If anyone should know how to rig a constitution, it’s me and George Bush, Jr. You might say it runs in the family.

Take my uncle, for example.As the British Empire began to break apart in the aftermath of World War II, he was one of many former military intelligence officers assigned by the imperial administrators in London to exercise their Oxbridge educations for the benefit of the constitution drafters in the colonies. On one of his stints, my uncle helped install a British constitution in Ghana. Much later, he helped provide advice during the course of the only constitutional putsch to have occurred in Australian history. The outcome was the removal of the elected Labor prime minister, and his replacement by a conservative. For his legal skills and loyalties, my uncle was handed the unpopular reward of becoming Australia’s governor-general. It was one of those jobs that someone has to do in Australia, if not in Ghana, which got rid of its Colonial Office constitution as quickly as it could manage.

I was working for U.S. President Jimmy Carter when the call for help came in from Prime Minister Jayewardene of Sri Lanka. He had just been elected, and he was thinking of changing his constitution. It was another of those Colonial Office jobs that had my uncle’s fingerprints all over it. The prime minister was thinking of turning himself into a president, and needed someone who knew how to handle the English and American rue-book. We worked hard over the next few months, and for a going-away present, Jayewardene’s Cabinet colleagues presented me with a leather-bound version of their mint-new Sri Lankan Constitution. I was touched, and in my acceptance speech, I invited the 20 or so ministers and advisors at dinner to sign the document, if they didn’t mind. Constitutions can be short-lived, and the good a man does to rig one for today, can be quickly forgotten tomorrow, I said to knowing nods. Within a decade, many of the signatories were unnaturally dead, blown up or shot down in the civil war that has afflicted that unhappy land. I still have my leather-bound keepsake, though.

A decade of good works later, and I happened to be in Athens the year US President Ronald Reagan thought it was time to rig a Greek election, and dispose of socialist Prime Minister Andreas Papandreou. He was much too popular at the time to lose a constitutional election, and as Reagan’s advisors warned, they had already toyed far too often with the Greek constitution for another attempt to be worth the try. And so the idea was hatched to encourage a little war between Turkey and Greece over oil exploration rights on the seabed of the Aegean Sea. The plan was to humiliate Papandreou in front of the voters. The Greeks started preparing for war about six months before Washington told the Turkish prime minister to give the order to set sail into Greek waters.

It was a fateful order. In a flash, Papandreou turned off the electricity at the American intelligence bases, cutting their ability to listen into Greek military communications. He moved the Air Force to front-line bases, fully armed and ready to take off on three minutes’ warning. And he called Todor Zhivkov, president of Bulgaria in those days. Zhivkov ordered his tanks to start rolling towards the Turkish border. It was the first – and last – display of coordinated military action by a NATO state and a member of the Warsaw Pact. It was also the shortest war that Greece has ever won over Turkey. The Turks and the Reaganites suddenly got cold feet. Their geological survey vessel was ordered back to harbor, and the Turkish prime minister checked intci a Houston clinic for a cardiological checkup. Greece and its Const tution were safe, until Reagan’s next trick – a scandal hatched with a Greek fraudster, who owned a local football team. But that’s another story.

The experiment of the Soviet Union constitutionally re-jigging itself under Mikhail Gorbachev was hard for the outside powers to resist manipulating, and as we all know, they didn’t. Russia under Boris Yeltsin turned out to be a familiar story. Only memories are short, especially when prompted by those who receive stipends to forget.

When the Moscow Times reported this week that President Vladimir Putin is proposing to change the Russian Constitution “which was drafted by Yeltsin advisers amid political fights in a Communist-controlled Duma”, the audacity of the misrepresentation, or the forgetfulness, takes one’s breath away. The 1993 constitution that Yeltsin drafted followed his order to shell and machine-gun to death the popularly elected Supreme Soviet. About 140 lives were lost in that attack. The opposition to Yeltsin in parliament included a Communist Party majority because the voters put them there, under the constitution that aimed at maintaining a balance of power, or so it was called at the time. But support for reform of the constitution, then being drafted by non-Communist deputies like Oleg Rumyantsev, Sergei Baburin, and Ruslan Khasbulatov, was in no way controlled by the communists. Quite the reverse – the constitutional reformers were far ahead of the Communist Party.

The Moscow Times compounds its forgetfulness of what really happened with more distortion. The Yeltsin Constitution of 1993, claims the newspaper, “placed a lot of power in the president’s hands but introduced direct elections for governors, and reserved half of the seats in the Duma to directly elected deputies.” What is omitted is that Yeltsin eliminated direct election of senators to the Federation Council, substituting the governors and the regional parliament chairmen in their place. This was done because direct election of the upper house had created an anti-Yeltsin majority during the constitutional battle with the Supreme Soviet. Yeltsin used the formula of direct gubernatorial election to make sure he never faced a hostile senate again. That was an irreversible shift in the balance of power. The Constitutional Court, which had also been showing independent opposition to Yeltsin, was locked out, and its membership then swamped with presidential trusties. These measures were promoted, then roundly applauded in Washington at the time. When Yeltsin rigged the vote for ratification, there was no complaint from foreign democrats, or the local ones besides.

That sordid story does not justify the attack on Putin’s proposals from the same forgetful gang that backed Yeltsin’s destruction of parliament, court, and constitution 11 years ago. Eleven years for a rigged constitution has proved long enough to forget the democratic options that Yeltsin destroyed. He himself can claim today “we will not allow ourselves to deviate from the letter, and most importantly, the spirit of the Constitution that our country adopted by popular referendum in 1993.” But the old crocodile is weeping phoney tears. The spirit of the 1993 constitution was rigged; the letter was a fraud; the outcome was a rotten borough parliament in which seats (as well as parties) have been bought and sold. Eleven years isn’t so long that Putin should be under obligation to preserve that.

Gubernatorial seats are so expensive, they have required oligarch-sized fortunes to acquire. Thus, for exampe, Sibneft owns Chukotka; Norilsk, Krasnoyarsk; Alrosa, Sakha; Russian Aluminium, Samara and Khakassia; and Tyumen Oil Company, Tyumen. It has been cheaper to buy seats in the Federation Council, and the State Duma. It’s difficult to say whether single-mandate seats in the lower chamber are are costly, more tradable than places on the party lists. Both together represent a concentration of corporate wealth that has been the real character of Russia’s parliamentary evolution since 1993.

The big question today is whether Putin will prove strong enough to continue his campaign against the oligarchs, and clean parliament of their corruption at the same time. Remember that, at the start of last year’s parliamentary election campaign, not a single political party or candidate told the voters whether he was for or against Mikhail Khodorkovsky’s massive tax evasion and fraud. That did not become a campaign issue until Putin’s initiative demonstrated that it was both official and popular at the same time. Reviving ideologically distinct political parties through a simple proportional representation system is a worthy aim. But if the United States hasn’t managed to achieve this yet, Putin may be biting off more than he can chew. And if he succeeds, the political outcome may be too democratic to be digestible. For proportional representation will sharpen the ideology of Russia’s political opposition. It will almost inevitably produce a revival of leftwing, even communist opposition. This is hardly what the so-called democratic critics of Putin want to see. The outside powers have spent billions of dollars rigging the Russian Constitution so that would be impossible.

Of course, that was mostly the doing of George Bush Sr. and Bill Clinton. Bush Jr. arrived too late to rig the Russian Constitution. He almost didn’t arrive at all. If he hadn’t rigged the constitutions that regulate the state of Florida and the Supreme Court in Washington, everyone knows that Bush Jr. wouldn’t be president today.

by John Helmer - Wednesday, September 22nd, 2004
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MOSCOW (Mineweb.com) — In Robert Louis Stevenson’s “Treasure Island”, the adventure begins with the approach of Blind Pew, emissary of Captain Flint’s pirate crew, to deliver the Black Spot, the verdict of death, to Billy Bones, the crewman who held Flint’s precious treasure map. In fear of his life, Bones was always on the alert for the tap-tapping of the blindman’s cane.

Russia’s new Minister for Natural Resources Yury Trutnev also holds the map of the national treasure, lying in the sub-soil for which the ministry has issued some 16,000 licences to dig. Trutnev, who was appointed minister in March, has used a handful of press oppoprtunities to express his keenness to release the map to the powerful Russian and foreign companies who called him for it. That was until this week, when Trutnev appears to have heard Blind Pew’s cane.

In a speech on July 12, for example, Trutnev – who built a business fortune importing Swiss foodstuffs to his home region of Perm, before becoming governor — announced that he wanted to cut the six-month time period currently required by Russian mining law for the tendering of major mineral deposits. Specifically referring to the long-delayed Sukhoi Log gold deposit in Irkutsk region, and the Udokan deposit in Chita, Trutnev announced that he was preparing an amendment to the law, shortening the tender period to 45 days.

“We cannot commission a lot of large deposits for the 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,” Trutnev said, according to the text of his speech provided by the Ministry spokesman. “This is a very long time, and costly. We want to reduce this term to 45 days.” He went on to hint that the Sukhoi Log tender could be issued and awarded by the end of this year.

With 33 million ounces of gold in estimated reserves, Sukhoi Log is one of the largest unmined gold deposits in the world; for more than a decade it has been attracting worldwide interest among miners. In Russia, Norilsk Nickel has been keen to accelerate this tender, as principal shareholder, Vladimir Potanin, has been in a hurry to include Sukhoi Log in his plan to spin off his gold assets, and swap them in a transaction with an international miner to give him a protected foreign shareholding worth several billion dollars. Gold Fields was the target of this scheme until recently.

Norilsk Nickel denies lobbying Trutnev for fast-track enactment of the 45-day rule. Trutnev has said through a spokesman that he will not respond to questions. Almost exactly a year ago, Norilsk Nickel successfully lobbied another minister, Finance Minister Alexei Kudrin, to push through parliament an amendment of the state secrets law to allow Norilsk Nickel to disclose its metal reserves publicly, as well as sales and production figures for platinum group metals. The State Duma approved the measure in a highly unusual three-reading vote in a single day. Although President Vladimir Putin followed by signing it into law in November, the Kremlin blocked implementation twelve weeks’ later, embarrassing Potanin’s plans to issue foreign bonds and raise other debt that required the disclosures he was no longer legally allowed to make. The measure is still suspended.

If Norilsk Nickel is shy about admitting to lobbying on the Sukhoi Log tender, its rivals in the race privately concede that they are tlying to persuade the government, including President Putin’s advisor on natural resources Vladimir Litvinenko, not to make the award to Norilsk Nicke. The Irkutsk regional administration, headed by Governor Boris Govorin, appeared to be backing Norilsk Nickel for a time, but it too has conceded that the final decision is out of its hands. In his July speech, Trutnev also claimed that he was opposed to excluding foreign miners from the bidding for Sukhoi Log. “We do not see the necessity to create a distinct ban on foreigners. Although there are situations when the state should protect the national interest in the sphere of natural resources usage, such situations should not be resolved by administrative methods, and should be required to be registered in the law.”

Trutnev’s remarks hinted at a significant difference on strategy with Litvinenko, whose official position is Rector of the St Petersburg State Mining Institute, the premier geology training academy of Russia. Before Trutnev’s appointment, Litvineko told Mineweb he favoured radical changes in current mining legislation and policy towards licensing. Calling for the adoption of a mineral and mining code “on the model of developed countries with a market economy”, Litvinenko said he also favoured limiting foreign investment to the processing segment of the resource sector. As for mining, he said he favoured “a system of privileges and preferences for the domestic companies.”

He also said that he is opposed to allowing foreign investors to take shareholding control of Russian mining enterprises. Sale of shares outside Russia can be allowed, Litvinenko said, but control should be vested in a “golden share” held by the Russian government. Applying this limit on divestment by the Russian oligarchs was urgent, he said, in the cases of “Gazprom, United Energy Systems, important petroleum companies, Norilsk Nickel, and many other companies.”

Since saying that, Litvineko has fallen silent. But all the indications are that a debate over strategy has been under way between him, Trutnev, and the leading natural resource companies. Anonymous leaks from Trutnev’s ministry have claimed that the new draft of the Sub-Soil legislation, with all the amendments Trutnev was promising in July, has been signed and approved by the government for despatch to parliament. But when asked to confirm this, Trutnev’s spokesman and staff at the Committee on Natural Resources at the Duma have said they cannot. Then Trutnev appears to have heard Blind Pew’s cane tap-tapping. It was a signal from the Kremlin that he could not ignore.

The first indication was an anonymous leak last week from the ministry claiming that the oilfield operating licences of Yuganskneftegas, the principal unit of the beleaguered Yukos oil company, could be revoked within two weeks on account of non-payment of taxes. This threat was clearly part of the Kremlin-led campaign against Yukos and its imprisoned shareholders, Mikhail Khodorkovsky and Platon Lebedev, who are on trial for fraud. The company has already been convicted of tax evasion.

The legal requirements for licence revocation are much more complicated and time-consuming than the leak suggested; that was one reason the minister wanted to do what he was bidden, without having to explain himself.

Another anonymous leak from the ministry last week claimed that there would be no accelerated award of the Sukhoi Log tender; and that the earliest this could happen would be the second quarter of 2005.

Whether Trutnev himself was behind the leaks, or the Kremlin, the minister went public himself in Irkutsk on Wednesday. This time, he repeated the threat to yank the Yuganskneftegas licence, and added a new one, indicating that the TNK-BP group – which links oligarchs Mikhail Fridman and Victor Vekselberg with British Petroleum – might lose its licence to develop the Kovykta gas field.

Then Trutnev announced that the government intends postponing the Sukhoi Log tender until next year, and may bar foreigners from bidding. “The new natural resources law,” he is quoted as saying, “will include an option to limit foreign participation in tenders for unique deposits – such as Sukhoi Log and Udokan [copper deposit].” Clarifying that the backstage fight is not yet over, Trutnev went on to explain that the proposed changes to the legislation would be discussed by the cabinet of ministers next month thus confirming there is no official consensus yet on what should be sent to parliament.

Russians who have been dealing with Trutnev say he is much more commercially minded than his predecessors, and more energetic. Russian miners say they do not know who was behind his appointment. One believes he was the candidate of German Gref, Minister of Economic Development and Trade, whose ministry has often clashed with the Natural Resources Ministry in the past. Whether it was Gref, or a Kremlin official, or Litvinenko, who promoted Trutnev to his portfolio, it is now clear that Trutnev’s auditory facility has been under constant training since he took over.

by John Helmer - Thursday, September 16th, 2004
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MOSCOW (Mineweb.com) – Cash cows need careful herding, just like the lactating and the beef species. As every cowboy knows, if you don’t fence them in properly, on cloudy nights you run the risk losing then to rustlers or wolves.

Gazprom, Russia’s leading resource company and the world’s largest gas producer and exporter, has been inadequately protected from the beginning, ) when it was created by rustlers with well-known names like Victor Chernomyrdin, Rem Vyakhirev, and his family. Alexei Miller, the ranch hand engaged by President Vladimir Putin to get the company safely back into the corral, has been too slow, too weak and too ineffective, by most accounts; although it is too early to say that he is allowed the big cash cows in the Gazprom herd to escape, or run wild.

His inventory recovery efforts have made some former Vyakhirev associates nervous. Alisher Usmanov, for example, had been in charge of converting Gazprom receivables and debt into assets and revenue streams managed through a company called Gazprominvestholding, which did exactly what its name suggests, but off the Gazprom books. These assets have now grown into the prize bulls of the Usmanov herd – the Oskol steel plant, Urals Steel (formerly the Nosta steel plant), and the Lebedinbsky iron-ore mine. Leveraging these assets, Usmanov has been trying to borrow or trade his way into a safe-haven fortune offshore, in the Anglo-Dutch steelmaker, Corus. The Corns shareholders have appreciated the share value Usmarov’s raid has generated, but they have kept the keys to the ranch-gate to themselves.

The announcement by the Russian government, and by President Putin, that Gazprom’s shareholding is to be reorganized, so that: the state stake will be increased from 38.4% to 50%+1 control, Gazprom shares swapped with Rosneft, and the latter turned into a fully-owned Gazprom subsidiary, creates the perfect corral for the combined enterprise.

Incidentally, but demonstrating much foresight, the move allows the government to create enough capitalization to acquire the distressed Yukos oilfield assets – in settlement of its tax and fraud bills – and at the same time, allow the beef-hungry share markets of Moscow, London, and New York to buy into the upside value of the new Russian energy giant. Sharebuyers in those markets have been hobbled by the so-called ring fence, the state rule limiting direct purchase of Gazprom shares.

In a trice, the dream Mikhail Khodorkovsky, principal shareholder of the Yukos group, once had of doing the same thing with Yukos, creating a Russian energy conglomerate bigger than Gazprom and selling half of it to the United States, has been replaced by an idea foreign share-buyers and speculators will now consider much safer. By dismantling the old ring fence, and erecting the corral, the stock markets can swap speculative Yukos, Sibneft, or other commercial Russian oil risk for sovereign risk in the new Gazprom-Rosneft combination. To the stock-broking trade, this is pure filet mignon.

It is a move that required careful analysis over many months, blanket secrecy, and a deft public relations touch at the end. For all the abuse that has been heaped by the Khodorkovsky-fed media on those in charge – Putin himself, his advisor Igor Sechin, and the specialist advisors in the natural resource sector -it is a model of the post-oligarch Russian resource company that meets both the state interests Putin has spelled out, and also the foreign investment conditions.

As the grass-fed Moscow brokerage analysts have already begun pointing out,the new company is compatible with the state-controlled energy corporations of all the great oil-producing states in the world. Yukos shareholders and directors were uncertain of the outcome of their gunfight with the Kremlin, this is their tombstone.

Just in case anyone remembers the lurid conspiracy theories of the Financial Times, Vagit Alekperov, CEO of LUKoil, has announced, simultaneously with the Gazprom disclosure, that when the state shortly sells off its 7.6% stake in his company, most likely to ConocoPhillips, the American oil company will not (not, editors of the FT be advised) be permitted to raise that shareholding to anything approaching a blocking stake.

If anyone in Washington needs further reminding that the fight over Yukos has been to stop US takeover of Russian resource assets, the next steps Putin will take in the corral strategy should suffice. The roundup of the cash cows will continue.

Putin is now on track to apply the corral approach to all of the Russian resource extraction industries that were prematurely rustled, a decade ago, by the so-called oligarchs. These include the minerals, inducing precious metals, owned by Vladimir Potanin; aluminium and bauxite owned by Oleg Deripaska and Victor Vekselberg; and oil by Roman Abramovich and Mikhail Fridman.

A Kremlin investigation on whether to approve or veto Potanin’s $1.16 billion purchase of a 20% stake in South African miner, Gold Fields, is now in its sixth month. But already the South African shareholders of Gold Fields have decided to pre-empt Potanin’s takeover ambition by merging with the Canadian miner lAMGold, thereby doing to Potanin what he has often done to others – diluting his share value, paralyzing his manoeuvre.

The Kremlin might therefore do Norilsk Nickel a favour by ordering a reversal of the Gold Fields deal, forcing Potanin to liquidate his stake, and repatriate the funds to Russia. Two years ago, on a flying visit to Norilsk, Putin warned Potanin that the company was paying too little tax;. A fresh attack on this front might be the route Putin’s advisors will select or restructuring the Norilsk Nickel shareholding and corraling Russia’s largest mining company, according to the new model.

Deripaska’s attempt to sell Russia’s largest aluminium rolling mill at Samara, plus the smaller Belaya Kalitva plant in Rostov, will be another good test, since Deripaska requires Kremlin permission – nominally, the authority of the federal anti-monopoly service of the Ministry of Economic Development and Trade – to sell the assets for about $220 million to Alcoa, the: US-owned global aluminium leader. Alcoa had expected approval to be granted by June, and here we are almost in October, with no approval – and no veto – in sight yet, according to the federal and regional officials involved.

Kremlin concerns about Deripaska’s political ambitions, his sweetheart deals with regional governors to supply cut-price electricity, and his tax minimization schemes have been under investigation for weeks now. Had the Kremlin reached a consensus on what to do, it could have brought Deripaska to his knees by the simple expedient of having Sberbank call in repayment of several hundred million dollars’ worth of loans to Deripaska’s cash cow, Russian Aluminium (Rusal).

To anticipate that, Deripaska has been seeking an equivalent loan from a syndicate of European banks. Their reluctance to lend has lasted a year now. At the same time, Deripaska’s cash cow is urgently required for milking, in order to fund acquisition of the remaining 25% stake in Rusal, which Deripaska doesn’t own. The sellers in this case include Abramovich, Eugene Shvidler, and others in the Millhouse holding company. Their selling price will be at least $1.2 billion more than Rusal can afford to give Deripaska right now.

Other Rusal schemes to buy or build expensive new mines, refineries and smelters in Australia, Venezuela, Jamaica, India, Nigeria, and the Congo have been proposed, but most are still up in the air, awaiting Kremlin judgement of how to corral the aluminium cashflow in the national interest.

No-one has paid quite as much money as Victor Vekselberg recently promised to Brian Gilbertson, former CEO of BHP Billiton, to drive his cash cows to market outside Russia. If he succeeds, Gilbertson stands to set the world record for cow-punching compensation; for Vekselberg, the price would be worth paying to swap his vulnerable stake in Siberian Ural Aluminum (SUAL) for the safety of foreign registration.

You do not have to like American westerns to know what the genre demands. When ambitious cowpunchers come into town, they either pay their respects to the sheriff, or they prepare to fight him. Gilbertson has yet to do the former. And if he can read the meaning of the Gazprom-Rosneft announcement, he will understand that it would be folly to try the latter. He is out-gunned.

by John Helmer - Wednesday, September 15th, 2004
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Among soldiers and other hired gunmen, it is said that the bullet always tell the truth. It’s the triggerman’s way of passing moral responsibility for his deed, and his good or ill fortune, from the trigger to the target.

In interpreting a national shock like this month’s killings at Beslan, in the Northern Ossetian Republic, many contradictory truths have been claimed, some of them ripped almost literally from the corpses. But it is the single biggest mistake of most of these interpretations, foreign and Russian alike, to predict that the Beslan events will be a turning-point for Russia; that the truth-talking bullets that took so many lives will, somehow or other, change Russian politics in a decisive fashion.

Putin’s strength. The many Russians, and their Anglo-American patrons, who were already sharp critics of President Vladimir Putin, can’t avoid expressing the hope that the mismanagement of the Chechen war, and of the new violence in the Caucasus, will expose Putin’s weakness, and lead to his downfall. In fact, Putin has done the unprecedented thing of admitting what none of his predecessors has ever conceded – and thereby gained strength in popular, as well as elite support. If the Russian state is as weak as Putin admitted, and if the weak get exploited, as he warned and we all know, then who is there left standing to defend that state from its enemies, if not the President? Of course, Putin has a problem he hasn’t quite acknowledged, although his actions during and after the Beslan crisis demonstrate what he means. After almost five years in command, Putin has found not one spokesman who can be trusted to address the media, the people, or his own chain of command -except himself. This has awkward corollaries. The prime minister can’t open his mouth on a subject of national policy. Down the military chain of command, officers are reluctant to issue orders, or take the initiative, for fear of being countermanded, or sold out, by their superiors. They fear reporting intelligence assessments if they risk contradicting the vested interests of these who lie between them and the President. Putin himself trusts just five people to help him run the country. This six are too few. Little wonder that crises are difficult to anticipate, and slow to resolvne. But the alternatives to Putin are not simply worse. They are what brought the state to its knees in the first place.

Cockpit warfare. Several months ago, Beslan was chosen by those who directed the terrorist gang, not because it was close to an airport for a getaway; nor because the regional police were susceptible to bribes, nor because the school was wide open to attack. Those vulnerabilities are everywhere in evidence, all over Russia. Beslan was picked, because it is a cockpit for ethnic conflict between the tribes, clans, religions, and national loyalties of the Caucasus. And, as it was in Ottoman, British; Empire, Crimean War, and Hitler’s days, the Caucasus is the most vulnerable of Russia’s frontiers. In this respect, Beslan was for the planners of the operation what Lebanon was in the 1970s; Nicaragua in the 1980s; Yugoslavia in the 1990s. Set off a detonator in Beslan, it was thought, and the explosion would tear open such a hole in Russia’s under-belly, it would bleed to death, and outside powers gain the advantage, just as happened in the other cockpits. Putin made clear from his first speech after the freeing of the hostages that he understood this. Much of the interpretation of who the terrorists were, where they came from, who commanded them, and what they wanted, if anything, is beside the point that they were intent on triggering war in Beslan, not on negotiating Russian withdrawal from Chechnya, let alone an exit for themselves. Credible negotiators like Leonid Roshal, the Russian pediatrician, and Ruslan Aushev, the ex-president of Ingushetia – neither with a public axe to grind against Putin or the Chechen resistance — have said they doubted there was any exit for negotiation. The reported killings of three of the terrorists by their leader suggest the same thing. That the violence was inevitable doesn’t excuse the faults of the Ossetian security forces, or the federal commanders. But admitting those, and trying to rectify them in future, are only a small part of the cockpit war strategy Putin must now pursue.

The second front. For more than a year, Putin and his small band have been waging war on the other front in which they judged Russia was under direct attack, and against the other gang of bandits that has been staging repeated smash and grab raids, the accumulated value of which dwarfs the country’s (record-high) international reserves. The second front is the war to save Russia’s natural resource wealth from the Russian oligarchs, the half-dozen or so men, who began their operations against the state at the same time as the Chechen secession; with the same support from Washington and London; but with arguablt much greater firepower to destroy Russia. Boris Berezovsky, Vladimir Gusinsky, and Mikhail Khodorkovsky have been defeated; Oleg Deripaska, Vladimir Potanin, Roman Abramovich, Mikhail Fridman, Viktor Vekselberg, Anatoly Chubais, and some others remain. It is repugnant to compare the value of their thieving against the value of the lives lost in Beslan. It is enough to note that, from the start of the campaign against Khodorkovsky’s attempt to sell the Yukos oil company to the United States, none of theimedia voices, belatedly and reluctantly aroused today on behalf of the children of Beslan and Chechnya, has spoken in defense of Putin’s campaign against the oligarchs. Nor was there any support for Putin from his own chief of staff, Prime Minister and cabinet, regional governors, the State Duma, or the so-called parties then campaigning for the parliamentary election. Putin’s second-front campaign has had to be fought by the same small band, with many of the same problems of command and control visible at Beslan. Clumsy but successful nonetheless, Putin’s war against the oligarchs should now lead on to new targets, especially as very large, fresh sums of money must now be raised by the Kremlin to fund the cockpit war in the Caucasus. Should there be any doubtjabout his priorities, Putin will shortly explain why the billion-dolliar cash-out transactions attempted by the oligarchs take the country hostage just as surely as the Chechen secessionists and the Beslan gang. The corollary will be a renewal of the campaign to retrieve the wealth taken by the oligarchs, in order to fufid the bounties now required on the military front, and in the domestic economy of Chechnya.

The fourth column. Never has so much ill-gotten money been spent on a media campaign to make the breakup and asset-stripping of Russia look democratic and desirable, and the fight-back look Stalinist and indefensible. A newspaper editor who claims to have been fired after clashing over Beslan reportage with the oligarch who is his proprietor, and a pro-secession reporter whose claim to have been poisoned by Kremlin agents lacks the rudimentary corroboration required by her profession, have been treated in the western media as the only honest heroes to have emerged from the coverage of the Beslan affair. Putin’s public reminder that press lords like Rupert Murdoch do not make a free press outside Russia is a polite way of saying that the Russian media perform no worse, no better, and that Putin himself inherited this from his predecessor Boris Yeltsin. That the oligarchs he defeated fought with media weapons has made inevitable that the beaten media should be keen on revenge. It is a commonplace of the journalism profession to acknowledge that, in war, truth is the first casualty. For the Russian and foreign media to blame the casualties of Beslan on Putin is just another bullet, just another casualty, in the war for Russia that cannot be negotiated to a peaceful end any time soon.

by John Helmer - Monday, September 13th, 2004
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MOSCOW (Mineweb.com) – The official debut in Moscow this week of Brian Gilbertson as the new chief executive officer of SUAL International is the third swallow to fly.

The first was Ian Cockerill’s Moscow round with Vladimir Potanin in April, following Norilsk Nickel’s purchase of a 20% stake in Gold Fields, with the promise of acquiring more. The second was AngloGold Ashanti’s purchase in June of a 29% stake (plus a 51% earn-in right) in Trans Siberian Gold, the London-listed junior with gold properties in Krasnoyarsk and Kamchatka regions. Are these the swallows that signal the unprecedented summer alliance of South African miners with Russia’s mining industry? Or are they the birds that have flown the South African coop?

Gilbertson, the well-known SA executive who built his reputation as an international dealmaker at Billiton and then BHP BiIitton before moving to London in 2003 to chair the Indian miner Vedanta and provide consulting advice to Lonmln, has been quietly working on SUAL’s behalf for some time.

SUAL International, the international arm of Russian aluminium, alumina and bauxite producer, Siberian Ural Aluminum, is controlled by Victor Vekselberg, one of Russia’s most-powerful businessmen. Gilbertiton replaces fellow South African Chris Nerval, who had been CEO of SUAL International since vekselberg launched the new company in January 2003, along with partner Roddie Fleming, head of the London-based Fleming Family & Partners (FF&P). “SUAL as a vertically-integrated aluminum company will be transformed into a diversified company which will also have assets in the ferro-nickel, tantalum and coal sectors,” Vekselberg said at the time. International banking sources believe that Nerval accomplished little to attract either assets or investors to hit the $3-bn in capital targeted at the time of the launch of the Vekselberg vehicle. The sources are divided in their opinion of whether Gilbertson will prove to be more successful.

SA sources claim Gilbertson has already begun deal-making talks on vekselberg’s behalf, introducing him to Anglo American and to Lonmin several months ago. The latter is reportedly one of several merger or reverse-listing options Vekselberg is pursuing as he, like other Russian oligarchs, seeks international protection for hisbRussian assets and dividend income, in the wake of the Kremlin’s assault on the oligarchs at home. Vekselberg himself visited Johannesburg in February at the invitation of the SA foreign ministry; his spokesman, Bill Spears, declines to identify the business contacts he made. The company has acknowledged that Vekselberg has set up an SA branch of one of his companies, Renova, in an effort to develop black empowerment deals and to secure support in Pretoria. As Mineweb has already reported, Potanin is pursuing a similar SA strategy with a Russian cutout, based in Johannesburg, named Andrei Dubina.

Gilbertson will be based in Moscow. His appointment to SUAL follows a controversy in July with Vedanta, which removed him as board chairman after accusing him of a conflict of interest in his dealings with SUAL. “According to the international practice of corporate management, SUAL actively involves highly-skilled experts having big international experience if it does not contradict the standard rules of business,” SUAL’s spokesman Alexei Prokhorov was quoted as telling Moscow newspaper Vedomosti, when Vedanta’s concerns about Gilbertson’s link to SUAL first surfaced.

Gilbertson is the newest and most prominent of the non-Russians, who have been engaged to manage the oligarch-controlled companies, sit on their boards of directors, direct their legal and accounting departments, negotiate their borrowings, plan their mergers and acquisitions, or persuade investors to buy their shares and bonds. But can he and the others feel financially secure in managing Russian operations whose internecine complexity requires forensic skills that are way beyond their ken? In Gilbertson’s case, since SUAL apparently has not obtained – or will not acknowledge – directors’ and officers’ liability insurance cover for him, he may be directly and personally at risk of investoNifigation claims. What western executive would risk his reputation and personal fortune in taking a position in these enterprises that would expose them to the type of liability claims now filed against Russian oil company Yukos, its shareholders, American executives, and auditors? What insurance company would write a policy to protect Gilbertson in the event of a lawsuit against Vekselberg in future?

For starters, Gilbertson’s new job will oblige him to assess whether Vekselberg is powerful enough to secure the government backing in Moscow, without which there will be nothing Gilbertson’s offshore strategy can accomplish. For Gilbertson to be able to do that – and in the process second-guess his own employer – will require him to recruit two key allies in the Russian government – the new Minister of Natural Resources, Yury Truеtnev, and the Kremlin’s advisor on mining policy, Vladimir Litvinenko.

Trutnev signaled last week that he might be willing, in a campaign of press statements and newspaper leaks, he declared his independence of Litvinenko, whose official title is Rector of the St.Petersburg State Mining Institute. Trutnev was appointed to his ministerial post in March; he had been serving as the governor of Perm; in his early career he had an oilfield engineering background.

According to Moscow press reports, and statements by Trutnev, his ministry is proposing three new measures for adoption by the State Duma. The first is a limitation on the rights of foreign mining companies to bid for Russian mineral deposits. The second is the takeover by the federal government of the two-key system for licensing mineral and oil deposits, eliminating the role of the regional governments; and a new territorial limit of no more than 100 square kilometres for exploration permits for mineral deposits; territorial restrictions for onshore and offshore oil tracts have also been proposed.

A draft of these measures has leaked from the ministry, following a public statement by Trutnev of his intentions. Trutnev’s proposals stop short, however, of banning foreign companies from certain mineral or oilfield deposits that were well defined in the Soviet period, a position which Litvinenko has taken regarding Sukhoi Log, Russia’s largest unmined goldfield in the Irkutsk region. Litvinenko told Mineweb in January that Sukhoi Log‘s a “considerable deposit with a complicated geological structure. Preference should be given to domestic companies. Only in the absence of domestic contenders, foreign investors should be invited on the same conditions as the Russian contenders”. In public Trutnev said recently that “although there are situations when the state should protect the national interests in sphere of natural resources usage, such situations should not be resolved by administrative methods, and should be necessarily registered in the law,” The small print of Trutnev’s proposal would allow foreign miners to bid for Sukhoi Log, so long as they register Russian subsidiaries to do so.

In practical terms, Trutnev’s position favours Highland Gold, a London-registered gold miner, with Barrick Gold of Canada, as a minority shareholder; and Trans Siberian Gold, another London-listed junior with powerful South African AngloGold Ashanti as its partner. Trutnev’s measure would also favour the oligarchs, Potanin and Vekselberg, signaling his approval of their potential foreign listings through Gold Fields and perhaps, in Gilbertson’s case, Lonmin.

Litvinenko’s position is hostile towards the oligarchs. Calling for the adoption of a mineral and mining code “on the model of developed countries with a market economy”, Litvinenko told Mineweb in January that he favours limiting foreign investment to the processing segment of the resource sector. As for mining, he said he backs “a system of privileges and preferences for the domestic companies. He also said that he is opposed to allowing foreign investors to take shareholding control of Russian mining enterprises. Sale of shares outside Russia can be allowed, Litvinenko said, but control should be vested in a “golden share” held by the Russian government. Applying this limit on divestment by the Russian oligarchs was urgent, he said, in the cases of “Gazprom, United Energy Systems, important petroleum companies, Norilsk Nickel, and many other companies.”

Litvinenko – believed by western miners in Moscow to be much more powerful behind the scenes than Trutnev – has also been pressing for a tougher approach to the award of mining licences and to policing licence compliance. On this point Trutnev appears to agree. But Litvinenko declined to say this week whether he backs Trutnev’s proposal to allow foreign miners to register local Russian subsidiaries to qualify for Soviet in their place.

Albert Avetikov, spokesman for Polymetal, Russia’s second-ranked gold miner, recognizes Trutnev’s proposal for what it is. The new concept of the natural resources law,” he told Mineweb, “is not limiting foreign companies to participate in domestic licences, It wilt just allow for government to exercise control a Iittle better,”

Norilsk Nikel, Russia’s largest mining company and largest gold miner, told Mineweb through spokesman Elena Sherbinina: “the company did not gave me a straightforward position towards the draft law. Currently, I cannot comment, Yevgenia Komfeva, spokesman for Urals Mining and Metallurgy, the second-ranked copper producer after Norilsk Nickel, dismissed the reported controversies in the press by noting that “the law will start to work not earlier than the spring of 2005, according to Trutnev’s words, and so it is too early to draw any conclusions. Until then a lot of what has already been announced could be changed or reversed.”

Trutnev’s spokesman Nadezhda Kleymenova responded: “It is too early to discuss the draft of the law at this stage, and so I will not comment now. The press is too sensitive to all changes in the law. We are working and trying to create the best conditions for Russian companies to work; and also to remember that we are an open market, and must do everything on the basis of equality.” When Gilbertson picks up the telephone on his brand-new Russian desk, he will be testing just how much equality Vekselberg’s fortune will buy him.

by John Helmer - Tuesday, August 3rd, 2004
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To what extent is it possible for us to see what lurks behind the faces of Russia’s power elite?

Among the exhibits of the drawings of Leonardo da Vinci on display at the Louvre since May, there is a selection of four grotesques by the master.

It is said that Leonardo’s keen ability to see unusual faces led him to arrange parties for villagers. He would ply them with alcohol, food and entertainment, and, as they enjoyed themselves and grew less inhibited, he would sit down to make his sketches. Although Leonardo denied any intention of exhibiting these faces for derision, the subjects would hardly have felt complimented. There they are, with bulbous lips over toothless gums, protruding jaws, rotting teeth, deformed noses, humped backs, misshapen breasts, cauliflower ears, unkempt hair and leathery skin. (more…)

by John Helmer - Saturday, July 24th, 2004
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MOSCOW (Mineweb.com) – Victor Vekselberg has taken so much value out of the Siberian region of Tyumen, it’s understandable that he says he is thinking of putting something back.

According to Vekseiberg’s spokesman, Tyumen – the oil-rich region that has been home to one of Vekseiberg’s properties, the Tyumen Oil Company (TNK) – is being considered for a showing of a collection of Faberge eggs. Dozens of these jeweled ornaments were fabricated for the family of Nicholas II, the last Russian tsar, and eventually ended up in New York, the property of the Forbes family, publishers of a business magazine. Early price year, the 194-piece collection was bought by Vekselberg, after he paid a price he will not confirm, except to say that it was at the upper limit of the Sotheby auction house estimate. Ahead of the sale, the estimate was between $90 and $120 million.

Until July 25, Vekselberg is showing the eggs at the Kremlin in Moscow. After that, they will move to displays in Yekaterinburg and St. Petersburg. Then Vekselberg is considering despatching them for a showing in England Afterwards, he is planning to tour them to regional cities in Russia. Tyumen and Irkutsk lead the list, according to Vekselberg’s spokesman.

Not that Vekselberg is thinking of giving away his eggs to Tyumen, although returning $120 million to the region would be a minuscule fraction of the profit he has extracted. Nor is a temporary glimpse of his property quite the compensation Vekselberg means to offer for what others have openly called his theft of their property from Tyumen,

Take, for example, the affair of who owned the right to lift crude oil from the Kalchinskoye oil fields in Tyumen in 1998. Estimated to contain reserves of 20 million tonnes – worth $5.3 billion at today’s oil price – Kalchinskoye was licensed to joint-venture companies that in 1997 were part-owned by Ivanhoe Energy of Calgary, Canada. In 1998, Vekselberg’s TNK went to the regional court in Tyumen to revoke the Canadian rights, and take them entirely for itself. The Canadians accused TNK of violating its contracts, and stealing the oil. TNK disputed the claim, but after lawsuits were filed, the Canadian government applied pressure, and police arrived at TNK, Vekselberg and his partners offered about $30 million – the sum was kept secret, like the price of the eggs -so that Ivanhoe would drop its claims, pack up, and go home. In August 2000, if did. That might have been the end of the Kalchinskoye affair, except that the civil settlement did not eliminate TNK’s liability to criminal charges that the statute of limitations may yet allow time to file against those involved.

In the same month that Ivanhoe accepted TNK’s offer, Yugraneft, the Russian affiliate of another Canadian company, Norex Petroleum, refused to accept 30 percent of 172,000 tons of oil (now worth $46 million) which Norex had pumped to a TNK storage for safe. In January 2001 TNK gave Yugraneft and Norex an ultimatum – either take the 30-percenf offer, or risk losing, not only the oil already pumped, but the oilfields which had produced them. Six months later, using local court orders, TNK took everything. In papers filed subsequently by Norex in a US federal district court in New York, the Canadian company has accused Vekselberg, his partners, and subordinates, of fraud, bribery, extortion, use of armed force, racketeering, money laundering, and other crimes, in order to steal the oil, $40 million in cash and securities, oil production facilities, and oilfields; the total losses were estimated at more than $500 million. In a first ruling, a New York judge has rejected jurisdiction over the case, and a New York appellate court will shortly rule on whether jurisdiction should be accepted or refused. The charges in the case, including the criminal charges, have yet to be tested in court, and for Vekselberg – identified in the US court documents as holding permanent residency in the US – there remains the risk of prosecution. The trail of cash, identified by Norex in court filings, extends through dozens of international havens, remains open to prosecution for money laundering offences, and casts a shadow over the objects which that money has been spent to acquire.

Other court or government claims have been filed in New York and Washington against Vekselberg and his TNK men. In one, pursued by an investment company acting for Harvard University’s Endowment Fund, they were accused of “one of the most bizarre and brazen acts of corporate theft in recent memory.” in another case, pursued by British Petroleum, similar accusations were lodged, again relating to the theft of oilfields. In these two cases, involving the bankruptcies of Kondpetroleum and Chernogorneft court documents claim that the corruption of local government and court officials in the Tyumen region were instrumental in achieving TNK’s enrichment. Ultimately, BP settled its differences with TNK out of court, and a year ago, bought out Vekselberg and his partners for a multi-year payment of cash and shares, worth a total of $6.4 billion.

It is on account of this history that Vekselberg’s eggs require careful handling. They are controlled by him, his spokesman confirms. But legal title is vested in the “non-profit cultural historical fund Time Connexion. When the eggs move, they do so on customs documents that keep them out of the grasp of the Russian tax authorities, prosecutors, or other potential litigants. According to Vekselberg’s spokesman, this is no fly by night operation. He blames the existing Russian customs legislation, which imposes tax penalties and other restrictions on the movement of such cultural artifacts, for the precautions Vekselberg has had to take. He also says that Vekselberg has no intention of presenting the eggs to a Russian museum, although he is discussing a project for establishing a brand-new museum of private collections in Moscow, where she eggs might be shown. There is also the thought of presenting some of the lesser pieces in the collection, the non-eggs, the non-imperial items, to “regional museums which do not yet have Faberge work”

And that brings us back to the Tyumen region, where the goose got his start. Ignoring Ivanhoe and British Petroleum, which have buried the hatchet for approximately $6,380,000,000 in consideration, there is still the Norex claim for compensatory damages of $500 million, and punitive damages of $1,5 billion. They are the really golden eggs in this story. Vekselberg may succeed in driving his pursuers out of the US courts, but it is from Tyumen that the money originated. And it is in Russia, especially in Tyumen, where we shall find the goose, who lays the oil, that made the money, that Vekselberg took to pay Malcolm Forbes, who acquired the tsar’s treasure, which was also produced from wealth originating, among other places, in Tyumen. In the fantasy which Vekselberg’s Time Connexion foundation is proposing, Tyumen will be allowed a brief glimpse of the golden eggs; and the time cycle will be disconnected at the moment when the last hand on the eggs is Vekselberg’s.

This little fairy tale would be of next to no interest to South Africans, were it not that Vekselberg has been promising eggs of a different sort – nest-eggs, you might say – to black entrepreneurs willing to back Vekselberg’s plan to swap his Russian assets into South African ones. This is the scheme which Vekselberg has also proposed paying a fortune to Brian Gilbertson, the Mother Goose of fantastic mining mergers, to promote.

by John Helmer - Thursday, July 15th, 2004
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MOSCOW – It used to be said about a fraudster in Australia that he was too crooked to lie straight in bed. Until now, however crooked the Russian oligarchs – the handful of men who seized control of Russia’s oil and mineral wealth a decade ago – may have seemed, the lure of their money has overwhelmed the inhibitions of investors, bankers, non-executive directors and managers from jumping into the same bed. Until now, they had reason to believe that they could get in and out swiftly, and make a clean getaway.

A class-action lawsuit, filed last week in a federal court in New York, changes these calculations.

According to a 26-page statement of claim by lawyers for Rothwell Holdings Ltd, a Caribbean-registered investor fund, for nine months of last year, the controlling shareholders of oil company Yukos; the company’s chief financial officer; Yukos’ authorized representatives in the United Kingdom and the US; and the company auditor, PricewaterhouseCoopers (PwC), connived to lie, cheat and swindle investors who purchased Yukos’ Russian shares, or its American Depositary Shares (ADS), each of which represents four units of the common stock. Among others named individually in the lawsuit are shareholders Mikhail Khodorkovsky, Platon Lebedev and Valery Shakhnovsky, and chief financial officer Bruce Misamore.

At the heart of the US claim against them is the massive tax evasion for which Yukos has already been held liable in a Moscow court, and which Yukos has conceded in a letter to Prime Minister Mikhail Fradkov. The jurisdiction of the New York court was granted by Yukos when it registered its ADS issue for market purchase, and submitted thereby to US securities regulations. It was not safe to commit fiscal crimes in its homeland if by so doing, and by subsequent concealment and misreporting, Yukos took investors’ cash on the territory of the United States, violating their rights under US law.

“In order to overstate its earnings and to understate its tax liability for the period,” the US complaint alleges that “Yukos engaged in an illegal tax evasion scheme by creating fake organizations in the oil and after-product movement chain and further by registering these fake organizations in territories with preferential tax treatment. Defendants’ scheme was designed to avoid payment of the following types of taxes: profit tax, value-added tax, motorway user tax, tax on the sales of petroleum, and oils and lubricants and housing stock and social amenities maintenance tax on the amount of receipts from oil and after-product sales.”

The shareholders and managers, aided and abetted by auditors at PwC, then “materially misled the investing public, thereby inflating the price of Yukos securities by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants’ statements, as set forth herein, not false and misleading. Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the company, its business and operations, as alleged herein.”

Since the arrests in Moscow last July and October of Lebedev and Khodorkovsky, the details of the crimes alleged against them have been well known. That Shakhnovsky has already pleaded guilty to the charges against him in Moscow is also documented. But the international financial newspapers, which have touted for the oligarchs and benefited from their largesse, have editorialized against the charges against the Yukos group, calling them a politically motivated frameup, and intimating their wrongdoing was minor compared to the human rights violations alleged against Russian President Vladimir Putin and his prosecutors.

More woes for Yukos
Yukos’ troubles were compounded at the end of last week when international creditors declared it in default on a US$1 billion loan. The firm confirmed this on Monday, but the lenders have not demanded payment yet so technically it has not defaulted.

The move on the part of the lenders is presumably aimed at protecting their interests as the Russian government is forcing the giant oil firm to begin paying the first half of nearly $7 billion in back taxes.

Yukos accounts for a fifth of foreign petroleum sales by Russia, the world’s second-largest oil exporter. Yukos produces about 1.7 million barrels a day, ahead of all other Russian oil companies. With its bank accounts frozen by the government, the company has warned that it may have to start shutting down production soon. On Monday, it said it would be able to continue production until the end of the month.

The loan default notice was sent on Friday by a group of banks led by Societe Generale just days after a Moscow court upheld the first of the two tax bills to be paid. The notice asserted the lenders’ right to call the loan immediately, but the banks did not demand instant payment and said they wanted to help Yukos find a way to avoid bankruptcy.

The Yukos crisis has contributed to a rise in world oil prices, which broke above $39 on Tuesday morning. Other contributing factors were Iraqi crude exports being halved by sabotage and threats of disruptions to Nigerian supplies by union action.

The latest attacks in Iraq came a little over a week after that country’s exports recovered from earlier sabotage strikes, which halted shipments for about 10 days in the middle of June. Iraqi exports were running at 984,000 barrels per day (bpd) on Monday, down from close to 2 million bpd before attackers bombed a feeder pipeline running to two southern oil terminals and another pipeline linking oilfields in the north and south. Officials said repairs would take up to four days before exports would recover.

Yukos has tried to calm markets by saying that it planned no export cuts this month and had prepaid pumping deals with pipeline monopoly Transneft until the end of July.

On the trail of the oligarchs
What is more than novel about the new lawsuit filed against Yukos in the United States is that it threatens to put an end to all attempts by the Russian oligarchs to cash out their vulnerable Russian assets into UK- or US-registered securities, and launder the proceeds of their Russian deeds into ostensibly clean Western bank accounts, real estate, and other forms of wealth. The massive tax evasion that was practiced at Yukos is suspected to have been the standard operating procedure for the building of all the Russian oil, mineral, metal and mining fortunes that have been amassed by the likes of Roman Abramovich, Oleg Deripaska, Vladimir Potanin, Victor Vekselberg, and Mikhail Fridman, head of the Alfa banking group.

Thus, if the Yukos investors win their claim in a US federal court, lenders, investors and even employees and contractors of the other oligarchs risk facing parallel claims for fraud, based on what they have concealed (or had a duty to disclose) about the real operations of their companies. Indeed, Rothwell Holdings and US investors in Yukos do not even have to win a court ruling to detonate a bomb of due diligence and liability under the plans of the other oligarchs, whether or not they are prosecuted in Moscow, pay tax reparations, or negotiate an amnesty with the Kremlin.

For now, the threat of this litigation casts an immediate shadow over every transaction by Abramovich in spending cash derived from his oil company Sibneft and other Russian companies that are subject already to, or may soon be facing, charges of tax evasion. Tax investigations of Sibneft have already begun. They include a scheme of tax preferences issued by Abramovich in his capacity as governor of the Chukotka region to companies in which he had a financial interest. More than once, Abramovich has declared himself innocent of the charges against him, and Russian prosecutors have been hesitant to lay the type of indictment against him and Sibneft, which has been prosecuted against the Yukos group. Nonetheless, if Abramovich obtains funds from investors or lenders on the basis of artificially inflating the value of his Russian assets, and of illegally shielding his cashflow from legitimate Russian taxation, then the potential legal liabilities of doing business with him become serious.

A similar shadow also falls over the year-long negotiations by Oleg Deripaska’s Russian Aluminum (Rusal) to borrow $800 million from a syndicate of international banks; over Vladimir Potanin’s attempt to acquire shares in the South African mining company Gold Fields Ltd through borrowings from Citibank; and over Victor Vekselberg’s plan to float his SUAL International corporation under the leadership of Brian Gilbertson, and trade its shares with those of another Johannesburg or London-listed company. The most heavily indebted of the oligarch companies – Deripaska’s Rusal is estimated to owe at least $2.5 billion at the moment – are the most vulnerable to the new standard of disclosure and liability set by the New York court claim. The declared ambitions of these companies to retire their bank debt with unsecured Eurobonds, or issue initial public offerings in London or New York, face protracted delays.

Non-Russians who have been engaged to manage these companies, sit on their boards of directors, direct their legal and accounting departments, negotiate their borrowings, plan their mergers and acquisitions, or persuade investors to buy their shares and bonds, should no longer feel financially secure. What Western executive would risk his reputation and personal fortune in taking a position in these enterprises that would expose them to the type of liability claim now filed against Yukos’ Misamore? What insurance company would write a policy to protect them, in the event of a comparable lawsuit in the future?

According to the New York court documents, Misamore is alleged to be one of several defendants who “participated in the drafting, preparation, and/or approval of the various public and shareholder and investor reports and other communications complained of herein and were aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom, and were aware of their materially false and misleading nature. Because of their board membership and/or executive and managerial positions with Yukos, each of the individual defendants had access to the adverse undisclosed information about Yukos’ business prospects and financial condition and performance as particularized herein and knew (or recklessly disregarded) that these adverse facts rendered the positive representations made by or about Yukos and its business issued or adopted by the company materially false and misleading.”

Misamore will have his day in court to explain what he knew, what he didn’t know, and what he could have been expected to know about the flow of Yukos funds. For the time being, Yukos is officially not commenting on the allegations. Misamore is on the list of defendants, say lawyers involved in the case, because he provides a means of compelling discovery, according to the US rules of evidence (and perjury); and because his insurance coverage provides a means of recovery, in the event that Yukos itself goes into bankruptcy.

The naming of PwC, and the charges against the audit company for its role in misrepresenting the true state of Yukos’ accounts, mark the first time an international auditor has been charged with liability in a case of Russian corporate malfeasance. They have not been able to make a clean getaway in the best-known cases of US corporate fraud, but they have not been charged by Russian prosecutors to date. For as long as it takes to resolve Rothwell’s claim against PwC, this case opens up the possibility of litigation against accountancy firms, as well as law firms, by investors or lenders in many other cases.

“PwC’s responsibility as Yukos’ independent auditor,” assert the New York plaintiffs, included determining “sufficient competent evidential matter… to afford a reasonable basis for an opinion regarding the financial statements under audit” as to “the fairness with which they present, in all material respects, financial position, results of operations, and its cash flows in conformity with generally accepted accounting principles”.

By attacking PwC for failing this duty, the US claimants have punched a hole in the bubble of corporate transparency that has protected and promoted the oligarchs since the Russian financial crisis of 1998. For as long as the corporate assets of the oligarchs cannot be valued without taking into account their hidden and uncertain tax liabilities, and auditors such as PwC cannot warrant their balance sheets as a fair and accurate presentation of their financial position, it will be impossible for the oligarchs to cash out their assets on the international market. And without that cash as their lifeline, the oligarchs are likely to wither away.

by John Helmer - Wednesday, July 7th, 2004
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MOSCOW – It used to be said about a fraudster in Australia that he was too crooked to lie straight in bed. Until now, however crooked the Russian oligarchs – the handful of men who seized control of Russia’s oil and mineral wealth a decade ago – may have seemed, the lure of their money has overwhelmed the inhibitions of investors, bankers, non¬-executive directors, and managers from jumping into the same bed. Until now, they had reason to believe they could get in and out swiftly, and make a clean getaway.

A class-action lawsuit, filed last week in a federal court in New York, changes these calculations.

According to a 26-page statement of claim by lawyers for Rothwell Holdings Ltd., a Caribbean-registered investor fund, for nine months of last year, the controlling shareholders of oil company Yukos; the company’s chief financial officer; Yukos’s authorized representatives in the UK and US; and the company auditor, Price WaterhoiseCoopers (PwC), connived to lie, cheat, and swindle investors who purchased Yukos’s Russian shares, or its American Depositary Shares, each of which represents 4 units of the common stock. Among others named individually in the lawsuit are shareholders Mikhail Khodorkovsky, Platon Lebedev, and Valery Sjhakhnovsky, and CFO Bruce Misamore.

At the heart of the US claim against them is the massive tax evasion for which Yukos has already been held liable in a Moscow court, and which Yukos has conceded in a letter to Prime Minister Mikhail Fradkov. The jurisdiction of the New (York court was granted by Yukos, when it registered its ADS issue for market purchase, and submitted thereby to US securities regulations. It was not safe to commit fiscal crimes in its homeland if by so doing, and by subsequent concealment and misreporting, Yukos took investors’ cash on the territory of the US, violating their rights under US law.

“In order to overstate its earnings and to understate its tax liability for the period,” the US complaint alleges that “Yukos engaged in an illegal tax evasion scheme by creating fake organizations in the oil and after-product movement chain and further by registering these fake organizations in territories with preferential tax treatment. Defendants’ scheme was designed to avoid (payment of the following types of taxes: profit tax, value-added tax, motorway user tax, tax on the sales of petroleum, and oils and lubricants and housing stock and social amenities maintenance tax on the amount of receipts from oil and after-product sales.”:

The shareholders and managers, aided and abetted by auditors at PriceWaterhouseCoopers (PwC), then “materially misled the investing public, thereby inflating the price of Yukos Securities by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants’ statements, as set forth herein, not false and misleading! Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its business and operations, as alleged herein.”

Since the arrests in Moscow last July and October of Lebedev and Khodorkovsky, the details of the crimes alleged against them have been well-known. That Shakhnovsky has already pleaded guilty to the charges against him in Moscow is also documented. But the international financial newspapers, which have touted for the oligarchs and benefited from their largesse, have editorialized against the charges against the Yukos group), calling them a politically motivated frameup, and intimating their wrongdoing was minor compared to the human rights violations alleged against Russia’s President Vladimir Putin and his prosecutors. It is thus not surprising that the Financial Times of London buried the details of the new US court claim in a single sentence

What is more than novel about the new lawsuit is that it threatens to put an end to all attempts by the Russian; oligarchs to cash out of their vulnerable Russian assets into UK oil US-registered securities, and launder the proceeds of their; Russian crimes into ostensibly clean western bank accounts, real estate, and other forms of wealth. For as everyone knows, thel massive tax evasion that was practiced at Yukos has been the standard operating procedure for the building of all the Russian oil, mineral, metal and mining fortunes that have been amassed bylthe likes of Roman Abramovich, Oleg Deripaska, Vladimir Potanin, Victor Vekselberg, and Mikhail Fridman.

Thus, if the Yukos investors win their claim in US federal court, lenders, investors, and even employees and; contractors of the other oligarchs risk facing parallel claims for fraud, based on what they have concealed (or had a duty to disclose) about the real operations of their companies. Indeed, Rothwell Holdings and US investors in Yukos do not even have to win ja court ruling, in order to detonate a bomb of due diligence and liability under the plans of the other oligarchs, whether or not they are) prosecuted in Moscow, pay tax reparations, or negotiate an amnesty with the Kremlin.

For now, the threat of this litigation casts an immediate shadow over every transaction by Abramovich in spending cash derived from his oil company Sibneft and other Russian companies that are subject already to, or may soon be facing, charges of tax evasion. Tax investigations of Sibneft have already gotten under way. They include a scheme of tax preferences issued joy Abramovich in his capacity as Governor of the Chukotka region to companies in which he had a financial interest. More than once, Abramovich has declared himself innocent of the charges against him, and Russian prosecutors have been hesitant to lay the type of indictment against him and Sibneft, which has been prosecuted against the Yukos group. Nonetheless, if Abramovich obtains funds from investors or lenders on the basis of artificially inflating the value of his Russian assets, and of illegally shielding: his cashflow from legitimate Russian taxation, then the potential legal liabilities of doing business with him become serious.

A similar shadow also falls over the year-long negotiations by Oleg Deripaska’s Russian Aluminium (Rusal) to borrow $800 million from a syndicate of international banks; over Vladimir Potanin’s attempt to acquire shares in the South African mining company Gold Fields Ltd. through borrowings from Citibank; and; over Victor Vekselberg’s plan to float his SUAL International corporation under the leadership of Brian Gilbertson, and trade its shares with those of another Johannesburg or London-listed company. The most heavily indebted of the oligarch companies — Deripaska’s Rusal is estimated to owe at least $2.5 billion at the; moment – are the most vulnerable to the new standard of disclosure and liability set by the New York court claim. The declared ambitions of these companies to retire their bank debt with unsecured Eurobonds, or issue IPOs in London or New York, face protracted delays.

Non-Russians who have been engaged to manage these companies, sit on their boards of directors, direct their legal and accounting departments, negotiate their borrowings, plan their mergers and acquisitions, or persuade investors to buy their shares and bonds, should no longer feel financially secure. What western executive would risk his reputation and personal fortune in taking a position in these enterprises that would expose them to the type of liability claim now filed against Yukos CFO Misamore? What insurance company would write a policy to protect them, in the event of a comparable lawsuit in future?

According to the New York court documents, Misamore is alleged to be one of several defendants who “participated in the drafting, preparation, and/or approval of the various; public and shareholder and investor reports and other communications complained of herein and were aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom, and were aware of their materially false and misleading nature. Because of their Board membership and/or executive and managerial positions with Yukos, each of the Individual Defendants had access to the adverse undisclosed information about Yukos’ business prospects and financial condition .und performance as particularized herein and knew (or recklessly disregarded) that these adverse facts rendered the positive representations made by or about Yukos and its business issued or adopted by the Company materially false and misleading.”

Misamore will have his day in court to explain what he knew, what he didn’t know, and what he could have been expected to know about the flow of Yukos funds. For the time: being, Yukos is officially not commenting on the allegation:’.. Misamore is on the list of defendants, say lawyers involved in the case, because he provides a means of compelling discovery, according to the US rules of evidence (and perjury); and because his insurance cover provides a means of recovery, in the event that Yukos itself goes into bankruptcy.

The naming of PwC, and the charges against the audit company for its role in misrepresenting the true state of Yukos’s accounts, are the first time an international auditor has been charged with liability in a case of Russian corporate malfeasance. They have not been able to make a clean getaway in the best known cases of American corporate fraud, but they have nt)t been charged by Russian prosecutors to date. For as long as it takes to resolve Rothwell’s claim against PwC, this case opens up the possibility of litigation against accountancy firms, as well as law firms, by investors or lenders in many other cases.

“PWC’s responsibility as Yukos’ independent auditor,” asserts the New York plaintiffs, included determining “sufficient competent evidential matter … to afford a reasonable basis for an opinion regarding the financial statements under audit” as to “the fairness with which they present, in all material respects, financial position, results of operations, and its cash flows in conformity with generally accepted accounting principles.”

By attacking PwC for failing this duty, the US claimants have punched a hole in the bubble of corporate transparency that has protected and promoted the oligarchs since: the Russian financial crisis of 1998. For as long as the corporate assets of the oligarchs cannot be valued without taking into account their hidden and uncertain tax liabilities, and auditors like PwC cannot warrant their balance-sheets as a fair and accurate presentation of their financial position, it will be impossible for the oligarchs to cash out of their assets on the international market. And without that cash as their lifeline, the oligarchs are likely to wither away.

by John Helmer - Tuesday, July 6th, 2004
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MOSCOW (Mineweb.com) – At the turn of the last century, when Americans were the conspicuously new oligarchs of the western world F.Scott Fitzgerald was their story-teller.

In his novel about a rich young man of upper-class New York, called The Beautiful and Damned, Fitzgerald stuck a warning of his fate as an epigram at the front of the book – ” the victor belongs to the spoils”. There’s no escape from the corruption of too much money, Fitzgerald seemed to be saying in 1922.

Once that painfully snobbish tale gets under way, it’s a question which Anthony Patch, the doomed playboy, puts to his friend, a novelist like; Fitzgerald himself, swollen with the early financial success of his first book. Then the warning is expressed as a question, as if Fitzgerald thought it might be possible to avoid the corruption of riches, if only it can be recognized in time Three years later, when Fitzgerald’s life was coming apart under the strain of spending more than he could earn, he wrote wistfully about the very rich: “They are different from you and me…soft where we are hard, and cynical where we are trustful.” Much later, when Fitzgerald was a decade beyond his best work and almost broke, his sometime pal Ernest Hemingway rewrote the answer to the question of how the rich were different. “Yes, they have more money,” Hemingway’s character said simply. Fitzgerald told Hemingway he had insulted him.

For the time being, the only person in Russia who claims to have given Yukos oil company owner Mikhail Khodorkovsky the Fitzgerald warning in advance of his arrest last October is his mother. She says she phrased it more like the ancient Greek warning that pride goes before a fall, that too much hubris brings on nemesis, destruction by the jealous gods. None of the super-rich young men, the Russian oligarchs who made their fortunes alongside Khodorkovsky, apparently thinks the same. In fact, they are so far from heeding Fitzgerald’s warning, they are now trying to reverse it in their own favour . If Khodorkovsky’s assets are up for grabs, they have begun to tell their friends in government, let the spoils be auctioned off to those rich enough to afford them; in other words, a new round of rigged asset disposals by the government, for the benefit of the surviving oligarchs.

By way of announcing his readiness, Oleg Deripaska a, the controlling shareholder of Russian Aluminium (Rusal) and the holding company Basic Element, recently arranged for the Moscow press to be told that he is thinking of going into the oil business.

Mikhail Fridman, head of the Alfa banking group and one of the beneficiaries of last year’s sale of Tyumen Oil Company to British Petroleum, has gone further. He is reported by some in the Kremlin to have proffered a bid of $10 billion for the assets of Yukos, once the state has taken around $3 billion in tax payments, and Khodorkovsky and his allied shareholders hive been assigned, and cleared their penalties. At the time Fridman tabled his bid, the Yukos share price was tumbling towards a market capitalization of $12 billion. It has since risen to around $16 billion.

Roman Abramovich, the controlling shareholder of Sibneft, has gone much further. In proposals to both the Kremlin and Yukos, Abramovich has indicated his plan for unfreezing the court orders that have locked up the Yukos acquisition of Sibneft from last year, along with other Yukos assets, and cash. Abramovich proposes to allow Yukos to clear its debts to the state by selling its Sibneft stake back to Abramovich. Just how big a shareholding that is remains for the courts to settle. But Abramovich isn’t intending to part with any of his own money. According to his plan, he will only buy back from Yukos in value what Khodorkovsky will need to pay the authorities and then only on two conditions – that Yukos will indemnify him from lawsuits seeking enforcement of last year’s Sibneft sale contract, or restitution for the damage he may have conspired to inflict; and that the Kremlin will give him advance approval for reselling the stake he buys from Khodorkovsky at double, or triple, the price to a foreign oil company.

Inside the Kremlin, each of these proposals has its low and mid-level advocates. But for President Vladimir Putin, the problem of how to settle Yukos’s debts and resolve Khodorkovsky’s fate is far too weighty to be left to his aides, or to the courts, to decide. For every division of the spoils, and for each self-promoting victor, there is now a Kremlin faction busily promoting its line to the President; drafting its interests into his speeches and one-liners; and interpreting him to suit their own ends. They are eager to recruit ministers like Alexander Zhukov and Alexei Kudrin to their cause. They, in turn, are trying to gauge which way Putin is leaning, in order to avoid damaging themselves in his eyes, and to share in the eventual spoils, if they can. This appears to be so confusing, the President and his men now find they are in as much need of time, and courtroom delaying tactics, as the defendants at the bar.

But Putin may be undecided; he isn’t confused. He understands that if he proceeds to dismantle Yukos at Khodorkovsky’s expense,and then redistributes his shares and assets to Deripaska, Fridman, or Abramovich, he will be confirming the central charge which Khodorkovsky’s supporters, the US and English governments, and the oligarch in exile, Boris Berezovsky, have repeatedly leveled at him. He will be demonstrating favouritism for one oligarch over another, and inviting the interpretation that his motives are either political – that Khodorkovsky backed political opponents and media critics – or corrupt.

At the same time, Putin realizes that his power to pursue the other oligarchs for similar crimes as Khodorkovsky committed is limited. To prevent a legion of mid-level officials reopening files for the sole purpose of being paid to close them again, Putin has too few personnel, who are both loyal and honest, never mind competent. In this respect, despite the massive election mandate he won since he started the campaign against Yukos almost a year ago, and notwithstanding his reorganization of the government Putin is hardly better served today than he was then. He is obliged, therefore, to proceed slowly, agreeing to tax claims against one company, to threats of other consequences against others, and to delays on delivering the decisions everyone, including the oligarchs, are seeking.

The timing to redistribute the wealth, Putin is told by economic advisors, is as good as it is ever likely to be, with oil and commodity prices at their peak. But how to resolve the conflicting priorities that land on his desk each day, urging him to pursue Deripaska for one reason; Fridman for another; or Abramovich for yet another? And what of Abramovich’s demand that Putin reverse last year’s veto of sales of Russian oil company assets to American, French, or British companies? Is the weight of their lobbying so heavy, that for the sheer relief, he is ready to give an assent, which contradicts every statement he has made on national resource policy? Are the spoils of the anti-oligarch campaign to belong to Putin the victor, or will the victor belong to the spoils?

If Putin were to take a leaf out of Fitzgerald’s tales of rich Americans, he would discover that asking the right question repeatedly doesn’t produce an answer that is either convincing or enduring.

by John Helmer - Monday, July 5th, 2004
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