving a two-year old geological anomaly, in order make the takeover of Russia’s most expensive potash miner affordable.

On October 29 last, Uralkali (URKA:LI) had a market capitalization of $6.373 billion. In the three months since July, it had lost 64% of its value, because of the global collapse in equity values. In comparative terms, this was marginally better than the Russian RTS stock market index as a whole, which had dropped 67% in the same period.

This week, Uralkali’s share price fell 20% in Monday trading, and now stands at $2.145 billion. It has lost $4.228 billion in value in the three-month interval since October 29, roughly double the decline of the RTS index. The potash miner has been losing asset value at a rate of $45 million per day, including Saturdays and Sundays.

But the spot price for potash has remained virtually flat, unchanging since last July. A big deficit in supply of potash in the first half of 2008, and rapid action by Russian and North American producers to cut output in the second half of the year have combined to hold the bellwether price for potash delivered to Brazil at the $1,000 per tonne mark. It is also being held up by demand drivers — a sharp contraction in grain inventories, and a forecast improvement in grain prices.

Uralkali’s North American peers also lost share value and market capitalization from July. But they bottomed in December, and have been gaining value since then. Potash Corporation (POT:US) is up 44% since its December low, and its current market cap is $22 billion. Mosaic (MOS:US) is up 60% since December, and its market cap at the moment is $16 billion. Comparing the ratios of share price to earnings (P/E), Uralkali dropped to 2.7 for 2008, compared to 11.7 in 2007; and compared to 5.3 and 5.5 for Potash Corp and Mosaic, respectively, in 2008.
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by John Helmer - Tuesday, February 3rd, 2009
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By John Helmer in Moscow

Russia’s leading maritime fleet executives, who were keen to announce newbuild orders and fleet renewal plans a year ago, have become very coy in the face of falling cargo volumes and freight rates, and the expiry of long-term charters. The principal lenders to the Russian shipping companies are even more uncommunicative.

State-owned Sovcomflot is the fleet leader with 132 vessels totaling 9.4 million dwt, and 31 vessels currently on order for another 2.7 million dwt. Ranking itself in the top-5 global tanker companies, Sovcomflot’s last annual report for 2007 refers to long-term debt of $2.1 billion, up 11% on 2006; the “current portion” of the long-term debt is $153 million. The interest expense line shows interest repayment in 2007 at $90 million, up 29% from 2006, when it was $70 million. There are no auditor’s notes or elaborations of debt or fleet valuations in the text of the report. The only reference to bank lenders for fleet says: “Sovcomflot has long established relationships with major Russian and international banks allowing it to secure long-term debt financing on attractive terms.”

Novorossiysk Shipping Company (Novoship), also state owned, reports that its current fleet of 52 vessels comes to 4 million dwt, and its order-book includes 14 vessels for another 1.4 million dwt. The company provides no further detail on fleet financing or debt.

A Russian fleet insider says that Sovcomflot, which has taken shareholding control of Novoship, has persuaded lenders to value ships with a formula based on the purchase price extended for 25 years. Before the adoption of this formula, the Sovcomflot fleet was valued every year at market value, with revaluation differences reflected in the annual financial statement on the profit/loss line. It is unclear what valuation policy Sovcomflot’s lending banks are now insisting on, or what balance-sheet and replayment impacts this is having at present.
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by John Helmer - Monday, February 2nd, 2009
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By John Helmer in Moscow

In outer space, as everyone knows, the absence of the force of gravity produces the appearance of weightlessness. Everything floats away.

The markets have decided that Russia is now without gravity; its equities are without weight, and at risk of floating away. Late last year, the RTS, the principal stock market index, starting decoupling from the price of the principal Russian export, oil, as the latter started to plummet. The emerging market investment funds, which have also moved with oil and Russia’s other exportable commodities, also decoupled from commodity prices and the RTS. Since the start of January, the RTS and the oil marker have been in negative correlation. That means that even if the oil price goes up, Russian share prices go down. This is the equivalent of outer space.

It is no surprise, therefore, that everyone in the Russian market is gasping for an oxygen-mask, and a safety belt.

President Dmitry Medvedev and Prime Minister Vladimir Putin believe they are the constitutionally elected heads of government, and imagine their government is the air supply and safety-belt of the state. Those officials aligned with them — Deputy Prime Minister Igor Shuvalov with Medvedev, Deputy Prime Minister Igor Sechin with Putin — like to think that, although elected by noone to nothing, they too are the safety-belts, and pilots, of the state. Watch them closely — the more carefully Shuvalov brushes at his coiffure, and Sechin draws his face into a scowl, the more you can be certain they think they are in charge of Russia’s mass, motion, weight, air supply.

Without a banking and state audit system accountable to parliament, without a parliament accountable to the voters, and with regional governors and mayors appointed, not elected, where else can the force of gravity be located? If not with them, then all of Russia has indeed decoupled, and equity is in danger of valuelessness.
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by John Helmer - Friday, January 30th, 2009
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By John Helmer in Moscow

In the Kingdom of Russian fertilizers, there has been the Power and the Glory of hugely profitable export margins and high-flying share prices. But there is only one Will which can be done.

Prime Minister Vladimir Putin visited Acron’s Novgorod chemicals plant last Sunday, January 25, and he appeared to give his personal blessing to a string of costly financial and industrial blunders by Vyacheslav Kantor, the Geneva-based founder and controlling shareholder of the company. Putin was accompanied by Deputy Prime Minister Igor Sechin, who is currently reviewing several plans to consolidate Russian mining companies, including the principal potash and phosphate producers.

At the Acron plant, Putin is quoted by Bloomberg as saying: “The owners of this enterprise not only keep jobs in quite difficult conditions, they also develop the social sphere. Owners of the enterprise are not poor people. If those who deal with real production also have a feeling of social responsibility, we will support such people.”

The list of Acron’s supervisory board and senior management, and the disclosure of shareholders, do not include Kantor, who owns almost 72% of the company. But it isn’t difficult to determine how much of Acron’s profit, and Kantor’s wealth, derives from what can be termed “real production”. An experienced kabbalist might be needed, however, to interpret why substantially more “real” producers in the fertilizer sector than Acron have failed to qualified for Putin’s nod.

Kantor’s company Acron (ticker AKRM:RM) is Russia’s leading producer of complex fertilizers. These are a combination of the three basic chemical nutrients for plant growth — nitrogen, potassium, and phosphorous; or a combination of urea, phosphate, and potash, referred to by the acronym NPK. Nitrogenous fertilizers are derived from natural gas; potash and phosphates are mined. Acron mixes the ingredients and trades the NPK product in higher volumes than any other fertilizer producer in Russia, earning a higher margin on the spot price than the individual fertilizers which comprise it. But Acron doesn’t produce — that’s real production — the feedstocks which comprise the product it sells. It has bought licences to start mining the real stuff. But it is years away from that — and if what Kantor told Putin is the truth, Acron has no hope of ever getting there.
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by John Helmer - Thursday, January 29th, 2009
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By John Helmer in Moscow

Jonathan Oppenheimer, the embattled heir to Nicky Oppenheimer and to the struggling De Beers group, and Vagit Alekperov, chief executive and controlling shareholder of LUKoil, one of Russia’s leading oil producers, have started fighting again over the disputed Grib pipe; also known as the Verkhotina project in the northwestern Russian region of Arkhangelsk.

The diamonds at stake, unmined below the surface, were estimated a year ago to be worth $9.7 billion. Until the start of January, Oppenheimer and Alekperov were almost equal partners in a joint venture, signed last April, to develop a mine at Verkhotina. Now they are adversaries again, as Oppenheimer reshuffles his crew for a fight; and Alekperov signals that he is engaging a French company to start independent drilling at the minesite.

Oppenheimer has appointed one of his closest associates in the company to the board of Archangel Diamond Corporation (ADC). The announcement of Tony Guthrie to the ADC board was issued by ADC on January 23.

ADC’s Toronto listed share (ticker TSXV:AAD) lifted from 5 Canadian cents to 6.5 cents on the news. The Candian junior, controlled by De Beers, is the only foreign mining company ever to find, and try developing a diamond mine in Russia.

The ADC release is curt, giving no reasons for the shakeup of its board. “Archangel Diamond Corporation … has announced the resignation of Mr. Bruce Cleaver as Chairman of the Board and a director of the Corporation and Mr. Jonathan Dickman as a director of the Corporation. The Board expresses its appreciation for their services to the Corporation. Mr. Robert Shirriff, a current director of Archangel, has been appointed Chairman of the Board in place of Mr Cleaver. The Board has appointed Mr. Tony Guthrie and Mr. Steven Thomas to the Board to fill the vacancies created. Mr. Guthrie is a mining engineer and senior manager with De Beers Group Services in Johannesburg. Mr. Thomas is Chief Financial Officer of De Beers Canada in Toronto and is also Chief Financial Officer of Archangel.”
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by John Helmer - Thursday, January 29th, 2009
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By John Helmer in Moscow

Premature ejaculation is not usually an event which gentlemen call a public meeting to disclose. At least, not unless they are selling a cure.

The announcement this week in Moscow by Tye Burt and Yevgeny Ivanov, chief executives of Kinross Gold (KGC:US) and Polyus Gold (PLZL:RU), that they have signed a preliminary undertaking to think of doing a feasibility study in eighteen months’ time of the Nezhdaninskoye goldmine in Russia’s fareast is puzzling for its circumlocution, and its lack of specificity. According to the Polyus Gold announcement, the two companies “have concluded Memorandum of understanding on the possible joint development of Nezhdaninskoye hard-rock gold deposit located in the Sakha Republic (Yakutia)….within the time frame of 18 months the companies are planning to jointly prepare a Feasibility Study for the industrial development of the Nezhdaninskoye deposit.” Thereafter, another pair of conditionals — “upon completion of the Feasibility Study and, if warranted by its results, the parties will review the possibility to enter into a joint venture agreement for developing the Nezhdaninskoye deposit.”

Kinross has so far omitted to refer to Nezhdaninskoye, and Burt is not usually so coy. What is more, he already knows at least as much about Nezhdaninskoye as Ivanov. For this is one of the most carefully studied and valued gold deposits in Russia. First discovered in the Soviet period, and mined from 1975, it was thoroughly appraised in the early 1990s by David Deuchar, then technical director for Anglo American. The company decided the technical problems of the deposit raised costs above Anglo’s threshold of profitability, at the gold price prevailing at the time.

The mining rights subsequently went to Celtic Resources in its Irish phase. Then taken over by the West Australian Kevin Foo, all the detail the market might want for the deposit was issued in London, when Celtic was listed on the Alternative Investment Market (AIM). Although mining had been mothballed, and Celtic produced no gold for sale from the mine, Nezhdaninskoye performed as Celtic’s principal value- driver in the stock market, representing about 90% of its asset inventory. According to Celtic’s pre-feasibility studies and JORC count, Nezhhdaninskoye held 14 million oz of gold, with a prospective production rate of 450,000 oz per annum.
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by John Helmer - Wednesday, January 28th, 2009
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By John Helmer in Moscow

Once upon a time, in not so ancient Greece, a crooked banker had the idea of hedging the consequences of his crimes by buying a popular newspaper, and also a popular football team.

But the risk hedges didn’t work quite as he intended. The banker was indicted and jailed in his homeland; then escaped prison; and flew for asylum to the United States. He might have succeeded in securing safe haven there, for US officials wanted to give him asylum in return for his support of a Greek putsch they were planning. Instead, he was arrested before there was time for them to act. He spent three years in a US prison fighting extradition; and then a decade in prison at home. The government he tried so hard to attack survived him, and was re-elected.

That was an inauspicious debut for the idea of purchasing an asylum hedge through pop media and football teams.

The modus operandi – football team minus media – has been tested with greater success by the Russian, Roman Abramovich, in the United Kingdom. He hasn’t applied for asylum in London, where his team plays, but then he hasn’t needed to. A Russian state bank, chaired by the Russian Prime Minister, is lending his over-leveraged enterprises bailout money, and noone accuses Abramovich of indictable offences. Noone dares to.

Alisher Usmanov, another Russian who has bought a stake in an English football team, owns a newspaper in Moscow, and has also avoided the necessity of applying for asylum outside his homeland. His name appears in the civil court papers of a US court case involving a diamond mine, but he too is not guilty of anything.

Let’s be clear – just because a wealthy Russian buys pop assets in foreign lands doesn’t mean he’s guilty of anything. Except, possibly, of poor commercial judgement.
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by John Helmer - Tuesday, January 27th, 2009
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