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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By John Helmer in Moscow

The Russian Federation’s decade of rampant economic growth has been a boon to maritime activity and ports on the Black Sea. But the good times are coming to an end, writes John Helmer

Russia has been aiming to develop dry cargo movements, both export and import, as the preferred direction for Russian oil exports shifts eastward towards China, and from Arctic oilfields in the north westwards into northern Europe. Of course, that was before the global financial crisis intensified earlier in the autumn.

But the signs of trouble were there to be seen as early as July. Container volumes into Novorossiysk, Russia’s leading Black Sea outlet, had been booming on the back of growth in Russian incomes and consumer demand – up 42% in the first five months of the year, compared to 2007. By July, however, the turndown was already on the horizon. Novorossiysk reported for the month that container volume had slipped 10%, compared to June, and by 33% compared to July 2007. Reefer volumes fell in parallel by 84% and 63%, respectively. Steel, scrap, sugar, timber, and non-ferrous metals also fell sharply in the month, compared to the same period of last year. Crude oil, the mainstay of Novorossiysk, remained flat, both June to July and year-on-year.

The gloom had also started to descend on the Azov Sea ports, as the export of steel, aluminium, copper, and scrap began to suffer from falling global prices and falling export demand. In their place, there was the Turkish cement boom, which began in January this year, after Moscow had eliminated the import duty and encouraged Turkish imports to supply the burgeoning demand, especially in southwest Russia, along the Black Sea coast, for construction materials. Import volumes of mineral construction materials (MCM) also skyrocketed. Reports from the regional North Caucasus Railroad indicate a 30% jump in MCM tonnage transported, compared to the first half of 2007. Cement more than doubled to about 1.5M tonnes in the same period.
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by John Helmer - Saturday, November 29th, 2008
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By John Helmer in Moscow

In a stunning repudiation of Tajikistan’s President Emomali Rahmon, lawyers for the Tajikistan Aluminium Plant (Talco) agreed overnight to halt their High Court case in London. They have settled with Avaz Nazarov, the Ansol company, a former manager and traders of the aluminium plant, whom Rahmon and his cronies ousted in December 2004, in a scheme that has diverted more than half a billion dollars in aluminium export profits to safe haven in the British Virgin Islands.

Details of the settlement have not been made public; Nazarov and the others decline to comment. But the ramifications of their victory have only started to be counted — in Dushanbe, at Rahmon’s presidential palace, and in the board rooms of several international organizations, whose executives have been implicated in the frauds alleged in the court testimony, and documented in the evidence presented so far. The overnight agreement by the lawyers puts a stop to further disclosures in London, but the evidence remains for possible prosecution in Oslo, and internal investigations at the European Bank for Reconstruction and Development (EBRD), the World Bank, and the International Monetary Fund (IMF), who have been backing Rahmon in the litigation that has now failed.

Although noone is saying, the confidential settlement appears to include reimbursement by Talco of the multi-million pound costs incurred by the targets of the court case, one of the most costly ever recorded in the UK courts.
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by John Helmer - Thursday, November 27th, 2008
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The news has just been received from London of the capitulation overnight of President Emomali Rahmon and the Tajikistan Aluminium Plant in their court case against Avaz Nazarov and a group of former managers and traders of the aluminium plant. The terms of the settlement, and details of the circumstances, which put a stop to one of the most costly court cases ever litigated in London, will follow shortly.

One of the key documents in evidence is an agreement involving Hydro Aluminium of Norway, the European Bank for Reconstruction and Development, and the World Bank, implicating their senior officials in what has been described in court as a racketeering scheme to divert hundreds of millions of dollars of profit out of Tajikistan.

Settlement Agreement between Norsk Hydro and TadAZ, Dec 20, 2006

by John Helmer - Thursday, November 27th, 2008
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