Sukhoi Log (in Russian the name means “Dry Gulch”) is no longer an asset in which Kremlin and other government officials see value in mining. Value for themselves, that is.

Russia’s largest unmined gold deposit, and the second largest unmined deposit in the world, Sukhoi Log is located in remote forests northeast of Lake Baikal, in Irkutsk region. The nearest habitation is the old miners’ settlement of Bodaibo, a 30-minute helicopter ride away. Equally far away are electricity, roads, and fuel.

Containing at least 33 million troy ounces of gold, distributed awkwardly underground, there is little that is not already well-known to international goldminers about the deposit. This is because it was the principal asset of the now defunct Sukhoi Log Mining Company (SLMC), which in turn was a 50/50 venture of the Australian junior, Star Mining, also defunct, and the local alluvial mining association, Lenzoloto (“Lena [River] Gold”).

At a gold price of $475/oz, Sukhoi Log’s reserves are worth almost $16 billion. But if the gold price slips below $300, for those who have studied the project carefully, the mine’s profitability begins to look chancy.

The Star group invested more than A$50 million in prospecting, drilling, and preparing a feasibility study of the Sukhoi Log project between 1993 and 1997. Having engaged SRK and other consultants, Star reported on the deposit to several stock exchanges, investors, potential mining partners, and lenders, such as Standard Bank. Star also loaned Lenzoloto US$5 million.

But in 1997 Lenzoloto backed the revocation of the mining licence which it had held in partnership with Star through the SLMC. Lenzoloto then defaulted on the Star loan, which has never been repaid. Star defaulted in turn on financing it had received from Standard Bank. Star’s shareholding in Lenzoloto was subsequently diluted for the reason, claimed by Russians involved, that Star had not met investment targets in the project. At the time, Star was partnered by JCI of Johannesburg, when it was run by Bill Nairn, now of Anglo American.

The government official who arranged Star’s exit was Boris Yatskevich. At the time he was both deputy minister — later minister – of the federal ministry of natural resources, and chairman of the board of directors of Lenzoloto. After he had evicted Star, Yatskevich awarded a temporary exploration licence to Barrick Gold, enabling the big Canadian to drill its own holes, mapping the deposit and estimating the grade. The drill-core samples which Star had obtained were shipped to the SRK consultancy in Johannesburg, where they were assessed for both their gold and platinum value.

Having drawn what value he could from Star, Yatskevich’s action devalued Star’s feasibility study, and opened up new possibilities for, and with, Barrick. However, before he was fired for reasons never disclosed by the incoming President Vladimir Putin, Barrick had turned on Yatskevich, publicly accusing him of “favouritism”. By the middle of 2000, there was no-one in charge at the federal ministry who stood to benefit from the award of the Sukhoi Log licence. Yatskevich’s fate was a signal that there was much at risk in awarding the licence to anyone at all.

For five years, the Sukhoi Log licence remained in limbo, along with the gold price, and Yatskevich was forgotten. Then in May 2004, Putin appointed Yury Trutnev, a wealthy entrepreneur who had served as governor of the central Russian region of Perm. Presidents appoint, but others promote, and also pay. In Trutnev’s case, he was lifted from obscurity by LUKoil, one of the most powerful of Russia’s commercial oil companies, and its dominant shareholder, Vagit Alekperov. His interest and financial clout overwhelmed an alternative candidate proposed by Putin’s personal advisor on mining policy, Vladimir Litvinenko.

Litvinenko is Rector of the St Petersburg Mining Institute. As an academic, Litvinenko supervised Putin’s postgraduate study of natural resource policy. He has been called upon to advise ever since. These days, as Putin moves towards the end of his term in 2008, his subordinates compete for the cash to tide them over the succession. Litvinenko may have Putin’s ear, but he does not have Alekperov’s cash. Sukhoi Log, on whose future Litvinenko has a clear opinion, contains future gold, but does not produce current cash. Litvinenko’s opinion, therefore, has been ignored, while Trutnev sought to exercise whatever decision his constituents wanted, and his ministerial authority allowed him to make.

Within days of his appointment in 2004, Vedomosti, a Moscow newspaper then part-owned by Norilsk Nickel controlling shareholder, Vladimir Potanin, reported that tender conditions were being finalized for Sukhoi Log that would bar foreign-controlled goldminers from competing for the property. This was an obvious sop for Norilsk Nickel to win the bidding. Other contenders, such as Polymetal of St Petersburg, qualified on the national criterion, but lacked the cash to bid and then develop the project. Still others, like Highland Gold, were foreign-listed and tied to foreign miners.

Among other conditions of the proposed auction for Sukhoi Log, the newspaper reported that the winner would be obliged within four years to produce not less than 10 metric tons (320,150 oz) of gold, and in three further years to ramp production up to 25 tons per annum (804,000 oz).

This upped the cash requirement for first-stage development of the mine. Total investment obligations in the project were estimated at between $800 million and $1.5 billion, according to the newspaper report. Star had calculated similar numbers eight years earlier, proposing a mining plan that would have concentrated the initial pit excavation at the site of the highest-grade ore, and used the proceeds to move across the vast tract of the deposit to the lower-grade ore bodies, keeping the initial costs down. One of the biggest up-front costs, however, remained the infrastructure of power and roads, which the site lacks.

A compensation payment was reported to be included in the tender conditions. This purported to indemnify costs of development already incurred by Lenzoloto. In fact, it had been Star, which had done that work, not Lenzoloto, which is primarily an alluvial operator. This proviso was ostensibly also a payback to Norilsk Nickel itself, which had acquired Lenzoloto in 2003 – or to any other beneficiary Norilsk Nickel and Lenzoloto had in mind. Neither Norilsk Nickel, nor Lenzoloto had any intention of compensating Star.

Vedomosti‘s press leak came from Trutnev’s new team at the Ministry of Natural Resources in Moscow, where he had evicted as many officials, cooks, and drivers as he deemed to be potentially disloyal, or who stood in the way of the patronage he intended to award. That produced disgruntlement, and it was therefore no surprise when officials at the Ministry’s licensing division refused to confirm what they were intending to do with Sukhoi Log.

For several years there had also been serious differences between this Ministry, the federal Ministry of Economic Development and Trade, and the regional government of Irkutsk over the terms of the Sukhoi Log tender. The latest press leak suggested that Trutnev was trying to force an award in Norilsk Nickel’s direction, but could not quite pull it off.

Litvinenko, for example, hinted that he did not favour Norilsk Nickel, so long as Potanin and partner Mikhail Prokhorov controlled the shareholding. Litvinenko had told Mineweb that Norilsk Nickel’s shareholding should be restructured, and a controlling “golden share” vested in the government. He was silent on how he thought to do this. The mechanism was probably a back-tax or fraud claim against Norilsk Nickel, repayable in equity and assets, along the lines of the claim the Kremlin had pursued against the Yukos oil company and its principal shareholders.

Litvinenko also told Mineweb that, since Sukhoi Log had initially been discovered during the Soviet period, it was a state asset from which foreign miners should be excluded, since they had contributed nothing to find or prove it. Litvinenko was dismissive of Star’s role in the 1990s.

A senior Irkutsk region official in charge of mineral resources suggested that the compensation provision in the tender terms was to be divvied up with the governor and his men. “Currently, the volume of the compensation is uncertain, but it is written down in the project [terms]”, he said.

In Russian licensing practice, the region where a mineral resource is located must agree with two federal government ministries, the Ministry of Natural Resources and the Ministry of Economic Development and Trade, before a tender can be officially issued, and bidding commence. Try though Trutnev might, with encouragement from the Irkutsk governor, the Ministry of Economic Development was reluctant. And behind them all, Kremlin officials were reviewing what reward they might draw from the process if they used their power to select the winner.

The “compensation” payout was far too little for them, not least because there were too many people already standing in line for it. Asked if the compensation were proposed as a fixed amount, or as a percentage of the winning bid, the Irkutsk official told Mineweb “there are too many ways to calculate, so I don’t think I can tell you now how it will be counted.” He also added that “the amount should be not more than the winner will pay for its license.” He indicated that in the draft terms agreed by the Irkutsk regional government, the starting bid price for the license would be Rb960 million (US$33 million).

Some of those who did not stand to share in the payout complained publicly. A senior official in the Ministry of Economic Development and Trade told Mineweb that his ministry has not agreed to compensation for past works at Sukhoi Log. “Currently this question is under review,” the source said. “The decision will be made by the end of the May, hopefully. Currently, we cannot announce the Ministry’s position for that question.”

A few days later, in June of 2004, Trutnev made his first public move. If the Irkutsk governor had been modest in arranging a share of a relatively low auction price, Trutnev was more ambitious. He went public, critizing the Irkutsk tender proposal for setting too low a reserve of between $10 million and $15 million in rouble equivalent. “Preliminary calculations show the lowest starting price at the auction is unlikely to be less than $150 million,” Trutnev announced.

He then proposed to change the licensing law, so as to favour the one bidder with enough cash to bid almost immediately, Norilsk Nickel. At the time, government and miners agreed, Russian law required six months between the official announcement of a tender for a mining licence award and the award itself. Accordingly, it was thought in the Russian mining community that the award of the project could not be effected until 2005. But Vladimir Sklyarov, head of the Irkutsk regional department of natural resources, told Mineweb that the six-month waiting period could be shortened to 45 days by an amendment of the law. “If the changes will be applied in July-August and results of tenders will be given not within six months but within 45 days,” Sklyarov said, “we will be able to manage the tender even this year.”

It was a clever move, but the Irkutsk men had not lined up all their ducks in Moscow. The Committee on Natural Resources of the State Duma, which has jurisdiction over mining legislation and must approve such proposed amendments before they can go to a vote in parliament, had not seen the Sukhoi Log speedup coming.. Anatoly Fedorenko, deputy chief of the committee staff, told Mineweb: “maybe it exists as a project in the Ministry of Natural Resources. But it has not come to us yet.” According to Fedorenko, his committee had been reviewing an amendment to simplify licensing procedures, and eliminate the role of the regional governments in setting tender terms. Proposed by Trutnev’s ministry, this amendment was naturally opposed by the regional governors. “There is nothing about changing the timing of tenders,” Fedorenko said. But he conceded that the timing issue could still come up. ” It depends on volume of lobbying from all sides, and the work of Duma.”

Trutnev showed how responsive he was to the lobbying when he issued a statement in July of 2004: “we cannot commission a lot of large deposits for this simple reason, that, under the current law, from the date of the announcement of tender conditions to the award, it is necessary to wait about one half-year…We want to reduce these terms to 45 days.fThere is an]other problem – the interaction between regions and the federal authority.”

But Trutnev also conceded that not everyone was agreed, and that he needed more time to persuade them. He therefore acknowledged that his proposed amendments to shorten the tender period and reduce regional involvement in mine licence awards could not be finalized by the government before “the end of this year”. Trutnev’s spokesman, Nadezhda Kleymenova, confirmed the ministry view that “the earliest realistic time for the [amended] law to start working is spring 2005.”

The timing in mid-2004 was particularly difficult for Norilsk Nickel. Although not admitted until later, it was then that Kremlin officials were reviewing the activities of Norilsk Nickel shareholders, Potanin and Prokhorov. In the forefront of the review was their acquisition of a 20-percent stake in South African miner Gold Fields on March 29 for $1.16 billion; and a bid that followed by the German firm Siemens to take a controlling stake in Potanin’s heavy engineering firm, Siloviye Mashiny [“Power Machines”]. Kremlin officials told Potanin they did not approve either, and for months Potanin was not sure how things would turn out – for his assets, or himself.

In time, Siemens was not allowed to make its takeover bid, and the state-controlled utility, Unified Energy Systems, took its place. In parallel, Kremlin officials were putting two even more valuable state takeovers in place — the takeover of the Yukos oil company by Rosneft for $9 billion, and the takeover of Sibneft by Gazprom for $13 billion.

The model for these takeovers is simple. It converts the bureaucratic power to regulate commercially owned assets into personal stakes in the current and future cashflow of state controlled assets, with commissions demanded, and paid up front for the deal arranging.

For Norilsk Nickel to win Sukhoi Log, Potanin’s and Prokhorov’s bid would also have to be approved by the Kremlin. Norilsk Nickel spokesman Elena Sherbinina has said she has no information on when the company’s management believes the Sukhoi Log tender will be issued. From this it can be understood that Norilsk Nickel, and its gold spinoff Polyus, do not have Kremlin support for the acquisition. Without that, Trutnev can do and say whatever he likes – he is impotent to make the licence award.

For Polymetal, the St Petersburg-based goldminer which has been Norilsk Nickel’s main rival for the project, the bidding is altogether too costly, and the outcome too uncertain. Polymetal is now for sale. But if Barrick and Anglo Gold Ashanti, two of the contending buyers, were to acquire Polymetal, Trutnev and Litvinenko are likely to rule them out of contention for Sukhoi Log, albeit for different reasons.

Just how powerless Trutnev is was evident from a statement made by an erstwwhiie subordinate this past March. Anatoly Ledovskikh, head of the Federal Agency on Sub-Soil Resources (Rosnedr), told Mineweb that the auction of the mining licence for Sukhoi Log will not be held this year.

Sources in his agency told Mineweb that although, bureaucratically Rosnedr is a part of Trutnev’s ministry, Ledovskikh has autonomous powers, and in this matter he was not acting as Trutnev’s subordinate. Trutnev’s spokesman, Rinat Gizatullin, was under orders from Trutnev not to respond to Mineweb questions.

The announcement from Ledovskikh indicated, not so much that Trutnev had had a change of mind regarding the future he has wanted for Sukhoi Log; but rather that, despite his ministerial rank, he lacked the power to overrule what others think best for the Russian gold sector. The move by Ledovskikh also indicated that it was higher authority in the Kremlin, which is now refusing to agree to hand the deposit over to anyone, least of all to Potanin and Prokhorov. At least not this year.

Several days ago, a reporter from Reuters was told to repeat the message. Dutifully, she claimed that “a source close to the Kremlin” had said that “officials in Putin’s office are focusing increasingly on projects linked to the 2007 parliamentary and the 2008 presidential polls – mainly in the oil, media and telecoms sectors. The Kremlin has concentrated on a number of projects that cannot be left unfinished before the election. They do not have time for other things.”

The literal and the commercial meaning of what was said are almost identical, though unprintable, with one qualification. In the sale of his stake in Power Machines, Potanin demonstrated the willingness to share his profit, and pay the price required for Kremlin approval to the buyer designated by Kremlin officials. That he and Prokhorov (gold is more Prokhorov’s line of business in their partnership) have not succeeded with Sukhoi Log, as Trutnev and the Irkutsk government wished for them, suggests that the real obstacle is the reluctance of Kremlin officials to agree on the price and conditions of the deal, and the future structure of Norilsk Nickel and Polyus.

If the obstacle were any lower in the Russian government, the deal would already have been done. But at the Ministry of Economic Development this week, the press spokesman replied to Mineweb‘s questions about the future of Sukhoi Log, saying: “we have no reply to your questions. We delivered your questions to the office of [Deputy Minister] Andrei Sharonov, who should be in charge of mineral sector decisions and business, but we received no reply.” He conceded that the decision on the Sukhoi Log licence is being taken elsewhere.

Litvinenko’s influence with Putin has been ebbing, and he has nothing to gain from making public his disagreements with Trutnev. He and Trutnev are both silent on the question of Sukhoi Log. The parliamentary Committee on Natural Resources declined to respond to the same questions for want of anything to add.

Valery Braiko, a veteran goldminer himself and head of the Russian Union of Goldminers, concedes the obvious: “The delay was expected. We are already not waiting with impatience, and if the question will wait for review until the next government [2009], then the delay could be even further. It is really difficult to identify the background for all of this, so I prefer not to form any hypotheses.”

Braiko is being understandably cautious. For the time being, there is no telling what further mining assets will be restructured for the benefit of state officials in the course of the Putin succession.

Silent though Trutnev himself has become on the subject of Sukhoi Log, his talkativeness on other mining prospects indicates how far afield his interests have ranged. Avoiding once again the questions of Mineweb, Trutnev authorized the text of the following communique to be issued, following his meetings last week with South African minister of minerals and energy, Lindiwe Hendricks.

“On October 5th the Minister of Natural Resources of the Russian Federation Yury Trutnev has held a working meeting with the Minister of Minerals and Energy of the Republic of South Africa, L[indiwe]Hendricks. During [the] meeting there have been spelled out directions of cooperation between Russia and the Republic of South Africa in the field of use of mineral resources. They include, first of all, training of professional geological staff, realization of joint projects on extraction and processing of nonferrous metals, and also an exchange of technologies. Yury Trutnev has supported active development of these directions of cooperation.

The [Russian] Minister of Natural Resources also has emphasized that interaction within the limits of the mixed Intergovernmental committee on trade and economic cooperation between the Russian Federation and the Republic of South Africa [known in Pretoria as ITEC] has allowed to realize successfully projects on investigation, extraction and processing of manganese ores in the Kalahari Manganese Field.”

This last reference is Trutnev’s endorsement of a project by the Renova company, a US-registered holding of Russian metals oligarch Victor Vekselberg. Trutnev has promoted Vekselberg’s bidding at every opportunity, acting as Renova’s lobbyist in South African to ensure that Hendricks’ ministry would issue manganese exploration and mining licences to Renova’s black empowerment partner, Pitsa ya Setshaba.

Trutnev was over-enthusiastic in his communique. The licences were issued in July, but to date there has been little exploration, and no extraction or processing. Of course, Trutnev’s reference is a reminder to Hendricks to keep up the good work.

If Hendricks were aware of the Sukhoi Log saga, there is no sign that she mentioned it to Trutnev as of interest to her constituents, such as Anglo Gold Ashanti, Gold Fields, Harmony Gold, or JCI. Her subordinates at the Department of Minerals and Energy (DME) are well aware that Trutnev has been promoting Russian entry into South African mining, at the same time as he backs the exclusion of South African mining companies from the bidding for Sukhoi Log.

The DME officials qualify their inaction on the matter by telling Mineweb that South African goldminers have not requested them to seek reciprocal access to mineral deposits from Trutnev on parity with Renova. If, however, they have been exchanging technologies with their Russian counterparts, as Trutnev’s communique suggests, then there could be another, technological explanation.

by John Helmer - Tuesday, October 11th, 2005
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BRITISH VIRGIN ISLANDS – Roman Abramovich, Russia’s and England’s richest man, quietly lost a court case in the British Virgin Islands (BVI) last week. But the sound of the judge’s ruling is about to toll right round the world, For the first time in one of the most successful careers in the world of what Karl Marx once called primitive capital accumulation, Abramovich is facing a court order, outside Russia, to explain how he and his oil companies seized control of a Russian oilfield the owner has accused him of stealing.

At stake in court is a group of oilfields in Khanty-Mansiisk known as Priobskoye, worth about $4 billion. The value of the theft, allegedly masterminded by Abramovich two years ago, which the court has said it will now adjudicate, is about $2 billion.

Before the court will rule on the evidence, however, and most embarrassing and serious for Abramovich personally, he has been ordered to reveal where he has hidden the proceeds – along with every asset he owns worth more than $1 million.

Until now, Abramovich has been able to evade all claims of fraud and other illegalities alleged against
Millhouse, his UK-based asset holding company, Sibneft, the oil company that serves as his principal cash cow, or the myriad of associated companies registered in tax havens across the globe. Abramovich’s spokesman John Mann publicly claimed this month, in a remark to an English newspaper, that “any attempt to drag Mr. Abramovich into litigation would be misguided, since he is not on Sibneft’s board and had no role in its dealings with Sibir.”

Sibir Energy Pic, an oil producer listed on the Alternative Investment Market (AIM) in London, has already filed charges of massive fraud against the Abramovich group in Russian courts. These are proceeding, although Abramovich has been winning on his home ground. Sibir’s financial statement for 2004 indicates that, minus the benefit of the Priobskoye oilfield, it had revenues of ” about $320 million, earning a pre-tax profit of about $40 million.

Sibir is principally owned by Chalva Tschigirinsky, a Moscow entrepreneur. The Priobskoye oilfield is a vital asset in a partnership which Tschigirinsky has with the Mosdcow city government and the Moscow oil refinery to create a vertically integrated structure supplying the city with petroleum products refined from its own crude oil. Sibir is accusing Abramovich and his companies of fraudulently diluting, and converting its 50% stake in Priobskoye asset to less than 1%.

In August 2002, in a fierce battle between Abramovich, D Tschigirinsky and Moscow Mayor Yuri Luzhkov, Abramovich’s Sibneft tried, but failed to take control of the refinery. For a time Sibneft cut off part of its crude oil supply to the refinery. Abramovich has personally made no secret that his subsequent takeover of Sibir’s stake in Priovskoye was, as he personally told Luzhkov, was retaliation for losing the refinery battle.

The High Court of the British Virgin Islands has taken jurisdiction over Sibir’s claim against the Russian oligarch, because, in his effort to spirit the asset out of Russian control, Abramovich used several BVI companies he secretly controls. They are listed in the court order as Gregory Trading, Richard Enterprises, Shaw Invest & Finance, and Carroll Trading. All are said to be located at the same address: Trident Chambers, Wickhams Cay, Road Town in Tortola. The court order has appointed an independent receiver to take over the shares of three of the BVI companies that are a part of the fraud claim. The other companies, including entities registered in Cyprus and Panama, as well as Abramovich himself, have been ordered not to make any move to shift the shares outside the BVI court’s jurisdiction, or the control of the companies that presently hold them. The proceeds from oil sales currently under way from the oilfield have also been frozen in place.

Details of Sibir’s claim in the BVI court, and Abramovich’s lawyers reply are still under court seal. What has already been publicly disclosed by both sides is that Sibir and Sibneft were equal stakeholders in a joint venture called Sibneft Yugra to develop the Priobskoye area. Sibneft was to fund the development, and Sibir and its Russian operating company Yugraneft, were to repay Sibneft, and then share the proceeds of oil sales equally. However, according to Sibir, Abramovich, his associate David Davidovich, and their subordinates secretly converted Sibir’s and Yugraneft’s stakes into holdings of the BVI companies and others, for Abramovich’s benefit.

Speaking for Abramovich, Mann has claimed that “everything that Sibir has done related to Sibneft Yugra has been within the framework of a set of agreements between our shareholders and their shareholders.” Sibir’s CEO Henry Cameron is reported in a Moscow newspaper as saying this is “all nonsense. We would like them to disclose to us what those agreements are.”

In order to rule on Abramovich’s defence, Judge Charles has ordered the Abramovich companies to produce these agreements in court. The court order also instructs the companies to reveal “when, from whom and for what consideration it acquired the interest in the share capital of Sibneft-Yugra presently registered in its name”. In addition, the companies have also been ordered to hand over their banking details. Although Sibneft makes its financial accounts public, the others are not. If forced to comply with the BVI court, the elaborate system through which Abramovich directs billions of dollars of oil revenues will be exposed for the first time. The evidence may then be used by UK authorities in London to investigate whether the money-laundering statutes have been violated by Abramovich’s high-profile spending in Britain. “We have not acted in any way illegally,” Mann has also claimed in a London newspaper interview. “All the court cases so far have confirmed that.” He was referring to the courts of the Khanty-Mansiisk region and the Moscow Arbitration Court. The decisions, which have gone both ways, are still pending on appeal.

In her ruling on Sibir’s claim No. 174/05, issued last Wednesday, and obtained from the court record in Tortola late Friday, Judge Indra Charles requires Abramovich to file an affidavit “stating the value, location and details of all his assets exceeding US$1 million in value wheresoever situated and whether in…his own name or not and whether solely or jointly owned, giving the value, location and details of all such assets.” The judge has set a deadline of July 22 to comply. If he fails, Abramovich and his companies face serious contempt of court claims, which can be enforced in England.

According to the court order in BVI, Abramovich has two personal UK addresses: Flat 2, 39 Lowndes Square, London SW1, and the Fyning Hill Estate, Rogate, Petersfield, Hampshire. The judge has given Abramovich until July 22 to hand over the information, or face contempt of court penalties. The safe haven Abramovich apparently thought he was acquiring from the long hand of Russian law turns out to be vulnerably to legal action in the British legal system.

The Sibir charge that Abramovich is a fraudster is not the first of its kind against Abramovich. In September 2003, Abramovich had been behind a transaction in which a company he secretly controlled sold a gold deposit called Maiskoye to Highland Gold, a London goldminer also controlled by men close to Abramovich, on terms that had been financially sweetened by the Chukotka regional administration, which Abramovich headed as governor. At the time, Abramovich’s spokesman Mann claimed that the seller of Maiskoye “is not connected in any way whatsoever with Abramovich”. Subsequent admissions by executives of Highland Gold revealed that Abramovich was the seller of Maiskoye. Russian and UK officials reportedly examined the charges in 2004, but took no action.

by John Helmer - Sunday, July 17th, 2005
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By John Helmer

Richard Cheney, the outgoing vice-president of the United States, is the modern version of Mime, second in command of the Niebelungs, the bad dwarfs of the mythical German underworld. It was Mime who forges a magical helmet to give his brother Alberich, the chief dwarf Niebelung, the power to change into anything he desires.

You don’t have to subscribe to pagan witchcraft; be a fan of Adolph Hitler; or enjoy Richard Wagner’s Ring cycle of operas, to know how badly the Niebelungs turn out, their thievery and thuggery bringing on the fiery destruction of themselves, and the gods who patronize them. But that’s only on stage. Having launched two wars the US is now losing in Afghanistan and Iraq, Cheney intends to launch the third, and most destructive of all, the war against Iran. To divert Americans from opposing this folly, Cheney is now denouncing Russia for the very disruption of global oil supply which Cheney and his Israeli friends intend to unleash themselves – in less than a year’s time.
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by John Helmer - Monday, May 30th, 2005
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By John Helmer in Moscow

The English comedian, and co-founder of the Goons, Spike Milligan, once said that Americans are the new Germans.

He wasn’t exactly joking, but he was being selective. Not every American, he meant, was susceptible to the type of fascism that everyone who has ever been jack-booted by the Germans recognizes. But all too many are, the English jokester thought.

In these days of Russia’s remembrance of the 60-year old victory over Hitler’s Germans, there is one American who, if not cognizant of Milligan’s warning, might have been sensitive to current perceptions in Russia. But Condoleezza Rice, the US Secretary of State, who visited Moscow ahead of President George Bush’s attendance at the Victory Day ceremony, was having trouble with the difference between “da” and “nyet” in one of her interviews. It’s unsurprising, therefore, that she mightn’t be able to hear that what she was saying sounded to Russian ears not at all unlike what Hitler had thought best for Russia, before he was driven back into his bunker.
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by John Helmer - Tuesday, May 10th, 2005
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MOSCOW (Mineweb.com) – For at least a few hours on Monday, Harmony Gold’s Bernard Swanepoel knew more about Norilsk Nickel’s plan to spin off its gold assets in an offshore placement than Norilsk Nickel itself.

“Harmony wishes to advise”, a company announcement declared in Johannesburg, “that it has consented to the transfer by Norilsk Nickel of all its snares in the issued share capital of Gold Fields to an indirect wholly-owned subsidiary of Norilsk (“Subco”) and to cede all its rights and delegate all its obligations in terms of Norilsk’s irrevocable undertaking to Subco.”

In Moscow, the spokesman for Norilsk Nickel told Mineweb she didn’t know anything about Subco. Neither did the spokesman for Polyus,Norilsk Nickel’s principal gold-mining unit, although he admitted he had just seen Harmony’s announcement.

According to Harmony’s version of the correspondence it has just received from Norilsk Nickel, “the transfer by Norilsk of its Gold Fields shares to Subco is in accordance with its strategy to consolidate all of its gold assets into one vehicle and does not have any impact on the obligators under the irrevocable undertaking.”

Exactly who has authority to speak for Norilsk Nickel n such binding terms, and to plan what to do next, has been unclear since January, when Vladimir Potanin and Mikhail Prokhorov, the co-owners of Norilsk Nickel, decided to fire Leonid Rozhetskin, their principal strategist for the C oldfields deal. Since then Rozhetskin has been unable or unwilling to return to Moscow, where awkward questions from state investigators probing other dea s await him. An associate told Mineweb that he believes Rozhetskin is comfolable abroad with a well-known Italian partner, and that currently, he is talking with Merrill Lynch about the future of what is now called Subco. According to documents that surfaced in a New York court late last year, the spin-off gold company was first codenamed I for “new international goldco” by RozHetskin and his advisors at HSBC. According to HSBC’s presentation of “Project Golf, if Harmony Gold and Norilsk Nickel succeeded in their takeover of Gold Fields, “I” was to be created out of the international gold assets of all thiiee companies, and “listed as a new ‘major’ in North America attracting premium valuation.”

Potanin and Prokhorov have refused all opportunities to speak, or requests to answer questions in public, about the Gold Fields acquisition, or their “1” plan. Notwithstanding, Potanin has told Gold Fields CEiO Ian Cockerill that Rozhetskin continues to have his authority to negotiate on the fate of the 20-percent shareholding, and the last stages of Swanepuel’s ill-fated bid. Gold Fields’s management, and other major stakeholders in Harmony, expect the bid to expire on May 20. In the meantime, is the disclosure of Subco by Swanepoel a last-ditch move to expose Potanin and Prokhorov ttji the commitment they once made to the takeover?

For one Moscow investment banker, who has been at different times close to all sides and a consistent backer of the “I” strategy, Subco was a surprise name for no surprise at all. “As far as I know,” he told Mineweb, Norilsk Nickel “can do what they like with their holding of gold asset.” If he were advising Norilsk Nickel at the moment, and he says he is no:, he would advise the company not to sell the Gold Fields stake, “There is ncl pressure to sell now. I know of no [government] pressure to sell.”

Late on Monday afternoon, Norilsk Nickel issued u press release citing Prokhorov for the announcement that it intends to create a new gold asset company, and then sell its shares abroad. “At its meeting on April 15th, 2005,” the fresh announcement reads, “the Board of Directors: of MMC Norilsk Nickel (“Company”) resolved to initiate steps which should leatjl to the demerger of the Company’s Russian gold assets consolidated under |ZAO “POLUS” and its subsidiaries (“Polyus”) and the Company’s 20% interest in Gold Fields Limited (the “Transaction”).

The contemplated Transaction, if implemented, shoLId create a new large independent gold major (Newco) with the potential for substantial organic growth and a window into one of the world’s most prospective gold regions: Russia. The Transaction, if implemented, would, in the (opinion of the directors, provide investors with direct exposure to this unique Investment, and should allow Newco to realize its inherent growth options, enhance gold business’s direct access to the financing opportunities and unlock substantial value for all Company’s shareholders.”

“The initial step in the Transaction will be to consolidate! all the Company’s gold assets (including its 20% interest in Gold Fields Limited) under Polyus.lt is the intention of the Board of MMC Norilsk Nickel that tsewco would seek both domestic and international listings as soon as practicable, following the Transaction.”

Prokhorov is cited in the announcement as saying “we.; see the demerger as a means to unlock substantial value for all Norilsk shareholders and to create a platform to build a new global gold major centred around existing gold assets.” Deutsche Bank is listed as financial advisor for the new scheme, and its legality assigned to Debevoise & Plimpton.

For investment bankers and lawyers, there can never be a political obstacle so high that it cannot be climbed to sustain their clients’ willingness to pay lucrative placement and arranging fees in the hope of seeing their cash safely out of Russia.

And so, when Brian Gilbertson, CEO of SUAL International, the Moscow-based resource company, announced last week that the Kremlin will not allow the large-scale sale of SUAL shares abroad, a Moscow resource banker claimed Gilbertson was talking his book, not telling the truth. SUAL is not ready for a placement, the banker told Mineweb. Gilbertson was passing the buck to the political leadership, he claimed.

The banker also claimed that his institution has three mandates from Russian resource companies on the go at present, and that none of them has been blocked by Kremlin fiat. Accordingly, he was emphatic that Norilsk Nickel’s owners are free to plan to move their gold assets offshore to “I” or Subco or Newco. Naturally, the banker didn’t concede that his firm’s access to know the Kremlin’s mind has been limited recently; especially since a share-buying scheme of a closed company the Kremlin is trying to eform was discovered to have been one of his bank’s inventions, and to have led to an investigation of its legality.

But is there a contradiction between what Gilbertson iiaid is impermissible, and what Potanin, Prokhorov, deutsche Bank and Debevoise & Plimpton would like to get away with?

In remarks to the Russian Economic Forum in London April 11, Gilbertson is reported to have said that Kremlin policy currently prohibits large-scale share listings or initial public offerings for Russian resource companies. He also acknowledged with apparent approval legislative and regulatory provisions in Chile, Brazil, and South Africa to assure state control of resource companies like his own, SUAL, Gilbertson assured, “accordingly will develop its strategic opportunities with its feet firmly rooted in the soils of Russia and the CIS.”

Yevgeny Ivanov, CEO of Polyus and the principal strategist of Norilsk Nickel’s gold strategy, followed Gilbertson at the same conference. But his remarks suggested that there are wings to his feet.

In response to questions about offshore listing plans, Ivanov said that he and his colleagues are considering listing in either Toronto or New York, or buying a company already listed there. Norilsk Nickel already owns the London-listed Norimet, and the New York-listed Stillwater Mining. But for the gold spinoff, Ivanov evidently has in mind something new. He was not asked directly about “I”, but acknowledged that a reverse takeover into Gold Fields was another “theoretical” possibility. At the time, noone had ever heard of Subco or Newco.

A few days earlier, Ivanov had told a Russian audience that these options could not be implemented for another two years. His spokesman told Mineweb that “all decisions could be made not earlier than in 2007.” What exactly must happen in the next two years is unclear. When asked if he favours Kremlin approval or disapprovasl of such an offshore listing plan, Vladimir Litvinenko, President Vladimir Putin’s advisor on resource policy, signaled that he is negative. Local bankers believe that the Newco will require at least a year of technical work to prepare. Two years may be required to overcome the Kremlin objections that are visible now.

Gilbertson’s acknowledgement of a Kremlin bar to IPO’s for major Russian resource companies is the first of its kind. Other Russian executives are sensitive to the requirement for Kremlin approval of their schemes, but they never discuss them openly. Once before, when Norilsk Nickel first announced, a year ago, that it had acquired the Gold Fields stake from Anglo American, it claimed publicly that no Russian government approval was required, and none had been sought. Central Bank action, and Kremlin advice, began to change that position several weeks later. However, it is still not clear what Kremlin officials have demanded, and what Potanin has promised in return.

I, Newco, or Subco are names that have a temporary ring to them. Why Norilsk Nickel’s board did not announce its plan immediately after deciding it last Friday, and waited until after Harmony Gold had disclosed it today, suggests that neither the board, nor the company owners have the confidence that their plan will be anything but temporary also.

by John Helmer - Monday, April 18th, 2005
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MOSCOW (Mineweb.com) –On the eve of Good Friday, President Vladimir Putin called the leaders of Russia’s major businesses to meet with him at the Kremlin. The oligarchs were hoping that Putin would go long on resurrection, and short on crucifixion, at least of the type that has kept their colleague, Mikhail Khodorkovsky, in prison, and destroyed his Yukos oil empire.

At last Thursday’s meeting, Oleg Deripaska, the oligarch who controls Russian Aluminium (Rusal), had his head down as Putin spoke, busy taking notes of the speech Putin was reading from three closely typed pages. Deripaska is the most active of the Russian oligarchs in Africa, with a big bauxite and alumina operation in Guinea, and ambitions to start aluminium smelting plants in Nigeria and the two Congo republics. He has also been trying to gain footholds in India, Venezuela, Jamaica, Australia,Rumania, and Montenegro.

Since the Kremlin issued a full text of the speech immediately, and Deripaska lacks short-hand notetaking among his skills, perhaps he was scribbling to show Putin how attentive he was.

Although Putin made one tentative concession to the assembled oligarchs — to cut the statute of limitations on illegal privatization to three years instead of ten – this can help Deripaska in no way, since he seized his aluminium assets and export revenues, not from the state, but from other Russian businessmen, plant managers, and workers.

“I consider it possible to support the idea of reducing the statute of limitations on privatization deals from 10 years to three,” Putin announced, paying careful attention to the word “possible”.

Putin did not say that he was shortening the statute of limitations on back-tax claims, something of much more urgent concern to most of the oligarchs, especially Deripaska. His Rusal group was identified last September in a report by the Tax Ministry to the cabinet as paying an abnormally low rate of tax on its booming aluminium export business.

This, the report said, was achieved by use of tax minimization schemes, such as tolling, regional tax-offset zones, and transfer pricing. If Putin wants to unleash the tax men, he could deliver a tax bill for Rusal of more than $1 billion per annum for each of the past five years. According to Rusal, in 2004 its aluminium sales, mostly for export, totaled $5.4 billion. Its accumulated debt -an undisclosed figure – stands at over $1.5 billion.

Putin cannot easily change the Civil Code, even if Deripaska wanted him to. Even a concession on privatization violations is of doubtful value legally, because it is not the rigged privatization, in which the Russian government itself was involved a decade ago, that opens up the oligarchs to prosecution. It is their fraud, grand theft, embezzlement, money-laundering, racketeering, forgery, and other crimes, for which the statute of limitations cannot be reduced by a presidential decree.

In the remarks which Deripaska also dutifully copied down, Putin added that “a healthy competitive environment also depends on the appropriate corporate standards and effective self-regulation mechanisms within the business community itself.” That was another warning, less ambiguous than the remark on privatization, that the oligarchs must clean up their acts.

Was this what Deripaska was doing when, a day later, it was announced in Moscow that he had settled claims against him and Rusal by Mikhail Zhivilo of Paris, former owner of the Novokuznetsk Aluminium smelter, which Deripaska seized five years ago?

It was that takeover, and the subsequent conversion of aluminium trading contracts signed between the smelter and the Base Metal Trading and Alucoal group of companies, controlled by Zhivilo, that were the basis of a billion-dollar damage claim in the US federal courts of New York. The subsequent reporting of Deripaska’s record identified him as an alleged racketeer unable to obtain an entry visa for the US. Although the substance of the allegations was never tested in the court, because it refused to accept US jurisdiction, international lenders to the Rusal group have been preoccupied ever since by the risks associated with loans to Deripaska’s offshore companies and the Rusal group in Russia.

Despite the vindication claimed by Rusal from the refusal of the US courts to try the Zhivilo case, and from a parallel rejection of jurisdiction last year by a Stockholm arbitration panel, Deripaska has now agreed to pay Zhivilo between $50 and $60 million, according to a source close to the deal. In the Stockholm arbitration, Zhivilo had sought $325 million in a trading contract claim.

When the US Court of Appeals upheld a lower court’s rejection of US jurisdiction over the Zhivilo claims, Alexander Boulygine, Rusal’s CEO and close friend of Deripaska, said publicly: “each new ruling demonstrates there was never any case to begin with. Plainly, the plaintiffs thought that by generating negative publicity and raising our legal costs they could force us to pay them to leave us alone. We refused to be held to ransom.” Michael Burrows, his lead counsel, went further, attacking Zhivilo for making “false claims disguised with sensational allegations and far-fetched tales of intrigue. The plaintiffs sued without evidence or proof.”

Deripaska’s payment to Zhivilo goes a long way toward suggesting otherwise. It is the third major payment in the past 12 months by Deripaska and Rusal to claimants who had gone to court around the world, accusing his companies of contract violations, or worse.

Last year, Rusal was obliged by a Zurich arbitration tribunal and the Swiss high court to pay a $100 million claim from Aldeco, a trading company controlled by Deripaska’s arch-foe in Russia, Anatoly Bykov, the former head of the Krasnoyarsk Aluminium smelter. Deripaska and Rusal have also paid off a group of consultants in the Republic of Guinea, who won a UK High Court judgement against them for $3.5 million.

Rusal refuses to respond to questions about the settlement with the Zhivilo group, or the earlier deals. A spokeswoman noted that, according to a written order issued by ex-Rusal official Yevgenia Harrison, company executives are forbidden from speaking to Mineweb’s correspondent, and will be punished if they do.

Harrison, and her London-based husband Fred Harrison, recently lost their contract to represent Rusal. They were behind a series of attempts to induce editors of aluminium industry publications, notably McGraw-Hill’s Platts newsletter, into publishing only the good news about their group. After receiving a promotional payment from Rusal, Platts recently invited a Rusal executive, Peter Finnimore, to announce that among the “lessons” Rusal has learned in trading aluminium with the rest of the world, a “high level of customer service” and an “increased emphasis on social responsibility” are important, along with “governance”.

Finnimore glossed over the internal argument over Rusal’s public image. Late last year, this had led to a clash between the Harrisons and others in the company’s public relations division, who argued that negative tactics were continuing to damage Rusal, and that a respected international PR firm should be engaged to remedy the problems.

It will not be easy for Rusal to demonstrate it is turning over a new leaf. A claim for more than $300 million by Deripaska’s original offshore partner, David Reuben’s Trans World group of London, remains to be adjudicated in the courts of the British Virgin Islands. There are other conflicts heading for the courts as well.

Again, as with the Zhivilo claim five years ago, the potential damages of the new litigation are not only substantial, financially. If they reveal Deripaska as unrepentant, his business tactics unchanged, and his potential domestic tax liabilities uncertain, they will continue to cast a shadow over Deripaska’s efforts to persuade foreign governments otherwise. This is vital for him in the Ukraine, where Deripaska is dependent on alumina supply from the Nikolaev refinery, whose privatization is already under government review in Kiev; and in Montenegro, where Deripaska’s payment guarantees for a plant takeover were rejected last month.

In Guinea, and elsewhere in western Africa, the competition for bauxite and alumina is heating up with Alcoa, Alcan, Canada’s Global Alumina, Chinese companies, and others. This rivalry is unlikely to be decided by what goes on as Deripaska wages battle in the courthouses of Europe, or at the Kremlin in Moscow. But if he is to hang on in Africa, let alone expand, Deripaska must be able to convince his Guinea, Nigerian and Congolese partners that he can be trusted.

by John Helmer - Saturday, March 26th, 2005
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AND the Academy Award for best fascist dictator goes to Adolph Hitler! Woody Allen cracked the joke at the ex- pense of the US habit of making awards out of self-congratulation of the least worthy type. Were anyone to dare in the same spirit, they might award the new US nominee to head the World Bank, Paul Wolfowitz, the title of worst American to hold such a global post.

But wait a minute. Wolfowitz is hardly American at all, having spent much of his time as a career Washington warmonger under investigation by US counterintelligence and security agencies as an agent for a foreign power — for whose benefit he is suspected of supplying intelligence, cash, weapons and other favours.

In US law books, these may be crimes against the state, possibly espionage, even treason. But not the crimes against humanity which he has encouraged his favourite small state to commit, nor those which he encouraged his addled — if not yet treasonous — president to commit in the first of the great Middle Eeastem wars, which US forces will lose.

For Russia, against whom he has been waging war since he got out of short pants, his nomination as World Bank president presents something of a dilemma — and opportunity. During the first post-Sclviet decade, the bank under James Wolfensohn was one of many tools the US, as the bank’s dominant shareholder, used to destroy the economic: foundations of its rival superpower.

It paid stipends to Russian quislings; obliged the Russian government to incur sizeable debts for the privilege of being advised to dismantle its systems of command and control; and transferred the nation’s most valuable resources into the hands of a dozen individuals eager to betray their country for personal profit.

Not without reason was Wolfensohn’s favourite Russian counterpart Victor Chernomyrdin, the prime minister who enriched him self through creating Russia’s largest company, Gazprom.

Wolfensohn waged war by other means — Chernomyrdin was his collaborator; and the Russian treasury paid in full for its defeat

This arrangement could not last, and when the revival of the feeble Russian state began to challenge the value and terms of the bank’s operations in Russia, Wolfensohn decided to commission an assessment of the effectiveness of the programmes he had promoted in Russia.

He could have engaged Joseph Stiglitz, for four of the preceding years the bank’s chief economist, Nobel Prize winner and former chairman of the US President’s Council of Economic Advisers.

But by the time Russia had grown sceptical of Wolfensohn, and called a halt to new borrowings from him, Stiglitz had become a ferocious critic of everything Wolfensohn had done, or tried to do.

Wolfensohn preferred to hand the assessment job to a minor academic who had enriched himself selling Russians the very adviot Wolfensohn asked him to evaluate. The hungry fox invited to call the roll in the henhouse was US-employed Swede Anders Aslund.

“We don’t necessarily take his advice,” commented Julian Schweitzer, the bank’s Moscow representative at the time, on the appointment

Aslund’s defence of everything Wolfensohn had done in Russia did not , encourage the Kremlin to resume borrowing. Instead, it resolved to pay Wolfensohn off, a task the Russian treasury completed just a few months ago.

From Wolfensohn’s point of view, the evaluation may have helped salve the wounds Stiglitz had inflicted on him and the institution

More practically, it encouraged him to try to evade the Kremlin’s veto on borrowing, and recruit thin Chernomyrdins in the Russian provinces.

These were governors, local warlords and corporate magnates as keen to leverage themselves with the bank as fat Chernomyrdin — and President Boris Yeltsin — had been 10 years before.

With tactics like these, Wolfensohn has hung on for another four years after the Aslund report, but in Moscow he has remained a has-been, the banker no one serious wants to borrow from.

Wolfowitz’s nomination ought to remove any possibility that Russia — now a greater oil power than Wolfensohn or Wolfowitz thought possible — would borrow itself, or recommend that anyone else should

The dilemma posed by the Wolfowitz nomination turns out to be an opportunity for President Vladimir Putin to conclude that, from Russian experience, the bank does more damage than good, and should be isolated and ignored by those countries and economies mos: in need of development financing.

This should not be interpreted as anti-Americanism.
If the Federal Bureau of Investigation were permitted to disdose all it knows, Wotfоwitz may not be the American he claims to be. And with a record like his, it may be a violation of the American statutes to borrow from Wotfowitz.

In US jurisprudence, it is not just immoral to make covenants with war criminals, it is criminal.

by John Helmer - Friday, March 18th, 2005
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Although Russian steelmaking is booming, so too is iron-ore mining. As the only one of Russia’s steel mills without a significant supply of iron-ore of its own, Magnitogorsk Metallurgical Combine, Russia’s largest steelmill, is unhappy to have discovered this week that a domestic rival may take control of most of its iron-ore supply.

In the short history of commercial steelmaking in Russia, grabbing control over raw material supplies –iron-ore or coking coal — has been the shortest route for a raider to take control of the steelmill itself. In December, after the management of Magnitogorsk beat off one hostile takeover bid by the Mechel steel and coal group, and won a rigged privatization of the last state shareholding in the plant,Magnitogorsk had seemed impregnable

This week, Alisher Usmanov, a controversial Moscow entrepreneur, who recently abandoned a raid on Anglo-Dutch steelmaker Corus, announced that he is looking to buy the Sokolovsko-Sarbaysky ore-processing combine (GOK), known as Sokolovka for short. The mine, which is located in Kazakhstan, supplies about 70% of the iron-ore which Magnitogorsk needs annually. In all, Magnitogorsk needs 16 million tons of iron-ore to turn out 10 million tons of steel products per year.

Although Usmanov, who is short of cash, may be bluffing, Magnitogorsk, which has been negotiating itself with Sokolovka before, is not concealing fresh concern. A Moscow press report on Wednesday, claiming that Usmanov’s Gazmetall group is negotiating with Magnitogorsk over the future ownership of Sokolovka has been rebuffed by Magnitogorsk sources as a hostile signal. Still, acknowledging the extent of its dependency in an announcement last week, Magnitogorsk’s CEO, Victor Rashnikov said he will step down from his post in April, and will concentrate on developing new sources of iron-ore and coking coal for the mill.

Six months ago, Rashnikov and his colleagues announced that they were exploring for iron-ore from the Kiryabinskoye deposit in the Bashkirian republic of central Siberia. But rated at just 20 million tons in reserves, this is too small to satisfy the steelmaker’s long-term requirements. According to Rob Edwards, metal analyst for Renaissance Capital in Moscow, “the critical mass needed for Magnitogorsk to develop a greenfield iron-ore mine is 30-40 million tonnes of reserves.” The mill also has a licence for the development of the Techenskoe deposit in the Chelyabinsk region of central Russia, with estimated reserves of 50 million tons. In another two years, Magnitogorsk says it is hoping to produce 2 million tons of iron-ore from this source in order to boost steel a output to 12 million tons in the same period.

This week, a Magnitogorsk source said: “we have heard that Gazmetall has had negotiations with Sokolovka. Knowing the ambitions of Mr. Usmanov I think the meaning of the term negotiations is acquisition.” The source did not say that Usmanov has been negotiating this deal with Magnitogorsk.

Usmanov and his associates now control the Lebedinsky and Mikhailovsky GOKs with a total yearly output of almost 40 million tons, making them the dominant iron-ore producer in Russia; a quarter of that volume is exported. The other major domestic iron-ore mines are each controlled by top-10 Russian steelmakers –Severstal (Karelsky Okatysh, OlenegorskyiGOK); Novolipetsk (Stoilensky GOK); Evraz (Kachkanarsky GOK); and Mechel (Korshunovsky GOK). In all, Russia produces about 100 million tons of iron-ore per year.

Until recently, the steelmakers used their control of the mines to hold prices down, and depress the profitability of the GOKs. But the global shortage of iron-ore has set Russian iron-ore prices free to rise, and as they have done so, they have threatened unprotected mills like Magnitogorsk with serious cost pressure. Usmanov’s group also controls two top-10 steelmills, Oskol and Nosta.

Usmanov and partner Vasily Anisimov, a former aluminium smelter owner, are currently in the process of buying Mikhailovsky GOK from the Metalloinvest group of Boris Ivanishvili. A 29.9-percent stake Ivanishvili owns in the pig-iron producer Tulachermet is also included in the deal. Usmanov and Anisimov have said they will contribute $1 billion in cash, and borrow another $1 billion from a state-controlled Russian bank. Usmanov has disclosed that he has raised about $614 million in recent sales Of his shares in Corns; he is estimated to have bought them for about $295 million.

To fund another major purchase like Sokolovka, Usmanov and Anisimov may view Magnitogorsk as a necessary partner. However, the Magnitogorsk source says the plant is not in favour of joining this bid.

The source implied that, should Usmanov take over Sokolovka, iron-ore prices inside Russia would rise above the level currently offered by Australian and Brazilian exporters to Russia. In that event, the source said, Magnitogorsk is likely to upgrade port facilities it already controls at Vladivostok, in the Russian Fareast, so as to facilitate importation of iron-ore from Australia or elsewhere. “The problem with iron-ore delivery is Russian ports,” the source said. “They are not designed tor the unloading of such cargo. But that problem could be solved if need be. And I think that time will come soon, because if Usmanov will accumulate all iron-ore mine shares, and lift the prices, we will have nothing to do besides searching for alternatives.”

BHP Billiton and Rio Tinto have been assessing the Russian market for sales for some time, while local steelmakers acknowledge that the cost of rail transportation across Siberia has been a deterrent for as long as local iron-ore prices remaned constrained.

Usmanov confirms through his spokesman that there have been negotiations relating to the iron-ore mine, and that Usmanov is interested in acquisition.” He did not say that Usmanov has discussed the deal with Magnitogorsk.

Alfa-Bank metal analyst Maxim Matveyey said he believes Rashnikov may try to outbid Usmanov for Sokolovka. “While almost all major ferrous metal companies in Russia have ensured their raw materials supplies, Magnitogorsk controls only 10% of its iron ore and entirely lacks its own coM. We estimate that Magnitogorsk currently buys 15% and 10% of its iron ore from Mikhailovsky and Lebedinsky GOKs. Any news about a possible solution to Magnitogorsk’s raw materials problems would be a strong catalyst for the company, but we do not expect such news anv time soon.”

by John Helmer - Monday, February 21st, 2005
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MOSCOW (Mineweb.com) –Two things are known for certain about the conversation President Vladimir Putin had with Sakha region president Vyacheslav Shtirov in the Kremlin, at the end of December.

One is that Shtirov invited Putin to come to the region for fishing. The other is that Putin replied that now is not the time.

Maybe this was nothing but small talk; maybe Putin was thinking meteorologically of the region where the average daily temperature these days is minus-40 Celsius. . But whether there was a symbolic warning for Shtirov in Putin’s remark, no-one knows for sure. But time is certainly beginning to tell, and the clock is not ticking in Shtirov’s favour.

Alrosa, the world’s largest diamond-miner after De Beers, is now undergoing a revolutionary transformation at every level of its operations. This is being directed by the Kremlin, which has ordered federal ministries in Moscow to introduce new methods of supervision and control of the company. Shtirov has been told to stop delaying or obstructing this process with his fish tales. If he does not, he has been warned that Putin may oust him from power altogether.

Yury lonov, a KGB officer, was put in charge many months ago of the company’s legal affairs and cashflow security. Then a federal government appointee, Alexander Nichiporuk, was introduced to management, first as deputy CEO; in November, he was officially promoted to be the chief executive.

Through these two officials, as well as with external auditors and inspectors, the federal authorities have also begun a crackdown on Alrosa’s trading practices and marketing channels. Among the targets, they have aimed at the system of exports through the Sakha regional Committee for Precious Metals and Gemstones; Alrosa’s mining affiliates; and near-bankrupt diamond cutting establishments in Sakha and elsewhere, which Alrosa has kept supplied with diamonds. Preferential allocations of rough diamonds to favoured diamond-buyers, discounts, unrepaid credits, unusual service fees, and offshore banking schemes have all been exposed to federal inspection. If not for the first time, these schemes have been identified as multi-million dollar lossmakers, or worse.

In parallel, the federal authorities have been contemplating their own options to reorganize the unusual shareholding structure at Alrosa. This was created by a secret decree of President Boris Yeltsin in 1993, when he was desperate to secure the favour of regional governors, like Sakha president and Alrosa godfather, Mikhail Nikolaev. This decree, and others Yeltsin issued to award state property in the Sakha region to his satraps, have never been submitted to parliament for enactment, and in their existing form they may be unlawful. Abrogating the Alrosa charter, however, may undermine most of the state property transfers in the Sakha republic, including goldmines, coalmines, and oil prospects.

In its orginal form, Alrosa is a closed shareholding company, whose shares cannot be bought and sold, except between existing shareholders. These were the federal government, with an initial 32-percent bloc; the Sakha government with a similarly sized stake; the districts of the Sakha republic with 8 percent; a military veterans fund with 5 percent; and the balance held by individual company managers and workers.

Although the closed shareholding rule appears to be clear, there has been more than one loophole in the corporate charter, and these have encouraged both speculators and takeover schemers, hoping to capitalize on what they see as Alrosa’s eventual privatization by the state. The first of these schemes to be nipped in the bud was an attempt by a private entrepreneur to buy the 5-percent stake in Alrosa assigned to a military veterans organization. Instead, this shareholding was returned to the federal government, moving its stake up to 37-percent. With that, Shtirov’s place as chairman of Alrosa’s board of directors — technically called the Supervisory Board, since the company lacks a conventional open shareholding structure – was replaced by a federal government official, Finance Minister Alexei Kudrin.

Kudrin, however, has been easy for Shtirov to lull into a false sense of security; and to redirect away from the challenges to federal authority which Kudrin had been instructed by the Kremlin to counteract. While Kudrin looked askance, a trade began in Alrosa shares that has substantially cut the stake belonging to workers and managers.

To evade the closed shareholding rule, companies have been created with shares that have been gifted, rather than sold. Once established as shareholders, these companies can then legally buy other Alrosa shares. Through devices like this, for example, Renaissance Capital, a Moscow investment bank, has acquired an estimated 3-percent stake in Alrosa, paying between Rb4,000 to Rb5,000 per share (US$143-$179). Whether the institution was buying for its own account, or on behalf of other investors, is not known.

The Alrosa management is reluctant to discuss what has been happening to its shareholding. One very good reason is that the federal government has decided to accelerate its takeover of the majority stake in the company, and while it has yet to decide how to manage this, one option is to dilute the minorities. Instead of holding a stake estimated to be worth $150 million –assuming Alrosa’s capitalization is calculated at $5 billion — the 3 percent held by Renaissance Capital could thus be worth little more than was paid for it. The remaining workers and managers may find themselves comparably dispossessed, or with a much smaller premium than they had been anticipating. For them, it would thus be preferable that, if anyone is to lose money in the reorganization, it should be Shtirov’s administration and the Sakha regional government.

It was on account of the stakes involved in this process that documents were leaked a few days ago in the Russian press. These indicate some of the options which the federal authorities are currently considering for the reorganization of Alrosa’s shares. Most importantly, they indicate whom the leakers prefer to suffer the value loss, rather than themselves, when the Alrosa shares are surrendered to Moscow. For example, there was r\o reference in the press leak to dilution of the management and workers, or to the free floating shareholders.

Instead, documents were cited that indicate the possibility of converting Sakha regional property to federal government property, and adding to Alrosa’s capital the value of the royalty and rental payments this property can generate. Depending on what estimate is used for Alrosa’s capitalization – they range from $2 billion to $6 billion – this option could generate up to another billion dollars in capital value for the federal government’s share in the company.

A fight over this billion between Sakha and Moscow, between Shtirov and Putin, can be delayed. But there can be no doubt about the outcome. Putin’s recent message to Shtirov was that he has delayed for long enough.

It is also in the interests of the international diamond-mining community that Alrosa’s rustlers are rounded up, and the assets corralled as quickly as possible under federal authority. Once that is done, it will be much simpler for the Kremlin to decide how and when to privatize Alrosa’s shares. That is the payoff that investors like Renaissance Capital, or that miners like De Beers and BHP Billiton have been waiting for.

by John Helmer - Friday, February 18th, 2005
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The greatest dynastic struggle between two queens that is recorded in European history was the rivalry over the throne of the 16th century British empire between Elizabeth I of England and Mary, Queen of Scots, The contest was decided by bribery, knives, explosives, multiple murder, forgery, extortion, espionage, entrapment, torture, a rigged court, and finally the executioner’s axe. Even that was misaimed, and required three blows to kill.

Mary lost; and it was Elizabeth’s historians who got to tell the story. Mary deserved to lose, they said.But truth to tell, it was the Scottish lords who first murdered Mary’s husband Darnley, the King of Scotland;dethroned and imprisoned her; and forged the evidence that helped lead to her execution. Her son James betrayed her in a deal with Elizabeth to stake his own claim to the throne, and her spymaster Walsingham fabricated a plot to trap Mary into committing treason

Just imagine how the history of the Russian succession of President Vladimir Putin will come to be written, and by whom.

This month, for the first time since he came to power five years ago, Putin’s standing in the polls has dropped so fast and so low – maybe as many as 30 percentage points below the published numbers -that the president can no longer be confident of assuring his own succession. If he cannot do that, he and his allies realize they may soon be at the mercy of their opponents. In the fractious and unconfident staff that surrounds the president, this has triggered the worst fears they have known – for their own futures. Their loyalty, never certain in Putin’s mind, is in grave doubt; their ability to manage the state, never assured before, has become even more unlikely now. The regional lords, elected or appointed governors, have discovered they can defy the Kremlin with a few hundred elderly protesters on the streets.

And the business lords, the dozen or so oligarchs, each worth a multiple of a billion dollars, have revived the confidence to replace Putin with their own candidate. This combination of forces has provoked the most serious crisis of political power in Russia since Boris Yeltsin began his challenge to Mikhail Gorbachev in 1989. By English standards, the methods used then were relatively bloodless, although that’s no guarantee for Russia’s time ahead.

But wait a minute. This is not a history to be dictated by the winners of the 1990 contest that is obliged to repeat itself. Putin may be desperately short of voters, soldiers, and prosecutors. But he has restored the one state power that can save him this time round. It’s the power to tax.

Yeltsin abrogated that power, allowing his supporters and ^financiers to pay none, and ensuring that the voters would have no alternative but to accept a 100-percent income tax rate – the non¬payment of salaries. Putin’s “monetization” reform was premised on the quaint notion that the government’s services should be paid for at cost, and that incoming tax revenues on wealth would be more than adequate to pay for public expenditures aimed at poverty. Although he has yet to admit that the theoreticians whose plans he accepted were the same men who implemented Yeltsin’s perverse income tax, Putin has realized the colossal mistake he made in withdrawing the in-kind social benefits Yeltsin left alone, and replacing them with less cash than they cost.

The fiscal gap, Putin has been told by Finance Minister Alexei Kudrin – he learned his tax craft during the Yeltsin years as apprentice to Anatoly Chubais, the most hated man in Russia then – will cost Rb200 billion ($7.1 billion) to cover. That Putin has no choice now but to spend that money to end the state robbery of the poor, and to assuage the voters, is admitted by all, including the president. The choice that is still his to make is where and how to find this money. When the history of the Putin succession comes to be written, it will be said that Putin’s choice for how to raise that money will have decided the leadership of the country beyond the parliamentary elections of 2007, and the presidential election of 2008. Those government officials, who are already staking their own futures with someone other than Putin, the cash cannot, and should not be raised by a large increase in taxes this year.

But for Putin, a tax aimed directly at his sworn enemies, the most unpopular men in the country, ought to be the natural remedy for this crisis. And he does not need fresh manpower, nor new laws, to do so. All Putin must do is to order Kudrin’s finance ministry and the federal tax authorities to enforce the existing tax provisions on transfer pricing and tolling. A report by the Tax Ministry to the Prime Ministry last September spelled out how these schemes have been used for years to cut corporate taxes to a fraction of the legal obligation. Other tax avoidance schemes, using, for instance, the letter of regional tax laws in Chukotka – Abramovich’s territory -but violating the reinvestment provisions of those laws, have been exposed by the Accounting Chamber, especially for such beneficiaries as Abramovich’s Sibneft. However, the tax bills have not been delivered.

If he decides to do so, Putin can afford to be generous. According to a recent report by Fridman’s Alfa-Bank, “though there seems to be a general understanding in the market that more ‘prophylactic’ back tax claims for other oil producers may emerge, the general consensus is that they will not be anything comparable with the scale of Yukos’s penalties.” In other words, if Putin decides to enforce the tax laws against the oligarchs’ enterprises, he can afford to waive penalties and interest. He will have his $7 billion for the benefit of Russia’s urban poor. And before he attempts to introduce monetization of municipal housing benefits, he will be able to demonstrate to the voters that the rich will have already paid what the law obliges them to.

Call this the monetization of oligarch theft. It is so obviously Putin’s choice now that every man and woman in the street knows what is at stake if he fails to make the choice. For Alfa-Bank, “the continuing uncertainty over this issue is quite irritating, and will surely continue to weigh on overall sentiment.” Putin now must choose whether it will be he or his detractors who will decide the sentiment that will prevail in Russia.

by John Helmer - Thursday, February 17th, 2005
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