By John Helmer in Moscow

Herbert Smith is the large London-based law firm whose role in representing the Tajikistan Aluminium Company (Talco) has helped set one of the highest fee-charging cases in the UK High Court in recent history. The law firm also helped itself to some of the judge’s personal notes and papers in the case. That discovery led Justice Stephen Tomlinson to publicly rebuking Herbert Smith’s counsel in the case, Murray Rosen, just days before the case was settled out of court on November 27.

The UK High Court case began as a claim by Talco alleging fraud and mismanagement by Avaz Nazarov and others, who traded with the plant until they were ousted at the end of 2004. Nazarov filed a counter-claim, accusing the Talco management of fraud, forgery, and a scheme to force the plant to operate at a loss, while the profits of its aluminium exports were channeled through companies in the British Virgin Islands (BVI).

International banks, and the US and Norwegian governments, have become embroiled in the affair.

In June of this year, the International Monetary Fund (IMF) issued a public report ordering an independent international audit of Talco’s accounts, and charged the company with “most worrisome financial operations [which] remain nontransparent.” The IMF also ordered the establishment of “a special monitoring unit at the ministry of finance”, whose mandate will include identification in Talco’s books of “untapped tax revenues and hitherto hidden contingent liabilities.”
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by John Helmer - Tuesday, December 23rd, 2008
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By John Helmer in Moscow

Oleg Mitvol, Russia’s well-known mining regulator and gadfly to AIM-listed stock values, has filed a half-dozen lawsuits in Moscow, challenging the terms of his removal from his functions. And he appears to have Deputy Prime Minister Igor Sechin on his side.

The legal and political moves follow months of effort by Vladimir Kirillov, the new chief of Russia’s mine licence inspectorate, Rosprirodnadzor, has tried to fire Mitvol, his independent deputy. In the annals of the federal Ministry of Natural Resources, Mitvol’s resistance is unique; as is the apparent reluctance of the minister, Yury Trutnev, a former provincial governor backed by the LUKoil oil company, to intervene in the contest of wills, and in the conflict below the surface of Russia’s use-or-lose resource licensing policy.

On June 18, the state newsagency Itar-Tass reported that Mitvol had been “stripped of his water, forest and ecological supervision powers, which have constituted most of his competences”. This was the first sign of an apparent official decision, following informal efforts by Kirillov, commencing in February, to press Mitvol to resign. An anonymous source was cited by Itar-Tass for its information. It was also reported that “according to the source, the Rosprirodnadzor chief, Vladimir Kirillov, has no intention of submitting a motion to Natural Resources Minister Yuri Trutnev for re-appointing Mitvol as his deputy.” Itar-Tass confirmed Mitvol as saying: “As far as I know, in a future staff list, yet to be authorized, the position of a fourth deputy, that is, of yours truly, is absent.”
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by John Helmer - Tuesday, December 23rd, 2008
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by John Helmer - Monday, December 22nd, 2008
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By John Helmer in Moscow

Mechel, the fifth-ranked Russian steelmaker and leading coal miner, lost 2.6% from its New York-listed share price as the market failed to react positively to this week’s company’s release of nine-month financial results. The Mechel group’s market capitalization is currently $2 billion. It was twelve times larger, $24.4 billion, when the share price hit peak on May 19 of this year.

Mechel is one of the leading Russian suppliers to China of coking coal and iron-ore concentrate, which are shipped from Posyet, a company-owned port close to the North Korean border.

The state guarantee implied in the award of a $2 billion loan from Vnesheconombank (VEB) — reported in the Moscow press at the start of December, but not confirmed by the bank or the company — has also failed to lift confidence in Mechel. One reason may be that VEB has so far refused to lend the money.

A company-inspired press leak on December 1 claimed that VEB had given “preliminary approval” to the big loan. According to VEB announcements last month, it has undertaken to process loan approvals within 18 days of application. In Mechel’s case, the deadline has now passed. Three weeks after the press leak, according to Mechel spokesman, Ilya Zhitomirsky, the company is not confirming or denying whether it applied for the VEB loan. Nor is Mechel saying whether it will get the VEB money.
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by John Helmer - Friday, December 19th, 2008
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By John Helmer in Moscow

Russia kept its observer’s status at this week’s summit conference of the Organization of Petroleum Exporting Countries (OPEC), and avoided taking the plunge into membership of the international oil cartel that was hinted at by the Kremlin last week.

At the same time, the Kremlin is playing a siren song to attract greater coordination of the international gas trade when the cartel of gas producers meet to hold hands in Moscow next Tuesday, December 23.

The new OPEC cut of 2.2 million barrels per day (bpd) in output quota will not be supplemented by a fresh Russian cut, although Igor Sechin, the deputy prime minister in charge of the oil sector, announced at the meeting in Algeria that if crude prices do not start to recover next year, Russia will cut export volumes by another 320,000 bpd, following the 350,000 bpd export cut in November.

The projected cut looks likely to occur whatever Sechin says, because falling prices have reduced incentives to produce among the smaller Russian producers, and the majors are also cutting back on field expansions, and delivering more of their crude to domestic refineries, instead of to the ports for export as crude.

The Russian move was considerably less than the 400,000 bpd cut OPEC members had sought. Also, Russia has not agreed to a specific cut by a specific date, as the OPEC countries have done. Industry sources note that it is more difficult for Russia, compared to leading OPEC members like Saudi Arabia, to close down producing wells, as the harsh operating conditions in Siberia make it difficult to recommission the wells later.
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by John Helmer - Thursday, December 18th, 2008
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By John Helmer in Moscow

A 21-day ultimatum has been issued to the Russian government to put up the Grib pipe in Arkhangelsk for development by a joint venture between De Beers and LUKoil; or else De Beers will walk out of Russian diamond mining for good.

Sources close to De Beers claim that some senior executives in London are bluffing, in order to halve the $100 million payment which De Beers must pay LUKoil, if the agreement is finalized with the Kremlin by December 31. These executives believe that falling global demand, declining diamond prices, and a growing shortage of cash oblige De Beers to seek a modification of the terms of agreement, signed with LUKoil in mid-April. But some De Beers executives are more reportedly pessimistic. After a recent review of project costs, they are proposing to abandon the Arkhangelsk project altogether, and expect that LUKoil and the Russian government will oblige them by ignoring the ultimatum’s New Year deadline.

The ultimatum came in a press release from De Beers’s Toronto subsidiary, Archangel Diamond Corporation (ADC), labeled “notification of a Termination Event”.
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by John Helmer - Wednesday, December 10th, 2008
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By John Helmer in Moscow

The Indian government has until midnight to decide whether to pay a huge premium for undeveloped Siberian oil reserves held by one of the most highly leveraged oil companies in the Russian market. Yesterday, the UK Takeover Panel refused to extend the deal deadline beyond today. The oil is located in the Tomsk region, near the Chinese border, China and Japan have better chances of receiving the crude than India. Imperial Energy Corporation, a London listed company, owns the oilfield development licences, and controls the oil, which is still running at a trickle. In July, Imperial accepted a takeover offer from the Indian state group, Oil & Natural Gas Corporation (ONGC), for GBP1.4 billion ($2.1 billion). Since then, President Dmitry Medvedev and Prime Minister Vladimir Putin have given their approval.

They, however, may be backing Gazprom and Rosneft, both state owned, to buy a control share of Imperial from ONGC, in a second, and hitherto undisclosed transaction. That, it is speculated, is one reason the Indian bid has not been lowered to close the $800 million gap that has opened up between the original bid, and today’s market value of Imperial at $1.3 billion. According to ONGC, it must secure fresh sources of crude oil, outside India, to meet the demand. ONGC also defends its premium offer by forecasting $100 per barrel pricing for oil in future. So far, however, ONGC’s oil import replacement scheme has resulted in equity stakes in Russian assets, without dividends, and not oil that can be loaded on tankers.

by John Helmer - Tuesday, December 9th, 2008
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By John Helmer in Moscow

A surprise board reshuffle announced on Wednesday by the Evraz group, Russia’s largest steelmaker, has triggered a sharp negative market reaction. It has fueled speculation that Prime Minister Vladimir Putin and the board of the state bailout bank, Vnesheconombank (VEB), are unhappy with the way in which Evraz has heavily leveraged its Russian mills, in order to buy North American assets, and is threatening more active state supervision of the company’s operations.

Evraz’s share price was cut 8.3% in Wednesday trading in Moscow, while other Russian steel majors remained largely unchanged, and the index as a whole dropped less than 3% on the day. The reaction against Evraz came after the company issued a statement that its board had elected former controlling shareholder, Alexander Abramov, to be chairman of the board, replacing Alexander Frolov.

The board move is a fresh sign of Kremlin displeasure at the way the oligarchs running Russia’s steel business have enriched themselves at the expense of the domestic economy. Evraz is currently producing steel at about 60% capacity at its Russian mills, having cut output and employment more sharply in Russia than in its operations outside Russia. Two of the Russian mills, Nizhny Tagil and Zapsib, were forced to admit last month that they lack the cash to pay their tax bills, and have had to borrow $360 million to cover their obligations. This is in addition to the VEB loan of $1.8 billion, confirmed by the company on November 27. The first tranche of $201.3 million has already been drawn.
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by John Helmer - Thursday, December 4th, 2008
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By John Helmer in Moscow

Prime Minister Vladimir Putin has finally put in writing what Gunvor owner, Gennady Timchenko, has been lobbying the Kremlin to support for several years, ousting Transneft pipeline boss, Semyon Vainshtok, in the process. This is a new state-backed crude oil pipeline for the purpose of putting in business a new, Gunvor-owned tanker loading terminal at Ust-Luga, just 80 kilometres across the Gulf of Finland from Primorsk, Russia’s main Baltic oil outlet.

Why Ust-Luga? Gunvor declines through a spokesman to say. Putin’s order, signed this week, authorizes the design and construction of the BPS-2 (Baltic Pipeline System) pipeline that will pump crude from Unecha in the Bryansk region, about 900 kilometres northwards to Ust-Luga. Initial capacity in the Gunvor plan is for 600,000 barrels daily to be ready for tanker loading in 2012. A second stage of the plan, doubling capacity to about 1.2 million bd, is also on the drawing-boards. But the cost of the first stage has jumped from $2 billion, estimated when Transneft’s CEO Vainshtok was opposing Timchenko two years ago, to about $4.8 billion today.

The Geneva-based oil trader has been building the dominant trade position for Russian export crude, and in parallel with increasing the volumes it takes to market, the closely held company has been expanding its positions in rail transportation of oil, port loading, and tankering through ties to Sovcomflot, Russia’s state owned tanker group.
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by John Helmer - Wednesday, December 3rd, 2008
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By John Helmer in Moscow

In theory, Russia’s economic performance is correlated with global supply and demand for mined materials and commodities, and thus with the rate of global economic growth, especially China.
In the Russian market, 80% of earnings come from commodity stocks. Before the collapse, the enormous gains in market capitalization of Russian producers and exporters of gas, oil, nickel, copper, aluminium, iron-ore, coal, steel, potash, nitrogen fertilizers, and precious metals showed how dependent Russian asset value was on the belief that global demand was in an unstoppable super-cycle, sustained by China.

In addition, the valuation of the ruble itself is dependent on commodity prices; at low oil prices, the ruble needs to fall in order to counter the terms of trade shock. Therefore, the easy forecast for 2009 is that the market will remain subject to the global growth cycle, as everyone could see when it bottomed out in 1998 and 200, and bounced back over 2003-2007.

The not so easy question, then, is whether or not Russia will start to move up faster or slower than the rest of the world — as a leader or a laggard in the recovery cycle. The International Energy Agency (IEA) argues that the underlying shortage of crude oil supply in the market is so significant that as soon as global growth returns, the oil price will rise. As the oil price is the principal variable for Russia’s macro position, and one of the few reliable sources of tax revenue for the Russian state budget, the market should be expected to react positively and rapidly.
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by John Helmer - Tuesday, December 2nd, 2008
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