In October of 1812, when Napoleon began his withdrawal from Moscow, the initial mood of the French troops was much more optimistic than we suppose today.

Of fighting men, the French army was down to 95,000; but opposing them was scarcely the same number in the surviving Russian army. Buoying the high spirits of the French columns, however, was the extraordinary volume of civilians and vehicles engaged to carry the Russian booty back to Paris – up to 50,000 porters and servants, and as many as 40,000 wagons and carts. As is now well known, the vast jam of men, horses, vehicles, and treasure ground up the roads; clogged the bridges; exposed the army to Russian attack, and as winter temperatures fell sharply, turned the evacuation into one of the most famous routs in history.

The problem is much the same for the half-dozen or so men who accumulated fabulous treasure during their occupation of the Kremlin under President Boris Yeltsin, These men, the Russian oligarchs, can feel the winter approaching, and no matter how optimistically the booty they have seized may encourage them to feel, they are far from sure that they can hang on to this treasure, and at the same time fight off the growing number of counter¬attacks from Kremlin officials, government ministries, the tax authorities, federal and regional prosecutors, and the humblest of policemen.

Napoleon too thought he could stage an orderly evacuation to safe haven across the Russian border. What direction to take for the Russian oligarchs is just as problematic.

In a recent prosecution involving the conviction on corruption charges of a former Ukrainian prime minister, the United States government demonstrated that Washington, viewed not long ago by Mikhail Khodorkovsky and Vladimir Potanin as easy to lobby with money, and a safe haven to hang on to it, may be anything but that. US law enforcement agencies have made it impossible for some of their colleagues even to cross the border; while sensitivity to US money-laundering and racketeering laws has made the US banking system a risky place in which to move, let alone deposit large amounts of money. Since he acquired the Stillwater Mining Company of Montana a year ago, Potanin has discovered that his cashcow, Norilsk Nickel, Russia’s largest mining company, is now more methodically and transparently regulated by the US nSecurities and Exchange Commission than by any Russian government body. From the SEC reports, it is even possible to spot where and when Potanin and his companies are in violation of their borrowing covenants.

Oleg Deripaska, the controlling shareholder of Russian Aluminium (Rusal); Mikhail Fridman; head of the Alfa banking group; Victor Vekselberg of Tyumen Oil Company and Siberian Ural Aluminium (SUAL); and Vagit Alekperov, CEO of LUKoil, have all won recent US court judgements dismissing civil charges and billion-dollar damage claims against them. However, the US judges have ruled only that, on the evidence submitted, there was insufficient jurisdiction for the US courts to decide the merits of the case. Many of those judicial rulings are now on appeal, and could be overturned. But even if they are not, the warning to the Russian oligarchs is quite clear – don’t enter US jurisdiction, even if, as in Vekselberg’s case, he holds a US residency card.

The United Kingdom has so far proved to be more hospitable to oligarchs on the run. Boris Berezovsky has secured political asylum; Potanin has engaged Prince Michael of Kent; and Roman Abramovich, the Sibneft owner, has purchased the Chelsea football club and a PR agent from one of the London tabloids. Abramovich is not the first foreigner to be lured by the combination of bank directors, media proprietors, rent-a-titles, and political party treasurers who form what is known as the British establishment. What he is about to discover is that the hospitality with which they greet the initial billion-dollar cheques tends to wane, as the forensic bureaucrats catch up with the evidence of law-breaking, Even football teams turn out to be a form of pyramid gamble, in which larger and larger sums of cash are required to keep up the impression of winning, and paying dividends. Not so long ago, one of Greece’s most powerful entrepreneurs thought that acquiring a well-known Athens football club would help generate popular support for his ill-gotten wealth. But that didn’t save him from indictment on massive fraud, nor did his US friends protect him from handover to the Greek prosecutors, and a long stretch in jail.

Deripaska and his partner, Alisher Usmanov, have also discovered that their ability to turn the proceeds of their metal export operations from cash into London Stock Exchange-listed securities is limited, not by their cash supply, as by the resistance of the forensic bureaucrats. Usmanov, who occupies something lower than oligarch status in the shadow of his better endowed friends at Gazprom and LUKoil, convinced the Financial Times that he could, and should, take a board seat at the Anglo-Dutch steelmaker Corus. But he couldn’t convince the management of Corus, or several other London-based companies he has either courted or attacked.

France has a long tradition of welcoming Russian nmigrns, not all of them destitute. Fridman has availed himself of the opportunity to set up a residence in Paris for his wife and family. He has also applied to the French courts to silence his critics in the French financial press. But the French courts have also rejected the attempt by Deripaska and his allies to secure the extradition to Russia of Mikhail Zhivilo, the former Novokuznetsk aluminium smelter owner who has promoted most of the damaging litigation against Rusal in the courts of the US, Sweden, and elsewhere. France, it turns out, is generous with prime vacation real estate, while French banks like Societe Generale, BNP Paribas and Natexis have been liberal with loans. But the heirs of the Napoleonic Code are tough at taxing, and much quicker than they used to be at spotting and indicting official corruption. They aren’t what the Russian oligarchs need.

Even the banks of Switzerland are getting nervous these days at the windfall business which Khodorkovsky, Potanin and others have delivered to their private banking suites. Freeze injunctions, magistrate orders, document and personal arrest, and all the apparatus of international fiscal crime-busting have put a dent in the confidence the Russians had a decade ago in Swiss “neutrality”.

It has thus proved much easier for the oligarchs and their advisors to set up residences for their accountants from Gibraltar to Guernsey and Liechtenstein, from Panama to the British Virgin Islands and Nauru, than to find a safe place to live and keep their money for themselves. The more exotic the location, the more difficult it is for the oligarchs to be confident. Take, for example, the recent moves which Potanin and Vekselberg have made in the direction of South Africa. Because of their prominence in international mining, South African companies, which enjoy dual listings in London or New York, have become a target of opportunity for the oligarchs, and plans are afoot to swap cash and Russian shares into South African companies. Such schemes may require not only more cash than the oligarchs are anticipating, but also more approvals from the South African government than they have planned for.

Potanin has already cottoned on to the idea of lobbying the black political leadership and leading black entrepreneurs, using the link established decades ago between Moscow and Russian-speaking, Soviet-trained South Africans in the fight against apartheid. Vekselberg has been quietly promising money to small black-owned mineral exploration companies. It is one of the more exotic paradoxes of the withdrawal of the oligarchs and their wealth from Russia that men who grew rich on the destruction of the Communist Party and state are appealing to the solidarity of men, whose national liberation was backed and armed by that state.

by John Helmer - Friday, June 25th, 2004
No Comments »

MOSCOW (Mineweb.com) — Doveryai, no proveryai. It’s a hoary Russian maxim, meaning “trust but verify.” US President Ronald Reagan often used it, never managing to get the pronunciation right, during his scripted appearances with Mikhail Gorbachev, then the leader of the Soviet Union. It was Reagan’s way of convincing the diehards at home that even if it was good policy for the US to sign agreements with its arch-enemy, Reagan wouldn’t trust the Soviets to live up to their obligations — unless there was an effective mechanism for verifying compliance. Of course, Gorbachev thought the same of Reagan and the Americans. But then, he was too desperate for the appearance of goodwill to make the reciprocal claim. Reagan’s Russian was supposed to convince the Politburo that they could trust Gorbachev. But that’s another story.

Below the heads of state, and outside the walls of government, the maxim has had even more force. This was especially so when, in August 1998, a group of Russia’s most powerful businessmen, the so-called oligarchs, arranged for the state to default on its bond obligations; to cut the rouble adrift from its expensive dollar mooring; and to allow the oligarchs to slip away from billions of dollars of their obligations and failed foreign exchange wagers. Mikhail Khodorkovsky and Platon Lebedev, who in 1998 controlled the Yukos oil company and Menatep Bank, haven’t exactly got off scot free from Menatep’s collapse. They are now in prison, and on trial for a range of crimes, although the Menatep default isn’t one of them.

Vladimir Potanin’s bank, then called Uneximbank, was another of the defaulters. Potanin replaced it with the freshly painted Rosbank sign, and as the head of Interros and controlling shareholder of Norilsk Nickel, he is much wealthier today than he was before the 1998 collapse. He hasn’t been charged with any crime, and if the newspapers he controls, including the Moscow Times, are to be believed, he is as blameless as the driven snow.

Citibank, the flagship of the New York-based Citigroup corporate empire, is not an institution that believes in blame. But its credit committee and legal department don’t readily approve lending $800 million to Potanin without knowing and trusting him. Sanford Weill is the chairman of Citigroup, and Robert Rubin is his advisor, as well as a member of the Citigroup board; Rubin was a US Treasury Secretary dealing with Russia a decade ago. They refuse to say if they have been in touch with Potanin within the past six months; that is, in the period preceding the decision by Citibank to issue the $800 million loan on March 29. Potanin’s spoksmen also won’t say if he, Weill and Rubin have been on speaking terms lately.

But for gosh sakes! If Doveryai, no proveryai. was good enough for Ronald Reagan, it is the least Weill, Rubin, their head of credit, and their legal counsel could do for Potanin, when he needed the cash in a hurry.

This is why the wording of the loan facility agreement between Citibank and Norilsk Nickel makes a textbook case of how American bankers aim to verify that a Russian oligarch like Potanin will pay his debts. Fortunately, US law and the regulations of the US Securities & Exchange Commission (SEC) require that Potanin and his corporate group, now the controlling shareholder of Stillwater Mining, a US company, require timely and comprehensive disclosures of their financial operations. That is why, for the first time, one of the largest Russian offshore transactions, and the largest-ever Russian borrowing from Citibank, have been disclosed in great detail to the US Government, and everyone else.

For those who want to read on, trust, but verify for themselves, here is the link to the SEC website where the documents, filed on April 7, can be read in full: Click here.

Potanin’s intention has been plain for some time. He is trying to move the mining assets he secured by rigged privatization almost a decade ago, beyond the reach of the Russian government to tax or retrieve. He has learned from Khodorkovsky’s fate – after the latter tried to float Yukos shares on the New York Stock Exchange and sell a near-majority to an American oil company. Potanin’s approach has been piecemeal: to raise the indebtedness of Norilsk Nickel; and to prepare some of his assets – the gold-mines, for example – for swapping with a foreign company. If President Vladimir Putin decided to go after Potanin, as he has done Khodorkovsky, then Potanin’s strategy was to ensure himself blue-chip foreign company shares, protected from a Kremlin raid; and to arrange that Norilsk Nickel would foot the bill. If Putin left Norilsk Nickel alone, and in Potanin’s hands, then the defensive manoeuvre would cost Potanin himself nothing.

Accordingly, in the last ten days of March, a shrewd South African offered Potanin a 20-percent stake in Gold Fields Ltd., the large South African goldminer, for a price of $1.16 billion. The terms were take it or leave it, with a deadline of five days to say yes, and another five days to pay. After saying yes, Potanin asked Citibank, which was officially advising the seller, not the buyer, to lend him $800 million for the deal. The rest of the cash, $316 million, came directly from Norilsk Nickel.

Citibank had never loaned Norilsk Nickel more than $50 million before. That earlier loan of February 2003 was tightly secured by the export sale of nickel. Also, it had been the object of a due diligence effort over many months by no less than ten other banks, all of them with far greater exposure to Russian risk than Citibank. Privately, Citibank executives have now admitted that they secured the $800 million by taking Norilsk Nickel’s guarantee to repay out of metal sales. Publicly, however, Citibank insists “the loan to Norilsk for the purposes of buying a stake in Gold Fields was unsecured.”

Norilsk Nickel has insisted on the same thing, explaining through investment relations spokesman Sergei Polikarpov: “”there is NO his emphasis security of the loan:, which he attributed to “good negotiations skills”.

What the text of the loan agreement between the two reveals is that Norilsk Nickel agreed to repay the bank $300 million within 30 days, and then two tranches of $100 million each, in the months of May and June. By July, the contract calls for Norilsk Nickel to owe just $300 million, and to repay that by the end of September. $300 million has been the limit of Norilsk Nickel’s foreign borrowing capacity until now. The Citibank bankers and lawyers didn’t exactly lend them more for the announced term of the loan. Such large amounts of cash payable each month testify to the fact that nickel, copper, platinum and gold prices are very advantageous to producers and sellers right now; and Citibank put into its loan contract very specific accounting ratio requirements that Nolilsk Nickel would have to meet, month by month. In practice, Norilsk Nickel guaranteed repayment out of its monthly export cashflow. It was also obliged to pledge: that its monthly export metal sales could not be collateral for another borrowing; they could not be sold circuitously back to itself; nor could Norilsk Nickel divert the funds out of the accounts being monitored by Citibank for purposes other than those approved by Citibank’s auditors and lawyers.

The provisions of their agreement illustrate how well Citibankers know the structure of the typical Russian corporate trading scheme, according to which title to exports of oil or metals is passed from one dummy entity to another, from one offshore registered company to another, while the funds are transferred by accounting sleight of hand to hidden fronts of the controlling shareholders. What is left over to the company as profit is then taxed, and after taxes are paid, returned to another set of dummy entities as dividends for the shareholders. Citibank’s agreement disallows Potanin and his co-shareholder, Mikhail Prokhorov, CEO of Norilsk Nickel, to engage in double-dipping.

Thus, Citibank made sure it had security over Norilsk Nickel’s metal sales revenues and trade cashflow, and much more besides. The difference between what the bank and borrower admit to, and the reality, is in the small print. This leaves little doubt that Citibank’s requirements were so tightly drawn on paper that, if there were to be a payment default, Citibank could launch legal action for recovery within a month against Potanin’s offshore trading company, Norimet, and all of $1.16 billion worth of Gold Fields shares which were in its possession. The legal system chosen was the UK. After the first repayment of $300 million, Citibank thus had effective security against a debt that was shrinking fast. The big default risk existed for just 30 days. And knowing Potanin as well as the bank did, the calculation was that there was little risk that he would default in so short a time, when his strategy for cashing out of Russia was just beginning.

Citibank also appears to have agreed with Norilsk Nickel that no asset acquisition or disposal can be made by the group, including affiliated Potanin companies, until the entire loan has been paid off. Sect.20.7 (b) of the contract stipulates that, other than buying the 20% stake in Gold Fields, Potanin and his group cannot buy further shares in Gold Fields or any other company for the duration of the loan period if it might “cause a material deterioration in the creditworthiness of the Borrower or the Group.”

But did Citibank know as much as it should have about President Vladimir Putin’s attitude towards such deals in general, and Potanin in particular? The small print also reveals something never seen before in the department of Doveryai, no proveryai.

According to the text of the sale-purchase agreement, for Norimet, a Norilsk Nickel unit, to acquire the Gold Fields shares from Anglo South Africa Capital, an Anglo American unit, the Russians had to declare that “all consents, concessions, approvals, filings, registrations, authorisations and orders, governmental, regulatory, corporate or other, necessary for the execution, delivery and performance by the Purchaser of this Agreement and the consummation of the transactions herein contemplated and for the purchase from the Selling Shareholder of the Sale Shares in the manner set out herein, have been obtained and are in full force and effect.”

This was signed on March 29. Within days, Russian government and Central Bank sources announced that they had begun investigating the transaction. The Central Bank has up to six months in which it may disapprove NorNickel’s offshore purchase. In retrospect, it is now evident that Potanin did not make an informal enquiry of the government or the President. He went ahead with his deal, and subsequently Norilsk Nickel has claimed that no application or approval was necessary. That isn’t, however, what Norimet claimed when it signed on March 29.

The next day, when the loan documents were signed, Norilsk Nickel signed a separate undertaking that “all Authorisations required: (a) to enable it lawfully to enter into, exercise its rights and comply with its obligations in the Finance Documents; and (b) to make the Finance Documents admissible in evidence in its jurisdiction of incorporation, have been obtained or effected and are in full force and effect.”

It also averred that “any factual information provided by or on behalf of any member of the Borrower Group was true, complete and accurate in all material respects as at the date it was provided or as at the date (if any) at which it is stated.” According to the borrowing agreement, Norilsk Nickel claimed that there were “no administrative proceedings of or before any court, arbitral body or agency which is reasonably likely to be adversely determined and, if so adversely determined, would reasonably be expected to have a Material Adverse Effect” on the loan or the Gold Fields transaction.

Citibank’s legal advisors are identified in the documents as the UK firm, Linklaters. Their drafting put the entire responsibility for complying with Russian law, and disclosing what it had done, on Potanin’s men. They underlined that responsibility by including Section 21.9, defining among many instances of default on the loan agreement if “it is or becomes unlawful for an Obligor to perform any of its obligations under the Finance Documents.”

And just in case something unexpected happened, the agreement requires Norilsk Nickel to pledge notification of any administrative proceeding affecting the loan within 45 days of the end of each calendar quarter. This first reporting deadline fell on May 15. By then Russian officials had publicly acknowledged that their investigation was under way.

In addition, in the loan contract, Citibank warned Norilsk Nickel against misrepresenting any details of its undertakings, and gave the company 15 days to correct any statement that “is or proves to have been incorrect or misleading in any material respect when made or deemed to be made.”

Citibank showed just how well it has learned from a study of Potanin’s old tricks, as well as how closely it is following the Khodorkovsky case. In Section 21, titled “Events of Default”, the bank’s lawyers spelled out what might trigger an immediate call for repayment. In addition to non-payment on schedule, these “events” include a debt claim of more than $20 million against any member of the Norilsk Nickel group; a court insolvency action; government action to “displace” or “curtail” management of the group’s companies; government tax claims; government-ordered actions to “seize, nationalise, expropriate or compulsorily acquire” group assets; a repeat of the August 1998 debt repayment moratorium; or changes in the existing shareholding or shareholders’ capital.

Citibank has claimed through Spiro Youkim, one of the loan negotiators, that the transaction did not require Central Bank or Russian government approval. Norilsk Nickel was emphatic on the same point. Sources close to the Central Bank say they are mistaken. The Central Bank itself is non-committal so far, but is reviewing the deal. Several agencies of the Russian government, including the Security Council advising the President, say the same thing. Whether Citibank and Norilsk Nickel are right or not, an investigation is an investigation, just as Potanin discovered that a Kremlin warning is a Kremlin warning. When they happened, they ought to have triggered Section 21.4 of the contract, regarding the start of administrative investigations.

When asked about this, Citibank has said through a spokesman: “We cannot comment further.” Norilsk Nickel’s Polikarpov also did not respond to questions.

At May 31, Norilsk Nickel should have repaid half the loan, and owe $400 million. Were a serious default “event” to occur now, and Citibank have a problem extracting the cash from Norilsk Nickel, its legal claim for Norimet’s Gold Fields shares in the UK courts would almost certainly give it the collateral required. All the same, the cost would be to slash the Gold Fields share price. Still, for Citibank there must be confidence that it could realize at least $400-million worth of value from what was $1.16 billion worth of stock on March 29. By advising one side, and then lending to the other, Citibank has done well out of the deal.

Its debut as the free-to-air advisor to the world, including the Kremlin, on the risks of doing business with Potanin has been unexpected, however.

by John Helmer - Tuesday, June 1st, 2004
No Comments »

“There are two famous last words,” Charles Bohlen, a US Ambassador to the Soviet Union at the start of the Cold War, once warned. “One is ‘alcohol doesn’t affect me’. The other is ‘I understand the Russians’.” Russians who confidently say they know what the Kremlin is about to do fall into both categories. Russia’s remaining oligarchs – those who are not in prison, or in foreign exile -understand Bohlen’s warning. That’s what makes them especially nervous these days.

One reason for the uncertainty is that the Kremlin, like staffs of the head of state the world over,is overwhelmed with too much work, too little coordination, and too many enemies to be dealt with all at once. A second reason is also common to the rest of the world: clever politicians never telegraph their punches. A third reason is a Russian particularity, which is the legacy of former President Boris Yeltsin. In the name of wrecking the Communist Party, Yeltsin near-destroyed the apparatus of command and control on which the state depends. To the end of preserving his personal power, he initiated divide-and-rule tactics that continue to pit Kremlin faction against faction, in a fashion that President Vladimir Putin is hard-pressed to rule.

Putin therefore allows it to be known that he needs help in his campaign to recapture the state from the hands of the oligarchs who took it from Yeltsin. This is one reason why Sergei Stepashin, head of the Accounting Chamber, is mounting an independent strike against Roman Abramovich, after checking first with Putin to see if he would say no. Not all Kremlin factions favour the move; some, because their priority is to deal with the President’s political enemies, or with the state’s security threats; and some, because they have their hands full managing the campaign against just one oil company Yukos. So long as Abramovich was telling Putin how helpful he could be against Yukos shareholders Mikhail Khodorkovsky and Leonid Nevzlin, there has been an unwillingness among some of Putin’s advisors to start a campaign against Abramovich.

Not that there isn’t enough documented material in security agency files to spearhead such an attack. However, the problem for the Kremlin is that its intelligence resources are better suited to assembling the cashflow evidence for indictments of money laundering, fraud, grand larceny, and other charges – after the crimes have been committed. They are not well adapted to predicting in advance what the oligarchs are planning to do with their foreign bankers and lawyers, or how they are spiriting their cash beyond Russian means of control.

The President’s men can read in newspapers that Mikhail Fridman, head of the Alfa banking group, and Victor Vekselberg, the TNK oil and SUAL aluminium oligarch, want to cash out their $3.8 billion stake in British Petroleum shares; but they don’t believe the money will return to Russia. They can speculate on what Vekselberg was recently doing in South Africa, but they don’t know for sure.

The Kremlin staff was not able to anticipate major offshore transactions, such as Vladimir Potanin’s $1.2 billion purchase of a 20-percent stake in the South African goldminer, Gold Fields, in March; or Oleg Deripaska’s sale this month of the Samara and Belaya Kalitva aluminium rolling plants to the US corporation, Alcoa; small though that looks, compared to most other oligarch cash-out deals. What seems certain is that Potanin and Deripaska didn’t ask the Kremlin for permission in advance. What is now up in the air is whether the President will be advised to let them get away with it, or not.

How the Kremlin is directing the outcome of the Yukos affair is indicative of the likely answers to that question. What is already in evidence is that the Kremlin has chosen to install its own trustee in charge of the Yukos board of directors. Victor Gerashchenko’s role will not be to dismantle Yukos, and sell off its assets. He is likely to do a better job of keeping the company together than he did, under Yeltsin’s direction, of preserving the rouble zone, a decade ago. But let there be no mistake. Gerashchenko has not been engaged to use his own initiative or entrepreneurship. He will follow Kremlin orders. These are likely to include the separation of Yukos from Sibneft.

But just as Gerashchenko will oversee the new Yukos, Sibneft is likely to find itself under a similarly appointed guardian, with a similar mandate. Selling off large stakes in either oil company to foreign oil companies won’t be allowed. Just in case the new board chairmen cannot keep their eyes on everything at once, loyal Kremlin men with forensic accountancy backgrounds will be placed in charge of the oil cashflows.

It takes years to train and test such expertise. It cannot be hired from international firms, whose well-known names have become synonymous in Russia with qualified account statements and misleading balance-sheets that conceal the trading and tax avoidance schemes which the Putin administration has pledged to stamp out. There is no reason for the Kremlin to stop with Yukos and Sibneft. There are already signs that Norilsk Nickel, Potanin’s preserve, will follow suit, as tax reparations owed by Potanin to the state are transformed into a golden state shareholding, supervised by a Kremlin appointed chairman of the board.

Russian Aluminium (Rusal) – the creation of Abramovich and Deripaska – cannot be immune to this process, if and when it begins. But those qualifiers are big ones.

For reasons particular to those involved inside the Kremlin, it may happen that Abramovich and Potanin negotiate a stay of judgement, and Deripaska goes first. But when the President needs help, knowing what will happen next is far from a sure thing.

by John Helmer - Tuesday, May 25th, 2004
No Comments »

MOSCOW – Roald Dahl, the English humorist, once wrote a tale about a man who had acquired the secret of seeing through cards. Naturally, he had to conceal it, if he was to make a killing at casinos. As professional gamblers all know, casino managements are constantly on the lookout for players with systems that can beat the odds of losing. It’s also entirely legal for them to build systems for insuring their clients lose; and to ban those clients smart enough to overcome them.

Alisher Usmanov is a Russian businessman who thinks like a casino. He enjoys the reputation for big-stakes gambling, because that attracts other people’s money. But he doesn’t like the risk of losing his own. Last month, Usmanov suffered the biggest loss ever, despite what many judged to have been a cleverly managed entry into the casino that is the City of London financial market. But had Usmanov studied more closely, he would have known not to gamble, unless you have bought the casino first.

Usmanov’s loss came after a year of steadily buying up shares in the ailing steelmaker, Corus, an Anglo-Dutch company. As Usmanov bought, he also tipped off the UK press to his ambitions for Corus — a bigger shareholding he intended to accumulate, he said, in order to take a seat on the Corus board of directors, and to build a link between Corus and the steel plant and iron-ore mine, which he controls in Russia. The more he publicized himself, and the more shares he bought, the higher the share price went. Over a year, Usmanov’s offshore holding called Gallagher accumulated almost 14 percent of Corus to become the second largest shareholder in the steelmaker. The share price rose in that interval from a low of 4 pounds on March 13, 2003, to a high of 45 pounds on March 9, 2004. Usmanov could count tenfold profits, at least, on his early stake purchases, if not on the later ones. He refuses to provide details, but it is possible to estimate that he has outlaid on his gamble not less than $200 million.

The Corus management repeatedly replied to Usmanov’s press statements by denying him their endorsement for a seat on the board of directors. But apart from vague generalities, they never explained why. They also rejected Usmanov’s attempts to link the two steel making groups. Gallagher’s share buying was good for Corus; Usmanov, the company decided, was not.

After booking his initial gains, it is unclear what Usmanov had to gain financially by continuing to spend more money to chase shrinking gains in a rising market. His iron-ore mine, Lebedinsky -the largest in Russia – is already producing at close to maximum capacity, and exporting almost a third of its production outside n Russia. It is virtually impossible for Usmanov to offer more iron-ore to Corus. As for Usmanov’s steel plant, Oskol Electro-Metallurgical Combine, its range of products doesn’t suit Corus’s range of needs.

Usmanov himself, and his spokesmen, have been fast on the press release making claims they then refuse to clarify. Accordingly, there are three theories of what Usmanov really wanted from Corus. The first is that he viewed the Corus board as his route to a seat in the Anglo financial establishment. Usmanov needed the ticket to respectability, so the theory goes, because his reputation in Moscow has been that of a corporate brawler, who muscled into assets on behalf of his sponsors in the Gazprom management, or in alliance with LUKoil CEO Vagit Alekperov. The biggest dent in Usmanov’s reputation came from his raid on a diamond-mine discovered in the Arkhangelsk region in 1996 by Archangel Diamond Corporation (ADC), a small Canadian company that now belongs to De Beers. In court papers filed in the United States, Usmanov (and Alekperov) has been accused of massive fraud. Initial rulings have rejected US jurisdiction, and are on appeal. The charges against Usmanov remain untried, not only in the United States, but also in an arbitration proceeding in Sweden.

The second theory of Usmanov’s campaign against Corus is connected to the first. He is greenmailing Corus — that is, he is positioning his newly acquired shareholding, or his Russian steelmaking interests, or both, for sale back to Corus, and not for buying into Corus. The Moscow opinion of Usmanov is that he is a financial investor, not a steelmaker. His objective, according to this interpretation, is to oblige Corns into relieving itself of the pain of his attacks by making him an offer to exit. This could take several forms, including a joint venture between the Russian smelter, the mine, and Corus; or it could be a simple cash transaction. Usmanov’s raid on the ADC is viewed in similar light by De Beers; Usmanov has hinted that for the right price, he might let go. Like Corus, De Beers has chosen to fight, not pay.

The third theory of Usmanov’s intentions go back to problems Usmanov admitted he was having at Gazprom, when the Putin administration began its reorganization of the company almost three years ago. It was then that several of Usmanov’s friends at Gazprom followed the sacked CEO, Rem Vyakhirev, out the door. Usmanov conceded at the time that he was feeling potential pressure on his assets from the new Gazprom management, led by Alexei Miller, which had started an investigation of what Vyakhirev had done with Gazprom’s assets and asset disposals. Through Gazprominvestholding, which Usmanov directed on Vyakhirev’s behalf, Usmanov had taken control of the steel plant and the mine. If Miller had wanted, he could have retrieved the assets from Usmanov. But that that was then. The situation at Gazprom has now changed, and Usmanov believes he is no longer under threat. In the interval, it stands to reason that if his control of Osko! and Lebedinsky was at risk, Usmanov should try to cash out into offshore assets. Corus, so this theory goes, was Usmanov’s cash-out vehicle — and an easy, lucrative one at that.

On March 16, Usmanov thought he would rap hard on the casino door, and threaten to blow it down if he wasn’t admitted on his terms. The threat to take “strategic and tactical steps” against Corus was issued in the March 16 issue of the Financial Times. Usmanov thought that Corus would be as intimidated by the newspaper as he is impressed by it. Employing also as his corporate chairman the former Liberal Party leader and ex-Foreign Minister, Lord David Owen, Usmanov might have calculated that he had both pen and sword on his side.

He was able to recruit a handful of sound-bytes in the media, but he failed to make a dint in Corus’s resistance, or in the opposition of other shareholders. They refused to accept the nomination of Usmanov to the board at the annual shareholders’ meeting, scheduled for April 22. Usmanov then proposed a palliative. If you won’t take me, he announced, I offer my nomination of a man you once trusted to run Corus, retired executive Adrianus van der Velden. A Dutchman for a Russian purpose was the proposal. But on the eve of the vote, Usmanov learned that neither the Financial Times, nor Owen, had swung a significant number of votes. Indeed, so small was his apparent gain over the 13.39 percent he already controlled, Usmanov decided it was better to retreat than to allow the magnitude of his defeat to be recorded. Van der Velden’s nomination was withdrawn before the shareholders’ meeting could vote it down. All four of the other nominees to board seats received more than 98 percent of votes in favor.

“We are not going to go away” was the riposte Usmanov’s spokesman made, as he retreated. Corns fired back, intimating that Usmanov had been unable to overcome his Russian dossier, “Gallagher’s challenge to UK corporate governance principles,” aCorus statement said, “has proved a distraction to the management of the company.”

Muffled though Usmanov’s defeat was, it was the first counter-attack on a major Russian businessman to succeed in the London market. From Usmanov’s point of view, the defeat needs to be camouflaged if he is to make good on either the ticket to respectability or the greenmail objectives. He has already made a success of the cash-out ploy, and will probably not waste any more money adding Corus shares to his holding.

But there is a lesson too, for the other major Russian businessman, who is presently keeping the London market in thrall – Roman Abramovich, owner of Russian oil and metal assets, the Chelsea Football Club, and England’s richest man. For him, as for Usmanov, there may come a time when the Russian dossier will catch up with him, no matter how many peers and other establishment assets he has bought. For there is one other lesson that Russian gamblers have yet to learn about the City of London — you can rent, but you can’t buy the casino.

by John Helmer - Wednesday, May 5th, 2004
No Comments »

In the snow, Russian peasants still say, the law is like a sleigh. A clever judge can steer it either way.

Vladimir Potanin, the controlling shareholder of Norilsk Nickel (NorNickel), Russia’s largest mining company, ought to know. In a decade of acquiring the assets that comprise his Moscow-based, multi-billion dollar holding Interros, he has had his share of success in the courts fighting off legal challenges to his takeovers. His methods, which were accepted by ex-President Boris Yeltsin, and the size of his wealth, combined with his political clout, have led Potanin to be publicly dubbed one of Russia’s oligarchs.

According to a filing last year with the US Federal Trade Commission to support a takeover bid for Stillwater Mining, NorNickel disclosed that Potanin and Mikhail Prokhorov, his partner and CEO of NorNickel, held joint and equal stakes amounting to about 57% of the company. A January 2004 report by Renaissance Capital indicates that 62% of the company’s shares are held by Interros; 4% by NorNickel employees; and 34% by institutional shareholders. The free float was estimated at 34%. There is currently no state shareholding, which was acquired by Potanin in 1995 for $170.1 million. Sales by NorNickel last year were $4.9 billion. The market capitalization of the company as of April 30 was $12.8 billion.

Last week, Potanin also got the message that he might be on the receiving end of Kremlin investigation. A powerful rumor swept Moscow and international markets that he had been called for questioning by the Procurator-General, the federal law enforcement arm of President Vladimir Putin. Rumors about the Russian oligarchs are common; but formal investigations of their business activities by the prosecutors are rare. The Moscow market believes that there can never be smoke from the latter, without someone in the Kremlin stoking the fire.

In two days of share trading, Norilsk Nickel lost more than two billion dollars in market capitalization. In the past two weeks, following the global downturn in metals prices, it has shed $4.5 billion. Whatever is happening, Potanin and Prokhorov are decidedly poorer.

The federal prosecutors first issued a refusal to confirm or deny the rumor. Then one of the prosecutors told me in carefully chosen words that “currently we don’t have information that Potanin has been in our office.” That left open a map of other geographical possibilities for the get-together – and it left an ominous warning for Potanin, as well as Prokhorov and NorNickel.

Not that this was the first warning they have received. In February, President Putin intervened to halt the implementation of a law, which he had earlier signed into effect. If implemented, it would allow NorNickel to declassify hitherto state secret data on reserves, production, sales and stocks of platinum group metals.

This data release, promised for early this year, is one of the requirements for NorNickel and its two controlling shareholders to offer the company shares on western stock exchanges, or for Potanin to swap his shares for another internationally listed company. Declassification had been lobbied by NorNickel for years. But state opposition to opening up the company to foreign buyers blocked the legislative move. It was then rushed through parliament by Deputy Prime Minister Alexei Kudrin, and signed by Putin last November. But the president was preoccupied at the time with parliamentary and presidential elections; he changed his mind when he learned what was at stake.

Kudrin was demoted in the cabinet reshuffle a few weeks ago.

When the law was suspended, Potanin was warned that a major cash-out transaction that would transfer sizeable wealth in NorNickel to foreign hands – in return for the offshore enrichment of Potanin – would not be permitted.

Potanin apparently didn’t listen. Nor did he pay attention to a second warning, also in February, that blocked the planned issue of a $1 billion convertible bond by Interros. That move would have allowed Potanin to take the cash, and leave in the hands of foreign bondholders the right to claim NorNickel shares.

Undeterred, Potanin and his dealmaker, Leonid Rozhetskin, deputy chairman of NorNickel, got the idea of buying into Gold Fields, using mostly borrowed funds; and then later – they told banking associates in Moscow — to merge their gold assets in NorNickel into a majority takeover of Gold Fields shares.

The first deal was a boon for Anglo American PLC, which had been looking to sell its Gold Fields stake for months. In five days Potanin had agreed, and in fourteen Anglo had its cash. Unbeknownst to Gold Fields, it was about to become a hostage in Potanin’s power play with the Kremlin.

Citibank, lender of $800 million to fund most of the April transaction, is also a hostage of sorts. If the Kremlin’s shadow falls on Potanin, it is unlikely another bank would agree to join a lending syndicate after Citibank’s six-month deadline is reached. Citibank would have to demand its money back. Potanin would have no alternative but to sell out of Gold Fields, quickly. Over the next month, the prosecutors do not have to say any more to make credible their warning that Potanin may not be permitted a cash-out deal.

Framing a charge-sheet against Potanin, and then compiling a multi-count indictment isn’t necessary for this warning to stick. Besides, there simply aren’t enough staff to prepare such documents, so heavily are they already committed to the prosecution and upcoming trials of the two leading Yukos oil company shareholders in prison since last year – Platon Lebedev and Mikhail Khodorkovsky. They are in prison, because they attempted to cash out a stake of about 40% in Yukos by selling it to ExxonMobil or ChevronTexaco. President Putin warned them not to; they ignored the warnings. The charges against them, and against Yukos, are different. They relate to a myriad of shareholding and cash transfers, tax avoidance schemes, fraud, and forgery. Independent legal assessment of the indictments suggests the two men are likely to be convicted.

Since February, Potanin has been courting the same fate. The rumor that he has met it doesn’t require much substantiation, in order to have the effect that high-ranking officials and advisors to the President, and possibly Putin himself, want to produce. The question for Potanin, therefore, is whether he should reconsider the Gold Fields deal, or proceed with the planned acquisition, and call Putin’s bluff.

Potanin began by reassuring Gold Fields at meetings last week with CEO Ian Cockerill in Moscow. Next, Potanin must pacify Citibank, lender of the lion’s share of NorNickel’s payment to Anglo American. Questions about the security of the deal, and the lack of government approval (which Potanin had sought, and received, when he took over Stillwater Mining in the US last year) have made it difficult for Citibank to find other banks willing to take over the $800 million loan when it expires in September.

The NorNickel oligarch’s biggest concern right now is to find out what Putin is really thinking, and whether last week’s rumor and reports were started to test Putin’s will, or Potanin’s nerves. In this game, as in last year’s Kremlin attack on Lebedev and Khodorkovsky, there is no telling what Putin intends until after he has moved, and the oligarch’s assets are in danger. The Gold Fields transaction may thus be no more than the trigger. What is near-certain is that Potanin’s control of NorNickel may be about to change.

That some of Putin’s advisors want this to happen was signaled by Vladimir Litvinenko, Rector of the St. Petersburg State Mining Institute, and an advisor to the president on resource policy. He recently said he favors giving the state a “golden share” in NorNickel. He has yet to elaborate on that. But if the precedent of Yukos’s fate is any guide, that could presage the filing of billion-dollar tax claims against NorNickel or other Potanin companies, and criminal charges against him, and possibly Prokhorov too. To save himself and pay NorNickel’s bills, Potanin may agree to sell at least part of his stake to the government. The transfer of a 17% shareholding in NorNickel, currently worth about $2.2 billion, would be enough to deprive Potanin and Prokhorov of majority control of the company, and allow the Kremlin to dictate new management strategy.

It is the market’s understanding of this vulnerability that has given last week’s rumor of trouble for Potanin legs to run. Whatever Potanin says or does next, time will tell whether Putin has already made up his mind; and whether NorNickel’s resale of its stake in Gold Fields will be either necessary, or sufficient, to satisfy the President.

There are many shadows on the snow right now. An investigation leading to a tax claim or an indictment would be curtains for Potanin, though not for Gold Fields. On their recent visit to Moscow, Gold Fields thought they were meeting the man in charge of their fate. But in reality they missed him. Putin may not mind the Russian government being an indirect stakeholder in Gold Fields; he is unlikely to want a takeover.

by John Helmer - Monday, May 3rd, 2004
No Comments »

MOSCOW – Vladimir Potanin has a plan to cash out somewhere between $3 and $5 billion worth of his fortune in Norilsk Nickel by converting it into a controlling shareholding of the South African mining company, Gold Fields. If he succeeds, he will have achieved a bigger transfer of Russian wealth offshore – beyond the reach of the Russian prosecutor, courts, tax authority, or Kremlin – than Mikhail Khodorkovsky, Roman Abramovich, Boris Berezovsky, Vladimir Gusinsky, or any other Russian oligarch has been able to get away with, so far.

Part of the cost of Potanin’s plan has already been borrowed from the coffers of Norilsk Nickel itself; part from Citibank, the US bank which is so nervous about the plan it dare not explain the terms on which, last month, it loaned Potanin the money in the first place, and why it’s now desperate to recruit other banks to lend the money in its stead. That first transaction, the purchase by Norilsk Nickel of a 20 percent shareholding in Gold Fields for $1.16 billion, was the single largest corporate purchase offshore in the history of post-Soviet Russia.

The second part of the plan was signaled by Potanin’s dealmaker, Leonid Rozhetskin, in London a few days ago. He said Norilsk Nickel intended to buy more Gold Fields shares. What he meant was that Potanin intends to take another 30 percent shareholding, and thus control of Gold Fields. Constructing this deal is Rozhetskin’s job for the next several months. He doesn’t exactly want to pay cash – at least another $2 billion in real money-because he is not at all sure that the banks, which are wrestling uncomfortably with refinancing of Citibank’s $800 million loan, will be agreeable to an even larger credit. And so, the trick Rozhetskin must pull off is to give the Gold Fields shareholders something just as valuable. This is likely to be the collection of Russian goldmine assets which Norilsk Nickel has been buying up for the past two years. They include Polyus, Russia’s leading gold producer from Krasnoyarsk, and other deposits and mining companies whose productivity is much less, and capital requirements much more.

Indeed, this is such a mixed bag that what Rozhetskin really needs to make his Gold Fields takeover deal effective is that President Vladimir Putin will agree to award Norilsk Nickel the Sukhoi Log deposit, Russia’s largest unmined goldfield. This lies in remote territory northeast of Lake Baikal, in the Irkutsk region. A decade ago, it belonged to a partnership between Lenzoloto, a local mining association, Star an Australian miner, and JCI. But Lenzoloto cheated its partners, and has now been swallowed up by Potanin.

Sukhoi Log is listed as having 33 million ounces of gold; if every ounce could be mined, they would fetch more than $13 billion at the current gold price. Rozhetskin’s plan is that if Norilsk Nickel wins the government tender for the new mining licence for Sukhoi Log, he will be able to create a separate Norilsk Nickel company concentrating this and the other gold assets, and then merge the lot into Gold Fields. For an oligarch like Potanin, Gold Fields shares are as good a refuge, if not better than Chelsea is for Abramovich.

The Russian government acknowledges that it has begun investigating the deal. The South African government is slower to follow suit, but it will. The last takeover bid for Gold Fields, from the US miner Franco-Nevada, was disallowed.

In the meantime, it is possible to ask a range of Russian policymakers, including party leaders, parliamentary deputies, and advisors to the President what they think of this huge cashout attempt by Potanin. It is possible to ask, I say, but the answers reveal a surprising detail about the post-election landscape in Russia. This is a pervasive fear of having, let alone expressing an opinion, that may offend either an oligarch like Potanin, or the President.

In December, Victor Gerashchenko, the veteran Soviet state banker and former chairman of the Russian Central Bank, was elected by the voters to a seat in the Duma representing the new Rodina bloc, headed by Dmitri Rogozin. The party positioned itself during the election campaign as a sharp critic of the oligarchs, with a national-interest line of policy. Gerashchenko’s election four months ago, which did not exactly align him with his party’s public platform on any point, was something of an irony. During two terms at the Central Bank in the 1990s, he defied repeated efforts by the Duma to make his administration of Bank affairs legally accountable. Gerashchenko’s high opinion of himself has been not negotiable with any of the democratic laws or organs of the state, save the President. It is thus the President who is likely to have approved the recent nomination of Gerashchenko to the board of directors of Yukos. With sensitivity to the proprieties, Gerashchenko has announced that if elected, he will resign is seat in the Duma. Before long, Gerashchenko may be chairman of the Yukos board, supervising whatever new shareholding and management arrangements the Kremlin has in mind for replacing Mikhail Khodorkovsky’s group, as well as the American management led by Semyon Kukes. Until then, Gerashchenko is still a representative of the people.

What view does he therefore take of the legality and benefit to the Russian commonwealth of Potanin’s moves offshore? As the guardian of the Central Bank’s capital transfer regulations, there is no doubt that Gerashchenko knows the rules which Potanin has been carefully skirting. Gerashchenko has had a great deal of documented experience doing the same himself. But Gerashchenko has no opinion he dares to express on Potanin, Through assistants, spokesmen and secretaries, none of whom will identify himself by name, Gerashchenko has replied that he is not refusing to express a view on Potanin’s transactions, but neither is he going to reply. He is simply “busy right now”, according to a spokesman.

Vladislav Reznik is chairman of the Duma committee that has legal and legislative jurisdiction over what Potanin is doing. This is the committee on credit organizations and financial markets. Reznik was elected to the Duma to represent the United Russia faction. Before becoming a parliamentarian, Reznik was well-known as the manager who tried to privatize the state insurance company Rosgosstrakh for his own benefit. His expertise in evaluating Potanin’s financial operations should be considerable. But asked to do so, Reznik replied: “I can’t comment on government questions. Better ask that question to the Central Bank itself.”

Mikhail Zadornov is another Duma deputy, former chairman of the Duma Budget Committee, and once the successor to Anatoly Chubais as Minister of Finance. A member of the unsuccessful Yabloko faction, Zadornov has fallen slowly, but far from the power he once enjoyed. Asked to say if Potanin’s Gold Fields transaction accords with his view of Russian public policy, Zadornov employed a lady of such rudeness, his reluctance to talk became an attack on the presumption of anyone for daring to ask. Her courage failed when asked to give her name. “Mikhail Mikhailovich,” she said, referring to the freshly reelected tribune of the people, is “very busy.” Zadornov was even busier to respond to the question of whether he had ever received election support from Norilsk Nickel, or from Potanin’s holding company Interros.

During the Duma election campaign, the Rodina faction led on the hustings as the most critical of the concentrations of wealth amassed by the oligarchs under former President Boris Yeltsin. But when Dmitri Rogozin, the Rodina leader, was asked to say what he thought of Potanin’s latest moves, his spokesman responded that his answers “are not ready yet.” This was repeated at regular intervals over several weeks.

Mikhail Delyagin, an economist who heads the Institute for Globalization Problems in Moscow, has recently been engaged by Rogozin and his colleagues to add economic policymaking muscle to the faction. Delyagin is a keen practitioner of the media sound-byte on almost anything his questioners put to him – except Potanin. “We are not refusing to answer,” said Delyagin’s spokesman, who gave her first name as Maria. “We are delaying just a little bit.’ Delyagin himself remains stonily silent.

If the Rodina faction is afraid to have a policy view of capital flight, cashout schemes by oligarchs, or the distribution of wealth in Russia’s mining sector, then surely the Communist Party could be counted on to restate the eternal Marxist-Leninist verities, and place its opposition to Potanin on the record. True, the party led by Gennady Zyuganov had a soft spot for Yukos, and took money from that direction to finance its election campaigns for the Duma and the presidency. That it failed dismally in both has now led to serious internal trouble over doctrine and leadership. Nikolai Sapozhnikov is the designated Communist spokesman in the Duma on economic policy issues. He has refused to take calls to answer questions about Potanin.

Zyuganov remains the party leader, and however embattled he may be, he knows better than to duck a question delivered face to face. And so, after listening to a recital of Potanin’s plan for Gold Fields, and after being asked whether he judges it in Russia’s national interest, Zyuganov began: “The past ten years we haven’t had business in Russia. It was robbery.” Zyuganov took another breath, and was about to deliver a second sentence, when ail of a sudden, an elderly assistant tugged at his sleeve, and whispered, not altogether successfully: “That’s enough”. With that, Zyuganov closed his mouth, and made for the door, Potanin’s future at the hands of the Communist Party left in the air, uncertain but not at risk.

Across the political spectrum of Russia, therefore, there is no one who dares to express a view on the single largest transfer of the country’s wealth abroad. No one yet, it should be qualified, because the reaction of Russian party and political leaders to the attempted sale of Yukos to an American oil company drew the same timidity when each was interviewed last autumn, before Putin had Khodorkovsky arrested. Then those running in opposition to the government found their voices, and dared to oppose the oligarchs.

But as Reznik the parliamentarian succinctly summed it up, matters of such high policy are for the government to decide, not the Duma. If he had been honest, he would not have said government either. He meant Putin alone. And that’s exactly where Potanin and the other oligarchs now stand. Reviled in public opinion, and the cause of a massive shift of votes towards the erstwhile opposition of Rodina, they are no longer capable of buying the silence or the complicity of the parliament. It is Putin, not the oligarchs, that Gerashchenko, Reznik, Zadornov, Delyagin, Sapozhnikov, and Zyuganov now fear, now wait for. By their action and inaction, they have created a one-man state. But if that is all that stands for Russia between Potanin and his ill-gotten gains, then is there anyone who will gainsay that, for the national interest at least, better Putin than no one at all?

by John Helmer - Wednesday, April 28th, 2004
No Comments »

Oleg Deripaska is probably too young, and certainly too self-confident, to contemplate those who marked the loss of their power, or their end, with famous last words. Farouk, the last king of Egypt, lived thirteen years after he was deposed, but nothing before, or afterwards, was as memorable as his words on losing his throne. “There will soon be only five kings left,” he said in 1952: “the Kings of England, Diamonds, Hearts, Spades, and Clubs.”

For the Russian oligarchs created by ex-President Boris Yeltsin, this is the time of testing how far their fortunes will go like a deck of cards. Mikhail Khodorkovsky will go to trial in June, or thereabouts. Roman Abramovich is to be tested by the Accounting Chamber on May 15, when an audit of his conduct of the affairs of Chukotka, under his governorship, will be tabled. Vladimir Potanin’s attempt to cash part of his Norilsk Nickel fortune into a multi-billion dollar takeover of South African miner, Gold Fields, is already into the second month of the Kremlin’s investigation. And Deripaska, who controls most of the Russian aluminium sector, is waging a fight for cheap electricity with the federal government and Anatoly Chubais that he has already begun to lose.

A few days ago, the Minister of Economic Development and Trade, German Gref, intervened to block an attempt by Russian Aluminium (Rusal), Deripaska’s most important property, to lock in a low-cost power supply from the 2,000-megawatt Boguchansk hydroelectric power station in Krasnoyarsk region. Government and industry sources confirm that a federal government appointed commission is to meet soon to decide the future of the Boguchansk plant. Gref will supervise the commssion, as he told Alexander Khloponin, the regional governor of Krasnoyarsk, at a recent meeting.

Government and industry sources say this formula has been adopted to neutralize the bid by Deripaska and Rusal’s allies in the Krasnoyarsk region to buy control of the 24-year old, but unfinished plant for a pittance — just $46 million — and a promise to arrange the investment required for its completion.The sources expect the government to favour preserving state control of the plant; but they can do that by protracting the negotiations for completing the low-priority plant for years.

Notwithstanding his setback in Moscow, Deripaska announced at a press conference on April 16 that he and Governor Khloponin, the former chief executive of Norilsk Nickel, had agreed on terms for Deripaska to acquire control of the Boguchansk plant in return for a promise to finish the power station at a cost of up to $1.2 billion, and to construct a new aluminium smelter nearby with annual output capacity of between 300,000 and 600,000 metric tons. Krasnoyarsk sources confirmed that an agreement had been reached but declined to say what Deripaska has promised to pay. Khloponin sang Deripaska’s tune, as if he had never heard from Gref.

Andrei Yegorov, spokesman for United Energy Systems (UES), the national electricity utility, which owns the controlling 64% stake in Boguchansk, says that UES is skeptical of both of Deripaska’s promises, and believes he has no intention of meeting either of them. “It’s important to understand what Deripaska really wants,” Yegorov said. “If it is a wish to finish the electric power station, then we do not see the investment plan, and it was not announced. We think that the main Deripaska priority here is to dilute the [state’s] blocking shareholding and take full control over Krasnoyarsk GES. Boguchansk GES is only of secondary interest and maybe there is no interest at all.”

The Krasnoyarsk power plant is the principal power supplier to Rusal’s smelter at Krasnoyarsk. However, UES has launched court proceedings against Rusal to recover what it claims are non¬payments or artificially low payments over several recent years.

UES chief executive Anatoly Chubais, whose nose is exceptionally sensitive to the way the wind is blowing, has been categorical in saying he opposes Deripaska’s plan for Krasnoyarsk: “We are against the deal and will not allow it to take place.” Chubais, who was speaking at the Russian Economic Forum in London, added: “We have doubts about the transparency of such a deal. We do not support non-transparent deals.”

This was as close as Chubais could come to pleading mea culpa for his past attempts at favouring Deripaska. It was also a signal from Chubais that a higher power in the land than himself won’t tolerate another Chubais giveaway. In July 2002, for example, Deripaska tried to acquire Boguchansk, and he and Chubais signed an agreement for Rusal to lend UES $10 million. In return, Rusal was to receive an equity stake in the plant as collateral for the loan. That plan anticipated that Rusal would gain full control of the plant as it raised more loan funds to finance the construction, and received more equity. But the Putin government intervened. Chubais, under criticism from minority investors in UES and the Russian press, for arranging a sweetheart privatization in Deripaska’s favour, was obliged to abandon the deal. At the time, UES told me, it was spending Rb400 million ($13.2 million) in maintenance alone to preserve the plant. UES had also invested, it said, about $45 million in 2001 and 2002 for first-stage generating capacity of 185 mw.

Today the UES plan, said spokesmanYegorov, is to combine several regional generating companies, but not to unite hydroelectric units with thermal power stations “because hydro power is much cheaper, and everybody will want to use it.” The plan for Boguchansk, Yegorov told me, is to generate “superprofits” from □ two new hydroelectric companies, and use these to fund the Boguchansk capital requirement, without diluting state control. Deripaska, who has borrowing problems of his own recently, will be unnecessary to finance completion of Boguchansk. “Our specialists calculate that superprofit from [two] hydro generating companies will be enough to finish the first part of Boguchansk by 2009,” Yegorov said. There are several different capacity targets for Boguchansk from 2,000 to 9,000 mw, and the investment requirement goes up according to which is selected.

Hartmut Jacob, energy analyst at Moscow’s Renaissance Capital investment bank, reports that “we believe that although this UES financing scheme appears sound, implementation will depend on the willingness [of the federal government] to accept lower taxes from the hydro plants’ production (which could be directed towards social purposes) for the sake of retaining control over the plant.” Jacob also says he expects “the negotiations, from my point of view, will take a long time. The government will try to select a compromise variant.”

Maxim Bistrov, a Ministry of Economic Development and Trade official, reveals that the commission mandate had been agreed by Gref and Khloponin before Deripaska went public with his declaration of himself as virtual winner of the Boguchansk power grab. According to Bistrov, Deripaska’s bid is only one of several competing options, from which the ministry will recommend to the goverfnment and Kremlin its choice. “The commission will evaluate and decide on three general variants, and several additional ones,” he says. The current variants are (1) offering several additional issues of shares of the power plant to an investor; (2) lease of the plant by the investor with the subsequent right to convert spending on built capacity into the share capital of the plant; and (3) merger of the plant with Krasnoyarsk GES hydro plant, which is already controlled by Basic Element the Deripaska holding company.” Implying that other metals producers, including Deripaska’s rival Siberian Ural Aluminum (SUAL), have an interest in the outcome, Bistrov said that “other variants, such as combining the capital of several investors, will be closely evaluated, too,” He said it is too early to say what the schedule of the commission will be.

Yegorov of UES also casts doubt on Deripaska’s promise to build a new smelter in the region. “There is a space for an aluminium smelter near Boguchansk, and it was planned to build a smelter there. But the problem is that currently Rusal doesn’t have an investment plan. There is no project for the smelter too. they have been promising to do it for four years, but even the feasibility study was not done yet. “There is no railroad there, and RZD [national railroad company] doesn’t have plans to move the railroad there in nearest future. A smelter without a railroad is useless.”

Rusal has made other promises to build smelters in exchange for regional approval of shareholding deals in Deripaska’s favour. One of these, a year-2000 undertaking to build a smelter in the Kharkiv region of the Ukraine in return for privatization of state shares in the Nikolaev alumina refinery, is currently in the Ukraine courts, where the State Property agency has filed suit against Deripaska’s Ukrainian subsidiary for failure to honour his promise.

In the Irkutsk region, Deripaska and Rusal have also promised to build a new smelter at Taishet after winning regional support to take control of the smelter from Alucom-Taishet, another developer led by former Bratsk chief executive Boris Gromov. Victor Tifikov, who heads industrial development for the Irkutsk region, told me “there is no Rusal activity around Alucom-Taishet.”

The clash over the Boguchansk power project is the first test of Deripaska’s political influence with the federal government since President Vladimir Putin’s relection in March. If Deripaska loses, several other projects, which Rusal is already proposing to its bankers and contractors, may prove to be as rich as Farouk’s royal flush.

by John Helmer - Monday, April 26th, 2004
No Comments »

MOSCOW – Nuri Said was the puppet prime minister of Iraq during the 1950s, when the British pulled all the strings in Baghdad. When he was toppled by revolutionary Iraqi officers in 1958, Said’s mangled corpse was dragged through the streets. His end more or less confirmed what he used to say: “You can always rent an Arab, but you can never buy him.” The Bush administration is filled with men with short memories who won’t have heard of Nuri Pasha, and aren’t in the frame of mind to listen to his advice.

Asia Times Online told this story in September of 2002 (Russia rooting for a quick hit on Saddam), and 18 months later it deserves to be repeated, especially after Said’s gruesome fate recently befell four American security men at the hands of an Iraqi mob in the town of Fallujah. Since their intensely televised death and dismemberment, the American occupation forces have faced surging rebellions by the two major communities of Iraq, the Sunnis and the Shi’ites. Their attacks have also targeted foreign civilians, pseudo-civilians, and soldiers of fortune in Iraq, forcing widespread evacuations.

For the first time, the US military leadership in Washington, fearing the political consequences of adding fresh, inexperienced US forces to Iraq, has cancelled the one-year rotation agreement it had with its troops, extending their service in the war zone for another three months. Rotation was a scheme devised by the White House to limit the extent to which unpopular and unwinnable wars might provoke mutiny in the ranks, and votes against the president at home. The one-year rotation failed to staunch the crack-up of the US Army in Vietnam, but neither presidents Lyndon Johnson nor Richard Nixon dared to cancel the rotation promise.

The political calculation by President George W Bush is that, even if the disgruntled families of the 20,000 troops affected immediately -one in every seven in Iraq – vote against him later this year in the presidential elections, that will still add up to fewer votes against him than if he adds 20,000 new troops who begin to suffer casualties.

The military calculation is that it will not be possible to preserve the US position in Iraq by paying local Iraqis to replace departing US forces. They must stay to fight; or they must retreat. The recent fighting has demonstrated for all to see that Said’s warning has returned to haunt those who ignored it. The Iraqis whom Washington has rented will never risk Said’s fate. And so, win or lose against Democratic Party candidate John Kerry, Bush has started down the slope that once defeated Johnson and Nixon, and put a brief stop to Washington’s imperial ambitions.

That’s a slope which Russian policy has no interest in either precipitating or accelerating – so long as it has the same outcome for US expansionism.

At the time of Nuri Said’s downfall, and again during the Vietnam War, the American leadership attributed its troubles to the cleverness of the Soviet Union, mostly because it was the Cold War, and Washington had no other way of explaining, let alone accepting, outbreaks of nationalism, localism and the like.

President Vladimir Putin, his Defense Minister Sergei Ivanov and new Foreign Minister Sergei Lavrov understand how easy it would be for Bush and his circle to revive similar charges, and put the blame for their own mistakes and battlefield losses on the Kremlin. They understand, too, how different the war in Iraq is from the war in Vietnam. They realize that the American people have even less commitment to the imperial fight this time than they had before. The Russian policymakers understand that it is Israel, and its men in Washington, who are mostly calling the shots for the president. The Russian assessment, and American public opinion, are therefore likely to converge, as the Arabs begin to exact the same toll on Americans in Iraq, as the Palestinians have been doing to the Israelis in that occupied territory.

Israel is trying to shoot its way out of a casualty ratio of one of their own to three Palestinians. For the time being, the US is trying to cope with a ratio of one to 50. Israel’s effective capture of the White House has taken a half-century to pull off, and for those, like Deputy Defense Secretary Paul Wolfowitz and Pentagon advisor Richard Perle, who now command the heights of US power, this is a do-or-die campaign. Only it will be patriotic Americans who will be doing the dying. And they are not as malleable as their president.

Russian policy is therefore founded on letting the battlefield serve as a reminder of Nuri Said’s warning. Officially, Moscow would like to effect a substitution of US troops for a combination of Iraqi sovereignty and United Nations support. But sovereignty cannot be rigged by Wolfowitz and Perle, nor paid for by the US Congress and Halliburton Corporation. Nor can Bush’s puppets in England, Australia, Italy, Poland, Ukraine and Japan pretend to UN legitimacy. The Iraqi resistance is making sure that point is already clear (ask Spain). Sooner or later, the allied occupation forces will have to be replaced. But creating a new Iraqi political consensus will take much longer than Bush has realized.

Until that happens, Russian policy is to try to neutralize the damage that the Israeli faction in Washington can do, and try to advance a strategic relationship with the Americans who may be able to wrest power over Bush from the grip of the Israelis. Two remarks by Ivanov on his recent visit to Washington indicate this direction. The Kremlin, said Ivanov, “considered joint Russian-US efforts within the framework of the counterterrorism coalition to be much more important than our differences about the war in Iraq …” The US alliance, he added, regarding the Balkan conflict in Kosovo, but a general principle nonetheless, “must finally understand that one cannot flirt with political extremists”.

For Russia, it is crucial to prevent the deteriorating US position in Iraq from becoming the policy of perpetual war and territorial aggrandizement, which has characterized the Israeli policy for decades. To this end, having such a person as Bush in the White House may be preferable, if the extremists around Bush can be defeated by the simple facts on the battlefield.

Ivanov and other Russian officials have acknowledged recently that if the Americans were to decide to abandon their redoubts in Iraq, as they did in Vietnam, the communal instability inside the country would pose severe risks of spreading. And that isn’t in the Russian interest, so long as Islamic fundamentalism already threatens across several Russian frontiers, and inside the Russian Caucasus. Ivanov made clear also that, beyond the Chechen conflict, Russia is especially concerned to protect the movement of its exports, especially energy, to market through waterways and pipelines that are vulnerable to attack.

Ivanov told his Washington audience that he expects that the most likely conflicts between the Great Powers that may “flare up in the foreseeable future will certainly be related to the economic domain, to the needs to secure by the individual, national states of their national interests, especially in the sphere of economy”. Teaching Washington to accept that Russian economic interests are not antithetical to American ones may take time. But as long as the US keeps making costly mistakes in Iraq, time is on Russia’s side. And so is the price of crude oil.

by John Helmer - Wednesday, April 21st, 2004
No Comments »

MOSCOW — There are so many different battles now going on for the assets of Yukos, inside the company, between the management and the shareholders, between different shareholders, between Yukos and Sibneft, and between the company and the state authorities, it is easy to mistake the plot.

Last week, Yukos CEO Simon Kukes took out a fulf-page advertisement in the Financial Times of London. When it was the alter ego of Mikhail Khodorkovsky, Yukos never had any trouble getting its message across through the news and feature columns of the FT’s ever-obliging editors and reporters.

That Kukes had to pay for space in the conventional way signals just how much has changed in the dynamics of spoon¬feeding by the Yukos PR machine and its rival, the Abramovich PR machine.

For months after Lebedev’s arrest last July, the Yukos headquarters near Paveletskaya train station in Moscow was the general head quarters for a Yukos-bankrolled war against President Vladimir Putin. But after it became clear that Khodorkovsky was going to lose his political battle with the Kremlin, the senior executives of the company panicked. They told associates they would leave the company by January. Months later they are still there, explaining that out of foyalty to their imprisoned ex-chairman they are duty-bound to stay and try to keep the company together. But this isn’t the same company, as the one Khodorkovsky, Lebedev and their partners Leonid Nevzlin and Mikhail Brudno believe they still own.

Legal experts, who have taken time to assess the cases built against Khodorkovsky, his partners and the company itself, have become increasingly certain that prosecutors will get convictions on many, if not all the grounds of their indictments. The initial thrust of the Yukos fighting machine was a political battle against the Kremlin, hoping that U.S. pressure and Western bad press would cower the presidential administration into abandoning its strong hand. But it has totally misfired, and Khodorkovsky is reduced to hapless begging for amnesty in exchange for a promise of good behavior.

Out of the legal crisis that has faced the Yukos shareholders, an opportunity was spotted, not just by Roman Abramovich and his Sibneft group, but also by the management headed by Kukes and his allies, Bruce K, Misamore, the chief financial officer and Steven M. Theede, chief operating officer, and president of YUKOS-Moscow

Abramovich ambushed Yukos intending to ingratiate himself with the Kremlin to protect his own assets, and not only those of Sibneft locked up in the Yukos-Sibneft merger. Whether or not Abramovich hoped there might be an opportunity to reverse the Yukos-Sibneft merger, and to win Kremlin permission for him to capture Yukos, he had a more urgent priority late last year. That was to protect himself from Khodorkovsky’s fate. By proposing to be subservient and even useful to Putin in private, Abramovich accomplished quickly what Khodorkovsky waited too long to attempt. After Putin had won both the Duma and presidential elections so handily, he didn’t need either of them.

Now that Putin is fully in command, there are three scenarios for Yukos. AH of them are what we call the Kukos scenarios. In the first one, Khodorkovsky is released from prison on parole, retakes the reins of his company, and everything ends almost as it had started —Yukos remains Khodorkovsky’s Kukos. This is unlikely.

In the second scenario, the Kremlin dismembers Yukos by subjecting it to tax claims it cannot pay, and accepts shareholdings to clear the debt and penalties. That would create the Kremlin’s own Kukos, possibly for resale later. This option has met with resistance from some of the economic advisors in the Putin administration who have been arguing that the costs to be inflicted on the domestic investment market would far outweigh the benefits to the state. They have also argued that Putin would potentially compromise himself if the outcome of the case against Yukos were to be a form of ^nationalization. Besides, Putin’s policy, according to the argument, has clearly advocated reducing the extent of the state’s stakes in the energy sector if control can be achieved by other means.

The third scenario now emerging is a Kukos with Kukes and his team in charge, in cahoots with the Kremlin.

Some time ago Yukos executives suggested that Yukos’ troubles were a hostile takeover scheme arranged between Abramovich and the Kremlin. But the Kukes group don’t apparently believe that any more. They have begun to attack Abramovich, but they have stopped insinuating that Putin was in on that plot.

In effect, there is increasing evidence that Kukes, Misamore,Theede and other senior executives are hoping to arrange a cheap-price management buyout of Yukos. Accordingly, they have been negotiating with the government and Kremlin, first to deter their support for a takeover by Abramovich and his Sibneft gang; and secondly, to lower the price at which the Kremlin will agree to divest the old shareholders and replace them with new ones. In pursuing this strategy, the three U.S. citizens must also do their best to disavow their nationality, and promise not to trade the company away to ExxonMobil or ChevronTexaco — at least not now.

The appearance of a page-long advertisement by Kukes in the Financial Times is a signal that this Kukos strategy is making
headway.

If Khodorkovsky is having the nervous breakdown that some journalists are reporting and that his mistimed, misjudged letters and notes are intimating, it is little wonder. He has begun to realize that his enemies may include his employees. He may think he can secrete a sizeable pile of cash away from the Kremlin’s retribution, although foreign litigation and court-ordered freezes may limit his ability to spend it for a while. He may think of negotiating a compromise with the Kremlin that would include sizeable penalties and the loss of some of his shares. But if the third Kukos strategy turned out to be effective, whatever plea bargain Khodorkovsky might secure from the Kremlin, he would be left without any significant economic base from which to operate, either commercially or politically, after his release. Without cash, ail Khodorkovsky’s talk of liberalism will prove to be tepid air.

by John Helmer - Monday, April 19th, 2004
No Comments »

MOSCOW (Mineweb.com) – The Faberge Easter eggs, which Viktor Vekselberg has bought from Forbes in New York and has brought back to Russia as his peace offering to the Kremlin, may also come in useful as pacifiers, now that Vekselberg has gone to war again with fellow aluminium oligarch, Oleg Deripaska.

After appearing to agree to a no-raiding pledge a year ago, Siberian Ural Aluminum (SUAL), owned by Vekselberg, and Russian Aluminum (Rusal), owned by Deripaska, have clashed anew. This time the fight – similar to the last one in late 2002 – is over shareholding control of the aluminium sector’s tidbits, the Volkhov aluminium smelter and the Pikalevo alumina refinery.

Maxim Titov, spokesman for SUAL, said that recently Rusal had outbid SUAL for a 14% state owned shareholding in OAO Metallurg, a Russian company which owns Volkhov and Pikalevo. Titov acknowledged there is a conflict between SUAL and Rusal over the 14% share sale, but he declined to say at what price Deripaska had bested Vekselberg for the shares.

The unexpected share raid is embarrassing for Vekselberg because, without the shares, he cannot claim that SUAL has bankable ownership of its assets, and without that credibility, he cannot go to the international markets with his plea to investors to cash him out of SUAL. Who would give Vekselberg a billion dollars for assets he doesn’t control tightly enough to prevent his most deadly rival from capturing?

The answer to this question has been so troublesome that Chris Norvaf. head of Vekselfoerg’s foreign flotation venture SUAL International, has made himself unavailable to answer questions for a year now. Behind the scenes, he has commissioned South African mining consultants. SRK, to do a new inventory of SUAL assets, as if to freshen them up, after financial advisor Fleming Family & Partners, has spent an unsuccessful year trying to market them.

Titov has also confirmed that a recent shareholder meeting called in St. Petersburg, failed to proceed, because of the conflict between the two groups. Rusal is seeking a seat on the board of Metallurg. SUAL blocked the shareholders from meeting on a technicality.

The Volkhov smelter, in the Leningrad region, is the oldest, and smallest, of Russia’s primary aluminium producers, it was first constructed in 1932, but it has been upgraded as recently as 1999, and has annual output capacity of 50,000 tons per annum. Production in 2003 was 22,600 tons. That figure is just 3% of SUAL’s metal production for the year. It is even more minuscule compared to Rusal’s production numbers – just 0.9%.

The Pikalevo refinery, also in the Leningrad region, was started at the same time. But operations were postponed because of the German invasion until 1959. It is the smallest of Russia’s refineries, and last year turned out 249,130 tons of alumina, the vital raw material for producing aluminium metal. Pikalevo alumina comprised 12% of SUAL’s output. To Rusal, however, which is starved for alumina produced in Russia, Pikalevo represents almost one-quarter of what Rusaf is able to produce tor itsetf.

With local partners, SUAL owns about 80% of the shares in the two production units. It has been aiming to consolidate full control of the units, and make them wholly-owned subsidiaries of the SUAL group. The Rusal acquisition badly frustrates that plan. It also puts potential pressure on SUAL to make its alumina available to Rusal at prices that are more attractive than the imports Rusal is also obfiged to depend on,

Deripaska has made raids against Vekselberg before, less for raw material gains, and more to sabotage SUAL’s corporate consolidation plans, and greenmail Vekselberg into paying a high price to be left alone.

In January 2003 SUAL declared victory over Rusal, following a three-month long contest over a 32% shareholding in the Nadvortsk smelter. Alexei Goncharov told me at the time that SUAL had reached an agreement to buy the shareholding, which Rusaf had acquired from two Nadvortsk directors in October of 2002. He confirmed that the fight over Nadvoitsk had been a bitter one,

In November of 2002, Gulzhan Moldazhanova claimed Rusal wanted to buy into Nadvoitsk in order to have a source of aluminium dose to consumers in the remote northwestern wastes of Karelia. Moldazhanova was at the time Rusal’s director for corporate development Nowadays she manages Rusal’s cashflow and corporate lending programme from a seat at Basic Element, Derlpaska’s holding company. In the weeks that followed her remarks, Rusal spokesman Yevgeny Ivanov attacked SUAL in the press for withholding aluminium claimed by Rusal as shareholder; SUAL denied the charge, and criticized Rusal’s media tactics,

Nadvoitsk produces just 76,000 tons of aluminum,

SUAL hinted at the time that Deripaska’s raid was a violation of a gentleman’s agreement between Vekselberg and Deripaska that neither man would attack each other’s aluminium business. Deripaska, the Vekselberg group suggested, was no gentleman. But neither group has ever admitted how much the raid cost Deripaska, nor how much Vekselberg paid to make it go away.

Asked if SUAL plans to buy out the Rusal stake in Volkhov and Pikalevo, Titov gays he cannot “comment on how this situation will be solved.” Rusal’s Moscow office refused to say anything.

by John Helmer - Monday, April 19th, 2004
No Comments »