Picasso was late for dinner at Gertrude Stein’s in Paris in 1907, when Alice B. Toklas said to him, after the painter had been seated beside her, that she liked his portrait of Stein on the wall above them very much. To which Picasso famously replied: “Everybody says that she does not look like it. But that does not make any difference. She will.”

Oleg Deripaska is like that. The Russian oligarch, who owns most of Russian Aluminium (Rusal), and the Basic Element holding, in which he has placed his paper and pulp assets; car and bus factories; an aircraft production line; more than one electricity plant; a bank, an insurance company, and stakes in a steelmill and regional media, is very sensitive about how his business operations and acumen are reported. Accordingly, he retains a large staff of PR men and lawyers to paint the portraits he prefers of himself, as well as of the financial condition of his companies. The job of this staff is also to issue complaints and threats whenever Deripaska does not look like the pictures others draw. He is currently litigating against Le Monde in Paris, and Frankfurter Allgemeine Zeitung in Frankfurt, claiming defamation. In the United States, he has engaged a former US attorney general and state governor to launder his reputation. In Moscow, he has frequently sued, or threatened to sue, newspapers and their writers,including The Russia Journal. But as Picasso warned, time will decide. None of Deripaska’s efforts will make much difference if President Vladimir Putin means to include him in his list of five, seven or ten Russian oligarchs, whose empires, Putin announced before Christmas, face dismantling.

Speaking fairly, Deripaska did not accumulate his most valuable assets through rigging privatization of state assets, at least not if his acquisition of the alumna refinery at Nikolaev is excluded, because it is across the border in the Ukraine. It is currently up to a Ukrainian court, and then the Ukrainian government, to decide that question. In Moscow, the only legal challenge Deripaska’s assets currently face is aimed at his takeover of the Ingosstrakh insurance company, Avtobank, and the Nosta steel company, which federal prosecutors have been investigating, at the behest of the former proprietor, for several years now. Elsewhere in Russia, there are legal challenges to Deripaska’s paper and pulp acquisition strategy, but these are private, and so far they do not involve state prosecutors. A recent negotiation between Deripaska and Ilim Pulp has ended without agreement on the size of the payment Deripaska would take for lifting his siege.

Deripaska’s prime asset, and the source of most of his cash, is Rusal, which after Alcoa, is the largest producer of primary aluminum in the world. It comprises four smelters, two alumna refineries, the world’s largest aluminum rolling mill, and various other metal fabricating plants. Rights to mine bauxite in Guinea are also part of the group’s assets.

Deripaska bought them in partnership with others, the most obvious of whom was Roman Abramovich. Deripaska claims he bought the least reputable of his partners out some time ago. Last September, he agreed to pay Abramovich $2 billion in installments for a 25% shareholding in Rusal, raising his stake to 75%. The cash to fund that acquisition is coming from Rusal. And therein lies a problem that Deripaska and his financial advisors have been wrestling with for months. He would like to acquire 100% of Rusal assets as soon as possible, just as he would like to consolidate the many shareholdings that comprise the Rusal group into a single, tradable, bankable stock. Among the oligarchs, Deripaska stands out as the slowest to reorganize the assets he controls into the form in which he could start selling it off to Western investors, at a premium price. For the time being, even if he wanted to cash out, he cannot sell a large stake of Russia’s aluminum resource to a foreigner like Alcoa or Alcan-Pechine. He even trails behind his much smaller aluminum competitor, Victor Vexelberg’s Siberian Ural Aluminum (SUAL), in being able to float on the international market (despite his promise, Vexelberg has yet to achieve that for SUAL). Ironically, these disadvantages are a form of protection Deripaska may presently enjoy from the Kremlin’s promised policy to secure domestic natural resources from their disposal by the oligarchs. Deripaska may be starting to have problems with the Kremlin’s new tax policy. But he can continue playing the Russian national card. It is to his advantage that he is not half as welcome in Washington or London as the other oligarchs.

Understandably, Deripaska feels this as a personal slight, and also as an added cost on his borrowing bill. But, if Rusal’s reputation is to grow, and its debt servicing charges to drop, Deripaska must provide more financial transparency than Rusal has done to date. At all costs, he must avoid the impression that Rusal is the cash cow, which the holding company Basic Element milks, whenever it is thirsty. On the other hand, the system of internal and offshore pricing on which Rusal and its producing and trading units has been built, makes transparency a difficult objective to achieve. Following last year’s deep freeze that paralyzed St. Petersburg’s port, aluminum shipments, including Rusal exports, to the United States, China, and other destinations were redirected away from St. Petersburg, according to metal traders and port records. In all, export shipments of nonferrous metals, including aluminum, through St. Petersburg have fallen year on year by more than 20%. At the same time, the State Statistics Committee has reported that production of primary aluminum rose about 4%. Much of that increase appears to have been exported, because production of aluminum rolled products has reportedly fallen during 2003 by about 3%. Rusal’s official website has not released comprehensive production or trade data since 2002. Rusal executives have attempted to suppress reporting of metal movements by claiming the details are commercial secrets, threatening anyone who discusses them. But the campaign of intimidation has turned out to be more revealing than the information itself. In the past, Deripaska has had reason to rue what his PR men have said on his behalf. He probably does not realize the damage they continue to do to him.

In the months ahead, the oligarchs who will survive Putin’s five, seven or ten threat will be the ones who can lie low most effectively. Deripaska understands how much the Kremlin already knows about his business. He can be confident that almost nothing that has been reported in the domestic or foreign media to date matches the scope of what President Putin already knows, or could call up with a telephone call to a subordinate. On the scale of demonstrable threats to the economic security of the state, Deripaska ought to be trying to convince his detractors, inside the Kremlin and out, that Basic Element and Rusal are not to be compared with the Yukos group, Sibneft and Millhouse, or Interros and Norilsk Nickel. Instead, he has inspired his subordinates to play a cat-and-mouse game abroad that threatens the very survival assets, that Deripaska will need at home.

by John Helmer - Friday, January 30th, 2004
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Napoleon’s Foreign Minister – Charles-Maurice Talleyrand-Perigord – once said that a man has been given eyes in the front of his head so that he can look forward, instead of backward. When Napoleon discovered that Talleyrand was betraying him to his enemies, Napoleon told him to his face he was “so much shit in a silk stocking.”

The question that still puzzles historians of Napoleon’s rule is why, given what he knew about him, did he permit Talleyrand to retain a position of power that enabled him to continue taking money for spying on Napoleon, weakening his political alliances and ultimately conspiring in his military defeat, abdication and imprisonment? (more…)

by John Helmer - Saturday, December 20th, 2003
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Earlier this year respectable western newspapers told their readers that Mikhail Khodorkovsky, then Russia’s richest man, was a close neighbour of President Vladimir Putin’s. This bit of geography was a plant from Khodorkovsky’s public relations machine, intended to convince those Americans to whom Khodorkovsky was trying to sell his Yukos shares, that Khodorkovsky and Putin were on afternoon-tea terms. Who knows if that’s why the Federal Security Service was obliged to send its agents to arrest Khodorkovsky in the central Siberian town of Novosibirsk, far away from the silverware and the petit-fours.

The editors of the Financial Times like to think they too are on afternoon-tea terms with Russia’s oligarchs. It’s one reason the FT has been unable to identify the sources of much its recent reporting. If afraction of it had been true, Khodorkovsky would be a free man today; ExxonMobil would be the new oligarch of the Russian oil sector; and President Putin’s United Russia party would have been trounced by Anatoly Chubais’s little right-wing claque at the parliamentary elections. Too much jam on English scones is known to have a sweetening effect that damages the appetite, and dulls perception.

For those who enjoy a taste for the Financial Times, here’s a cucumber sandwich from the PR men. They claim that the President has a soft spot for Roman Abramovich, the oligarch who has been calling a good many shots, since he met with Putin at the Kremlin a couple of weeks ago.

Among the shots Abramovich has been calling is the fact of the meeting itself. Although reports of the tete-a-tete have appeared in the Anglo-American press, as well as in Moscow newspapers, the position of the Kremlin spokesman, Alexei Gromov, is that nothing happened at all, Nothing official, that is. Asked to confirm the reported meeting, one of Gromov’s assistants responded: “we do not disclose that type of information. All official statements are published on the web site kremlin.ru, and you can find the answer there.” According to the website, during the period when Abramovich claims to have dropped in, the President’s schedule of meetings included one with Duma Speaker Gennady Seleznev, and another with the Patriarch Alexei II. But there is no sign that Abramovich dented a cushion on the presidential sofa. If his fingerprints were on the presidential teacup, they have been wiped clean.

Whatever the Kremlin did, Abramovich has exploited it, fostering the semblance that he has Putin’s authority to launch his attempt to unwind the merger with Yukos, or to restructure the management of the combined YukosSibneft company, or to sell an expanded Sibneft stake to a foreign oil company for much more than the $3 billion he received from the imprisoned Yukos shareholder, Mikhail Khodorkovsky. All the cards Abramovich wants his business rivals and his bank lenders to believe he is holding have been neatly laid on Putin’s desk, and made to appear there to be a royal flush, which – again according to the innuendo Abramovich has been promoting — Putin has agreed to cash for him. Abramovich has also convinced the media that his closeness to Putin places him under the president’s personal protection, and that the government’s anti-corruption investigations of Russia’s corporate malefactors shall touch neither Abramovich’s Sibneft interests, nor his personal profit-making while Governor of Chukotka.

The Kremlin’s silence has also been exploited by Yukos and its allies, not to mention the lemonade refugee Boris Berezovsky, as indicating that Putin’s election-winning campaign against the oligarchs is nothing more than that – an election stunt, aimed arbitrarily at just one oligarch and his interests. According to their claim, Putin’s only policy for the nation’s economic wealth is one of redividing the spoils, not redistributing the national welfare.

Unless the Kremlin breaks its silence, those who accuse Putin will have three months of the presidential election campaign to drum up the evidence for their charges. The protest vote against the oligarchs which Putin’s supporters handily won in the parliamentary election on December 7 is potentially unstable. The voters need to be reminded that in the etiquette classes where Putin was trained, rivals and enemies are always kept closer than friends.

If Putin cannot convince the electorate he is not a soft touch for the remaining oligarchs, the voter backlash on March 14, while unlikely to threaten the president’s reelection victory, could be embarrassing. Thus, to seal that victory, five moves should not be difficult for the President to make:

1. Appoint a new prime minister with a record for incorruptibility, and no career links to the oligarchs. No one in the current cabinet of ministers qualifies. Putin should pick an outsider.

2. Investigations by the state tax authorities and by local investment banks demonstrate that Sibneft has been paying an effective tax rate this year of 10%. That’s less than Sibneft paid last year; less than Yukos is paying; less than most other Russian oil producers will pay for 2003. Calculated as total taxes paid per barrel of production, Sibneft paid $5.41 in 2002. Yukos, which is now facing a $5 billion tax avoidance bill, paid $7.05. Putin should announce that Sibneft will have to pay up.

3. Abramovich enjoys legislative immunity for prosecution relating to actions he may have taken as the controlling Sibneft shareholder before his election on December 24, 2000. But he isn’t immune to investigation for actions he has taken as Governor of Chukotka since then. The dispatch of a federal prosecutor to Chukotka would dispel the impression that Abramovich is the beneficiary of favoritism.

4. Kremlin sources have said privately that, early in the year, Abramovich was warned that he should not attempt to sell Sibneft to foreign oil companies. That was when he and Khodorkovsky came up with their Kremlin-approved plan to merge. Putin should make a public statement confirming that if this merger is unwound, government policy will not allow a sale to foreign companies by either Khodorkovsky or Abramovich. Let’s see if Abramovich is quite so keen to pay $3 billion back to Khodorkovsky, if he can’t triple his money by selling to ChevronTexaco.

5. Anatoly Chubais should be relieved of his post as CEO of the state utility UES. In October Chubais tried to rally the oligarchs against Putin, threatening rebellion. He has used UES for his personal advancement, just as the oligarchs use their corporate treasuries. His UES reform is nothing more than another payoff to the oligarchs. Cutting Chubais from UES is the first step to cutting subsidized electricity from the balance-sheets of the oligarchs.

There is always the danger that, in a world as corrupt as the one we live in, a man who tries to be honest will look in the end to be either sentimental or stupid. But that’s not a danger the President of Russia should avoid. Boris Yeltsin convinced Russia’s voters he was sentimental, stupid, and corrupt. Those voters have just repudiated the last political relics of Yeltsin. In five handy moves, Putin can relieve himself of the danger of being honest.

by John Helmer - Monday, December 15th, 2003
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It takes times of despotism, when the best and brightest of a country’s elite are obliged to fawn, flatter, and commit crimes to make their fortunes, that a sensitive man discovers that virtues are usually only vices in disguise.

At any rate, that’s what La Rochefoucauld – ducal courtier, failed plotter, brilliant aphorist in the reign of Louis XIV, the Sun King – had to say at the head of the little book of maxims, which summarized everything he had learned in 17th century France.

In modern Russia, there has so far been no one of comparable quality, neither on the throne, nor plotting behind it. But could it be that an entrepreneurial schemer like Roman Abramovich, whose fawning has enabled him to accumulate great wealth, has turned Rochefoucauld’s maxim on its head? Are Abramovich’s vices – his avarice, ostentation, fanfaronade, rodomontade – actually new Russian virtues in disguise?

From the point of view of some in the Russian capital, Abramovich’s readiness to spend his fortune on foreign follies -football games, celebrity in the London tabloids, gold-plated taps in a gold-plated yacht – demonstrates the virtue of leaving Russia’s natural resource assets where he found them, and of not challenging President Vladimir Putin for either the legal right to sell them to foreign shareholders, or the political influence to decide their future. According to one version of the current Kremlin attitude towards Abramovich, he will be allowed to make a get-away with his ill-gotten gains, but only once. His return is barred – unless he were to bring the gains back, and reinvest them into Russia, without the inside trading favors that made the fortune in the first place. According to the same view, Abramovich and his advisors are dreaming, if they think they can vote their substantial stake in the Yukos-Sibneft conglomerate – following the federal prosecutor’s freeze of the Menatep Group’s 44%, this is now the largest unencumbered voting stake – to a private benefit not endorsed by the Kremlin. Frivolity, opportunism, vanity – if these are Abramovich’s personal vices, they have the contemporary virtue of being irrelevant to the future of the country, so long as he accepts that.

If he does not, then there are some questions Abramovich might be obliged to answer regarding his Russian business dealings. One relatively small one, worth no more than $35 million, may be the proverbial drop in the bucket. But then, as La Rochefoucauld also warned, “fortunate people seldom mend their ways, for when good luck crowns their misdeeds with success, they think it is because they are right.” It is just when a Russian oligarch thinks he is right that the federal prosecutor, on instructions from the Kremlin, may pounce on him with an indictment.

When Oleg Savchenko, erstwhile proprietor of the European Bearing Corporation of Moscow, and Deerfield Universal Incorporated of no certain address, recently sold his stake in a remote Chukotka gold-mining tract called Maiskoye, Abramovich apparently was convinced he had done the right thing. For what, or for whom exactly is the question Savchenko has been running from ever since, possibly until a prosecutor catches up with him.

Elected governor of Chukotka on December 24, 2000, Abramovich has been trying to attract investment into the region’s potential assets. Maiskoye was one of them. Located near the 70th parallel, south of the Arctic icepack port of Pevek, Soviet geologists had drilled almost as many holes in Maiskoye as there were people in the region. Digging underground tunnels at Maiskoye was the primary occupation of the area between 1972 and 1986. By that time, Maiskoye was judged to contain between 3 and 4 million ounces of potentially mineable gold. If brought to the surface, refined, and taken to market, that would have a current value today of up to $1.6 billion. But the Soviet state decided the costs of doing that, compared with other gold sources in Russia, was too high. After Soviet economics were replaced by Russian and western ones, many mining companies took a close look at Maiskoye – and came to a similar conclusion. Polyus, the goldminer owned by Norilsk Nickel, told Abramovich (in his gubernatorial capacity) hat it would be next to impossible to earn a profit margin of 20% at Maiskoye, unless the region offset the project’s costs with a number of long-lasting tax concessions. For a margin of less than 20%, foreign miners in the region were even more cautious.

And yet, according to an announcement of September 4, 2003, Abramovich (in his gubernatorial capacity) managed to persuade Ivan Kulakov, chief executive of Highland Gold, a London-listed junior mining company, to pay $34.9 million for the right to mine Maiskoye. The terms of the deal were simple, at least according to the company announcement. Highland Gold – buying through a Cyprus subsidiary called Stanmix Holding Limited – would pay the Maiskoye licence owner, Deerfield Universal (that’s Savchenko) $11.9 million now, and installments of $11.5 million annually over the next two years. On November 4, when Highland Gold announced it had finalized the deal and made the down payment, no other terms or conditions had been disclosed.

For a fellow in the business of ball-bearings, Savchenko appears to have been richly rewarded for his little Arctic trouble. Kuiakov, on the other hand, appears to have paid a great deal for something no one else had thought was worth buying at the price. If this wasn’t a case of snow blindness, then what flash of inspiration had the Governor of Chukotka managed to transmit to the buyer and seller, to bring off their transaction? Manage he certainly did, according to a spokesman for Millhouse Capital (UK) Limited, the holding of Abramovich’s private assets which operates from offices near London. According to Millhouse, two of its executives participated in the sale negotiations. So did Andrei Gorodilov, a deputy governor of Chukotka. Millhouse acknowledges that they all were, or had recently been, employees and business associates of Abramovich. Gorodilov had been a first vice-president of Siberian -Oil Company (Sibneft), Abramovich’s most valuable asset. Although Kuiakov was wearing a Highland Gold hat at the table, and spending Highland Gold’s money, he too had been employed by Abramovich, and had served for a time as a board director at Sibneft.

Savchenko was reported in a Moscow newspaper as saying he had provided his stake in Maiskoye to Millhouse, using a Russian term that can be interpreted in different ways – in trust, for management, as a lien, or for collateral to meet an obligation. According to Millhouse, Deerfield Universal, the company through which Savchenko held title to Maiskoye, and thus the legal seller of the hopeful El Dorado, “is not connected in any way whatsoever with Abramovich”. To the question of how to interpret Savchenko’s characterization of the role Millhouse played in the selling of Maiskoye, the Millhouse spokesman said he was “not exactly sure”.

How willing Highland Gold, and its principal shareholder, the South African goldminer Harmony Gold, were to be the buyer is also not exactly certain. Early in September, Highland Gold was in secret negotiations, described by a witness as frantic, to forestall the loss of its single source of cash, the Mnogovershinnoye goldmine in the Khabarovsk region, several thousand kilometers to the south of Maiskoye. Also, there was insufficient cash in the Highland Gold till to meet a combination of its Moscow bank debts, due for repayment in October and November, and the price it would have to pay at auction for mine equipment at Mnogovershinnoye, which the regional government had scheduled for public auction on September 16. Attempts at fresh bank borrowings at the time were not going well, according to the banks. Did Kulakov have $11.9 million for the first installment on Maiskoye when he was at the table with the sellers? And if he was uncertain he could afford to meet the price of the Khabarovsk auction, why was he ready to compound his financial risk two weeks earlier? What was his hurry? Why would Highland risk paying so much for a non-producing asset, when it was at risk of forfeiting its only source of income?

The Russian oligarchs attract gossip, which exaggerates their influence. The answers to the many questions surrounding the Maiskoye transaction were thus boiled down by investment bankers and mining analysts in Moscow to just one. Abramovich, so the envious wanted to believe, was behind the seller, just as he was behind the buyer. To ensure that the price suited his pocket, he also sat at the table through the Chukotka regional representative, and as the deal mediator, Millhouse.

How wrong the Millhouse spokesman has insisted – how unfair to Abramovich. As La Rochefoucauld observed, the world is full of pots jeering at kettles. Who better, then, to dispel the aspersions than Savchenko the seller? And where better to inquire than at the Moscow office of his European Bearing Corporation? Starting then on September 8, and continuing for nine weeks, Savchenko has been contacted, and questions relayed to him through his secretaries, assistants, and spokesmen. When had he acquired Deerfield Universal, and from what source? Why had he bought a gold prospect if he was in the bearings business? Had he ever done business with Abramovich or his group? What type of transfer of his Deerfield Universal shares had he made to Millhouse, and for what reason? Was he the final beneficiary of the $34.9 million sale of Maiskoye, or someone else?

Savchenko’s business trips out of Moscow have coincided with every attempt at making contact for the answers to these questions. And so, to determine just good the ball-bearings business has been over the past few months, a separate contact was made with his company, requesting a price list for bearings for export to a European destination. That is when Savchenko’s secretary responded: “unfortunately, we are a consulting company, and don’t do direct sales.”

If the title of his company is a misnomer, could it be that Oleg Savchenko are names for someone who doesn’t exist? Those who claimed to be his secretaries, assistants, and spokesmen were asked two fresh questions: How tall is Oleg Vladimirovich? Is running one of his sports? This time the response was: “All questions about the company can be answered by our press service manager, who is currently occupied at a meeting. Usually, we do not disclose personal information about our employees or administration.” Follow-up questioning failed to produce the name of the press spokesman.

Whether his name is as fleeting, or as fictive as Savchenko’s has proved to be unimportant, beside a set of admissions volunteered by Highland Gold’s investment relations executive, Christine Coignard. Speaking from her office in Germany on November 20, Coignard was asked what she knew about the seller of Maiskoye. “The official seller was Deerfield Universal,” she responded. “The person behind it was Abramovich. Abramovich was the beneficial owner and seller.” Asked what form the sale negotiations took, Coignard said they had taken place over “several months”. They were finalized, she said, in direct talks involving Abramovich, Highland Gold’s chairman Lord Peter Daresbury, and Ivan Kulakov, Highland Gold’s CEO. All three “were directly involved,” Coignard confirmed.

She added that, during the negotiations, Abramovich “had two roles, one as a seller, and one as the governor [of Chukotka]. He gave an undertaking regarding the [mining] license. He said he would help renegotiate the terms of the license to make it mineable.” According to Coignard, these were changes that required approval by the Chukotka administration. She said one of the changes Abramovich offered to make proposed to “remove production targets”. While these changes must be effected in written documentation, Coignard added there was another undertaking from Abramovich she was not sure had been put down in writing. This, she said, was that the Chukotka administration would build at state expense a road between the district town of Pevek and the Maiskoye site for all but the last 10 kilometres of the 180-kilometre distance. “So far as I know, this is not a written agreement,” Coignard said, “but it is an undertaking.”

It seems the gossips told the truth. In one of the most wretched of regions, in one of the weakest states of Europe, one would have to be unreasonably jealous to dispute the value that Abramovich’s actions in the matter of the Maiskoye goldmine have conferred on the region he was elected to govern. What but envy could dispute the reward of $34.9 million he persuaded Highland Gold to pay him for doing his public duty? As to the difference between jealousy and envy, why leave it to unlettered prosecutors to probe, when La Rochefoucauld has already explained the difference. Jealousy, the old duke said, “is in some measure just and reasonable, since it merely aims at keeping something that belongs to us, or we think belongs to us. Whereas envy is a frenzy that cannot bear anything that belongs to others.”

by John Helmer - Thursday, November 20th, 2003
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MOSCOW – When a man runs for the office of Russian prime minister, he must first learn to crawl.

Former prime minister Mikhail Kasyanov mistakenly imagined he was on a high horse, when in early October he received a delegation from United States oil company ExxonMobil and allowed his guests to announce publicly that the Russian government could find no obstacle to their acquisition of a strategic stake in YukosSibneft, Russia’s principal oil producer.

That put him on the wrong side of President Vladimir Putin at the very moment when Putin decided to make the fight of his career, arresting and jailing Mikhail Khodorkovsky, forcing chief of staff Alexander Voloshin into the cold, and deciding there will be no sales or share swaps of Russia’s strategic natural resources to foreign corporations.

If Kasyanov had any hope of retaining the prime minister’s portfolio after the parliamentary elections on December 7, or the presidential poll next March, he appeared to have lost it when, his eyes askance, he was obliged by Putin to listen to a blunt warning to the entire cabinet to stay out of the Yukos affair. Kasyanov’s exit became a certainty when on Halloween he publicly attacked the court-ordered freeze of the 44-percent bloc of Yukos shares that Khodorkovsky and his allies control.

By contrast, the three economic policy ministers in the cabinet, which Putin inherited from ex-President Boris Yeltsin in 1999, quickly understood that the ExxonMobil deal was impossible, and Khodorkovsky insupportable. German Gref, minister of economic development and trade, appeared by Putin’s side when the president met with a group of investment bankers.

Since the Yukos affair began, Gref and Victor Khristenko, the deputy prime minister in charge of the oil sector, have become timid advocates of a new tax, licensing and anti-trust regime for natural resources that should eliminate the oligarchs as the dominant force in the Russian economy. Timidity is the sound a man lacking confidence makes when he is on all-fours.

It has been Alexei Kudrin, the finance minister and deputy prime minister in charge of macro-economic policy, however, who has made the loudest virtue of that deportment. In defending the president from that posture, he has appealed for selection as Kasyanov’s successor, Russia’s new prime minister. A one-time protege of Anatoly Chubais, Kudrin learned early how to run and crawl at the same time. Responding to the exit of Voloshin from the Kremlin, he declared that “this marks the end of the Byzantine empire!” as if Kudrin’s humble service in Byzantium all these years has been nothing if not dutiful, selfless, and unflinching in his resistance to bad policy.

“Of course, we will close that tax avoidance loophole, pay wages, and reduce taxes,” proclaimed Kudrin, once he had been convinced by Putin himself that there was no reversing course in the clash with Khodorkovsky. “But it never ceases to amaze me why a far-from-impoverished oil company should crave those loopholes so vehemently.” Irony is usually not a quality favored in Russian prime ministers, as it doesn’t comport well with unswerving loyalty, and the ability to accommodate contradictions – two higher qualities for the job.

How will Kudrin’s new support for the restructuring of the Yukos shareholding, and for an end to tax privileges for oil companies, lead him to treat the tolling privilege in aluminum, which Kudrin conceded in favor of Oleg Deripaska and Victor Vexelberg; or the privatization of Alrosa, which Kudrin has been tempted to give away to the President of the Sakha republic; or the declassification of metals secrets which he awarded to lobbyists from Vladimir Potanin, enabling him to prepare to place his shares in Norilsk Nickel on the international market?

These are only a few of the policy contradictions over which Kudrin has presided at the Finance Ministry until now. But they are potentially serious vulnerabilities in his campaign to win Putin’s favor for the next prime minister, if they prove that Kudrin’s loyalty has been too easily swayed by either foreign economic interests in Russia, or the oligarchs. Sergei Stepashin, the current head of the Accounting Chamber and briefly one of Yeltsin’s prime ministers, is a contender who can lay claim to greater independence.

Stepashin even attempted to direct his auditors into the Finance Ministry itself, which Kudrin has preserved from any of the accountability or public sector reform he has urged everywhere else in the government bureaucracy. That ex-President Yeltsin should go to great lengths to publicly belittle Stepashin, and simultaneously promote Chubais – published in an interview with the newspaper that Khodorkovsky recently acquired – is a strong signal of what Yeltsin (and Chubais) fears may happen in the prime ministry soon.

“It is not that he had some shortcomings,” Yeltsin recently said of Stepashin. “He is a talented and well-educated person. It was just that he did not have all it takes to be prime minister and then become president.” What that meant in 1999 was clear – Stepashin was too great a risk to Yeltsin and the interests of his cronies. Now, and in the second Putin term, that may be just what Putin needs in order to run a government fully free of the Yeltsin group’s influence.

Another contender, Vladimir Litvinenko, is possibly the most influential of the Kremlin’s advisors on natural resource policy, and the most modest. As rector of the St Petersburg Mining Institute, and one of Russia’s leading academics on resource policy, he has been biding his time and nurturing the president’s understanding of how to manage Russia’s resource wealth.

If Litvinenko is chosen as prime minister, or as a super-minister for natural resources, this would be a signal that the cash flow methods and investment priorities of the oligarchs who will remain after Khodorkovsky’s case is over will not endure either.

Neither Stepashin nor Litvinenko is the sort of character who will crawl for public office. Whether they are running is up to Putin to decide. His decision may already have been taken.

by John Helmer - Tuesday, November 18th, 2003
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MOSCOW – Napoleon Bonaparte was the greatest tactician in European history.

Russian President Vladimir Putin needs to understand how similar Russia’s situation, and his own, are to the circumstances facing France, and to Napoleon, when the country was encircled by hostile powers, led by the British; its treasury emptied by corruption and civil war; its army demoralized and unpaid; and its fractious rulers intent on plotting one another.

There will be time over the 18 months that remain before the Duma and presidential elections to see whether Putin can think enough like Napoleon to turn tactical initiative into durable power. But we must begin in November 1793, when Napoleon was a 24-year-old artillery captain, and the battle of Toulon was fought against the British to liberate French territory. That victory launched Napoleon’s meteoric career. It was also a demonstration of Napoleon’s ability to defy conventional thinking, and win. (more…)

by John Helmer - Thursday, November 6th, 2003
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The idea of fiscal justice – that taxes should be paid in proportion to the taxpayer’s means -can produce bloody rebellions and even revolutions. But not in Russia.

What then-President Boris Yeltsin did in the 1990s was an old trick he might have cribbed from the histories of the old regimes of France if he had had the resourcefulness to read them. In his case, desperation took the place of literacy.

Until the French Revolution of 1789 halted the practice, French kings pursued buying the loyalty of those powerful enough to threaten their rule by handing out gifts of state assets. Productive agricultural land was the most important of these, but import concessions and commodity monopolies were also awarded. In addition, the kings sold titles of nobility. In return, they exempted the titleholders from paying most of the taxes of the realm. That’s what an aristocracy is made of – the right to exemption from tax, traded for a royal bribe, and the promise not to take up arms against the monarch. In this respect, all aristocrats are nothing if not petty bourgeois, and the foundation of their fortunes, while not necessarily a crime, is certainly a tax break.

Compared to the tsars, Yeltsin democratized tax exemption among Russians. He also favored a small elite, which has managed to concentrate most of the cash value of the exemptions into their own hands while selling off their debts. They are known as the “oligarchs.”

It is easy to understand that, the more insecure kings are, the more tax exemptions they dispense, at the same time as their expenditure requirements – for armies to protect themselves from rebellion – grow apace. The tax base shrinks, as fewer and fewer people are obliged to shoulder the costs of the unbalanced, crooked state. Yeltsin’s one original contribution to this long, sordid history was his invention of the 100 percent tax on low incomes: The practice, implemented by a succession of finance ministers, of withholding salary payments to state employees on the pretence of bureaucratic delays. By extension of the same practice to all those owed money by the state, the tax was adopted by private employers toward their employees.

Throughout the worst of this tax, there was only one revolt -that of the Supreme Soviet in 1993. By physically liquidating the parliament and killing more than a hundred of its defenders, Yeltsin taught a generation of potential tax rebels that it was safer to steal from the system than to fight it.

In the history of tax rebellions, poor people generally stay aloof. They die in swarms, but usually from disease, not from protest. Those who are prepared to fight for fiscal justice -attacking either the king or his noblemen – usually come from the small propertied classes; well-off farmers, tradesmen, artisans or small-business owners. They aren’t so poor that they don’t pay any taxes. Nor are they wealthy enough to buy their way into the exemptions of the aristocracy. So, they are the meat in the fiscal sandwich. When kings fear for their lives, these are the people who pay for his peace of mind. But their potential for disloyalty is always on his mind. The development of European bureaucracy, with all its record-keeping, inspectors and sanctions, is the evolution of squeezing the meat in the sandwich to the limit.

The current conflict between President Vladimir Putin and the oligarchs is unique, because, for the first time in Russian history, it is the king who is trying to dismantle the tax exemptions. He is doing this without any show of support from the small-business groups who stand to benefit most. They are too afraid of Putin’s weakness and the oligarchs’ vindictiveness to take his side, at feast for now. Those who ought to be their natural representatives, the deputies of the Duma Tax Committee, are hirelings of the oligarchs. Yevgeny Primakov at the Chamber of Commerce and Arkady Volsky at the Union of Industrialists and Entrepreneurs ought to speak for them, but they don’t dare to raise their voices either.

What Yukos CEO Mikhail Khodorkovsky is trying to do by selling a 40 percent stake of his oil company to ExxonMobil is nothing less than cashing out the capital gains on all the Yeltsin dispensations from which he benefited before next March. The timing is short and the method desperate, because Khodorkovsky and his fellow oligarchs are certain that Putin will introduce the necessary taxes to redistribute the wealth in the realm once he is reelected. “Stealing” is the word that, in the worldwide history of tax rebellion, all rebels use more often than any other to attack this practice. Khodorkovsky is no more than a thief trying to bank his loot in the United States. He may count himself less fortunate than Mikhail Fridman and Victor Vekselberg, whose sale of Tyumen Oil Co. to British Petroleum early in the year caught Putin unawares, uncertain of what to do ahead of the oil-price crisis the Iraq war could have triggered. Roman Abramovich has been just as fortunate in getting his cash out without paying tax, although the assets have remained in Russian hands. Thieves they are, in Putin’s view and in the opinion of most Russian voters.

This too makes for a unique alliance in the history of tax rebellions – the king in league with the passive poor. It is just as well that Putin has effective command of the Army and the security services, because his enemies are currently so numerous, his allies so impotent and the stakes so big that he might otherwise become a target for violence. Yeltsin destroyed the inhibition to use violent methods in 1993. The methods the oligarchs have used also lack this compunction.

Some of the oligarchs don’t have the stomach for confrontation with the Kremlin, but believe that Putin will be satisfied with a pantomime of concessions. Their paid propagandists at Vedomosti and the Moscow Times charge that all Putin is holding out for is a slice of the tax-exempt proceeds for himself. Vladimir Potanin, who controls both newspapers, has publicly proposed a program of raising employee salaries – although, at the same time, he is trying to make sure that the employees of his Norilsk Nickel mining company and the voters of the city of Norilsk will not elect as mayor the union leader who has been agitating for just such an increase since January. Vekselberg recently gave in to the first major strike of a group of employees at his Siberian Ural Aluminum-while simultaneously trying to prevent a single newspaper from reporting the wage gains the strikers have made, in case their example becomes infectious.

That’s another of the risks the oligarchs are running, as the conflict with Yukos drags on toward Election Day on Dec. 7. The chance is growing that Russia’s poor may cotton on to what Putin is trying to do and find their own spontaneous ways of taking the offensive against the oligarchs. A protest vote of this magnitude won’t show up in the preliminary polls. But, if it happens, it will signal that Russia’s young aristocracy is on its last legs.

by John Helmer - Tuesday, October 28th, 2003
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MOSCOW – There’s nothing more ungainly than newspapers, when their sanctimoniousness is aroused, and they try walking with their feet in their mouths. Call this the Duranty phenomenon.

Walter Duranty was the New York Times journalist who won a Pulitzer prize, journalism’s highest award in the US, for his reporting on Russia in 1931. Duranty died in 1957, and his editors at the Times, plus his Pulitzer board judges, have all joined him in the grave, so they are easy targets for critics. They believe that Duranty’s Pulitzer should be rescinded on the ground that he failed at the time to exercise the same judgment the critics have rendered in retrospect. More than one attempt has been made to oblige the Pulitzer board to yank the prize; another one is under way at the moment. Ukrainian-Americans are reported to be the most vocal Duranty, because they allege in demanding punishment for he failed to report on the lethal 1932-33 famine they blame on Moscow and Stalin.

“A lack of balance and uncritical acceptance”, claims a history professor engaged by the Times to review Duranty’s work, “was a disservice to the American readers of The New York Times and the liberal values they subscribe to,” The professor says publicly Duranty’s prize is a disgrace, and for the honor of the newspaper, it should be surrendered.

A letter to the Pulitzer board by the Times publisher, Arthur Sulzberger Jr., let the cat out of the bag. He conceded that “Duranty’s slovenly work should have been recognized for what it was by his editors and by his Pulitzer judges seven decades ago.” But at the same time, Sulzberger told the board, there are two good reasons for not rescinding the prize now, seventy years later. Rewriting history like this is a Stalinist practice, he argued. And more important, once you start, where do you stop? “The board would be setting a precedent for revisiting its judgments over many decades,” Sulzberger wrote.

Whoa! That really would test the limits of journalism’s elasticity, stretched as it always is between what the history professor calls the liberal values Americans subscribe to, and what reporters identify as the objective truth.

In Russia, the Moscow Times was an English-language newspaper that was created in 1992 from financial sources that remain a mysterious, and then twice rescued from financial collapse by Russian oligarchs. The first was Mikhail Khodorkovsky, the Menatep Bank and Yukos shareholder, who was jailed in Moscow on serious criminal charges over the weekend. The second, and more recent rescuer was Vladimir Potanin, the controlling shareholder of Norilsk Nickel, Russia’s largest mining company. Potanin’s control of the newspaper is far larger than Khodorkovsky’s was, and includes not only a sizeable shareholding, but also a lien on the newspaper company’s accumulated debts.

In the Russian revolution that started in 1991, and continued over the past weekend, the Moscow Times has always been on the side of those into whose hands the country’s wealth has been taken. Power to the people! has meant electricity for Oleg Deripaska and Anatoly Chubais. Bread to the hungry! is the slogan of Vladimir Potanin’s agro-industrial holding. Land to the peasants! has meant oilfields for Khodorkovsky and Mikhail Fridman. The Times has also backed a series of US government policies meant to dismantle the Russian military-industrial base to prevent it from ever again posing the superpower threat the Soviet Union had represented. Washington wanted a Saudi Arabia without rockets. The Times thought that was just dandy.

But now that the jailing of the Yukos shareholders coincides with a parliamentary and a presidential election, Russians can vote for the first time on the fundamental direction they think the slogans of the revolution should take. And despite the fact that men like Khodorkovsky and Potanin can bend the media, the political parties, the cabinet of ministers, and the parliament to their will, the combination of president and popular sentiment makes for a fresh shift of property that is on course to win both elections as democratically as Russia under Yeltsin ever managed. With a crucial difference: Putin isn’t making the election choice the phony one of himself versus the red tide, as Yeltsin tried three times, and still required a 10% fraud to win. Putin is silent, and the choice is thunderingly obvious.

According to the Times editorial, however, Putin’s silence is “unbecoming”. Not for the first time, the Times quotes Chubais -the real US ambassador to Moscow – in demanding that Putin justify Khodorkovsky’s arrest or release him. According to the Times, Chubais also threatened force, if Putin doesn’t reply. “There will be a conflict of such an extent that it will bring in the entire society, and it could turn out to be uncontrollable,” Chubais threatened. Those are fighting words for a man who no longer controls an army the way he did during Yeltsin’s time in office -and whose test run for president (in the poll of 2008) is currently drawing him voter approval of around 3.5%.

For the first time since 1991, the Russian president has called into question the policy of the oligarchs in turning over the economy’s resource assets to foreign enterprises, and taking the multi-billion dollar concession fees for themselves. No civilized country in the oil world – not even Saudi Arabia – allows foreign corporations to control the rate of their oil production and the risk of reserve depletion. If Russia must depend on oil for the short term, then Khodorkovsky was warned – in July – that neither he, nor Yukos, will decide this question of national strategy. And yet, he has continued to negotiate a sale to ChevronTexaco and ExxonMobil. As I have reported many times since July, it was the asset sale, not Khodorkovsky’s political manipulations, that crossed the Kremlin, and led to his current fate. The slow shift in the public positions of the economic policy ministers like German Gref and Victor Khristenko – toward decelerating oil output growth, increasing investment in reserve replacement, di versifying away from oil -demonstrated how difficult it was for the president to pull his own government behind his resource policy, instead of the oligarchs. Nonetheless, Putin has put up the greatest show of resistance to bad policy in the modern history of Russia. His reward has been a Moody’s rerating of sovereign debt, and the massive support of the silent Russian majority, which will get its big chance on December 7, Election Day.

But discrediting the English language as a platform of wealthy reaction, the Moscow Times reports the president is silent. That’s because the newspaper’s proprietor, like everyone else in Russia right now, can hear the message all too audibly. Power to the people! Bread for the hungry! Land for the peasants! If the Times is doing today what Duranty is accused of doing so long ago, then it will only be a matter of weeks, not decades, before we can judge for ourselves where the truth in the Russian revolution is really heading.

by John Helmer - Monday, October 27th, 2003
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Anatoly Chubais is the biggest factotum in Russia, and an oligarch of sorts, in part because he controls United Energy Systems (UES), the electricity utility on which the profit margins of several other oligarchs depends; and also because he was the government official who rigged the privatization schemes that created the oligarchs’ private wealth.

Because he is not the direct owner of UES, and governs it by an appointment of the majority shareholder, the federal government, he could in theory be dismissed with a stroke of President Vladimir Putin’s pen. His power is thus usually measured by the fact that he has surived so long. On the other hand, that power is usually qualified by the often reported public opinion that he is one of the most hated men in Russia.

Chubais’s survival in the Kremlin’s good-books is attributed by his friends to his resourcefulness as a manager. But when President Vladimir Putin began to focus this past summer on what should be done with Russia’s natural resource reserves, policymaking for the future of the country’s electricity – the generating plants, the transmission lines, the mechanism for regulating the market price of power – has begun unravelling many of Chubais’s schemes. His attempt to transfer unfinished power plants to oligarchs like aluminium producer, Oleg Deripaska, in return for little cash, and unsecured promises of capital expenditure, was aborted. Chubais’s bigger attempt to attract the oligarchs into buying up UES shares to use later in swaps for privatized regional generating companies has also been stymied, although not before the UES share price jumped more than 250% in the past year.

In a normal stock market, the share value of an electricity utility like UES is usually based on the depreciated replacement value of the generating assets it operates. But in the rigged Russian market, Chubais triggered a speculative run on the shares by proposing to allow buyers of UES now to swap them into controlling stakes of regional energy companies later, when UES is dismantled, and the regional sources of electricity will be offered for sale. Power-hungry aluminium and steel makers jumped at the opportunity to lock in control of their subsidized electricity costs for years to come. So did arbitrageurs looking for an opportunity to buy electricity assets on the cheap for profitable resale.

Then Putin began to intervene, in part to hold down electricity prices before the December parliamentary election; and in part to prevent another privatization ripoff. As the UES board struggled to secure Kremlin approval, the unbundling of UES into regional energos was postponed. The scheme for privatizing the energos was also reviewed, and under pressure, the state-controlled board of UES conceded that an open cash auction for energo shares might be preferable to Chubais’s share swap scheme. One of the steelmakers complained that it was unfair to change the rules in the middle of the game. That the game had been rigged from the start was the retort from Chubais’s critics.

At that point, Chubais announced he would be a candidate for election to the State Duma on December 7.

Normally in Russian politics, a man like Chubais would hesitate before running for a parliamentary seat, unless he were convinced that he would shortly need it for the immunity it provides to criminal prosecution. While the other oligarchs have tried to cash out, and place their cash beyond reach of the second Putin administration, Chubais hasn’t the same leverage. If he has hidden a fortune under a mountain of gold somewhere abroad, it’s peanuts to compare with the fortunes of those Chubais created for others.

The timing of Chubais’s political move suggested that he expected that he would be dismantled before UES, possibly after Putin’s reelection next March.

To announce, therefore, that he is not only running, but leading the small party called the Union of Right Forces is one thing; to follow almost immediately with the declaration that if elected, he won’t take his seat, is to forego the immunity, but call into doubt his real motive. Chubais’s candidacy is the first ever offered to Russian voters to pass judgement on his methods of privatization. It is also a vote on whether voters want electricity prices to be fixed by the oligarchs, or by the state. The outcome of both seems so obvious, it has to be wondered why Chubais would invite his fellow Russians to heap on top of the opprobrium his record has already earned, the nemesis that such a display of vanity should provoke. More than once Chubais has admitted getting away with the deceiving the International Monetary Fund; the last time, he said, was on the eve of the August 1998 financial crash. Even for voters with short-term memories, it isn’t likely Chubais will get away with persuading them to support him for his unrepentant insincerity and cynicism.

In the retiring Duma, the Union of Right Forces (SPS is the Russian acronym) holds 7% of the seats after winning 9% of the 1999 vote. Most polling organizations currently estimate that, compared to the eiection four years ago, voter sentiment has been cut in half, and that the party is struggling to make the 5% threshold for proportional representation of its party list. Chubais is ranked third on the SPS list, behind Irina Khakamada and Boris Nemtsov. If the latter duo were worried that their party organization was headed for oblivion, Chubais may have persuaded them that his candidacy was a necessary, if desperate measure.

Through its spokesman, Elena Dikun, the SPS isn’t so sure. Dikun says she doesn’t know what Chubais will be doing to campaign for the party in the next four weeks. To questions of what benefit the party thinks Chubais brings to its campaign, Dikun added that the only official comment the party will make about Chubais is that he holds the number-three slot on the ticket.

If SPS won’t say that Chubais will add votes to the ticket, Chubais isn’t so reticent. On a personal website, www.chubais.ru, he has posted the results of a poll among voters which asked whether voters would be more or less likely to vote for, or against, SPS if Chubais is on the ticket. According to the sample of 1,132, 54% responded that they would vote for SPS, whatever names led the party list. Almost 20% replied that they wouldn’t vote for SPS under any circumstances. That left 299 voters in the sample. According to Chubais, 4% said that they had been thinking of voting for SPS, but now that Chubais was running, they would not. Twenty-two percent said that Chubais’s candidacy had convinced them to vote for SPS. At best, then, the net benefit of Chubais’s candidacy to SPS may be a positive 18%.

For the Chubais boosters, this is evidence enough that negative sentiment for him in the Russian electorate is irrelevant. His campaign is needed, they say, to garner bonus votes that may tip SPS over the 5% electoral barrier. But none of the nationally recognized election pollsters believe this to be true. According to VTsIOM, SPS was polling 5.3% in August, before Chubais took his position on the party list; afterwards, it dropped to 3.6% in September. Analysts at the polling agency claim Chubais has changed almost nothing, and that SPS’s vote range remains bounded between 4% and 5%. ROMIR, another of the national pollsters, concurs. He puts the SPS vote between 5% and 6%, but is emphatic; “SPS has a very stable group of electors, and Chubais will not scare them off. But I’m not sure he will be able to add new voters.” The Public Opinion Foundation (FOM) has run voter intention surveys with Chubais’s name on the SPS list, and without.

The results show a vote range of 3% to 4%, without the addition of Chubais’s name making a difference. The Centre for Political Technologies confirms a similar finding. The SPS vote is currently running below 5%, and Chubais hasn’t lifted that, at least not yet.

There is one clue in the national polls to explain why some voters might vote for SPS because of Chubais. Most profiles of SPS voters indicate that they are predominantly female, young, and residents of Moscow or St.Petersburg. Many of them are so young, in fact, they don’t know what Chubais was doing in the mid-1990s. His record is irrelevant to these voters. They associate him with the wealth that is conspicuous where they live, and essential for their lifestyle. Call them courtesans with candles – they don’t care about high-priced electricity.

If SPS breasts the tape on election day with voters like these, then Chubais will have won a sideshow. The question of whether there is any place for him in Putin’s policy for the future of Russia’s natural resources will be decided elsewhere.

by John Helmer - Wednesday, October 22nd, 2003
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Oleg Deripaska, chief executive of Russian Aluminum (RusAI), Russia’s largest aluminum producer, and head of Basic Element, which holds his investments in other sectors of the Russian economy, has been feeling maligned for a long time now. A two-year-old lawsuit by smelting rival Mikhail Zhivilo in New York accusing Deripaska and his associates of using illegal tactics in the acquisition of his assets has been dismissed for lack of jurisdiction. But, in all likelihood, the case will either be returned to the courts on appeal or refiled. The trouble Deripaska has had with the U.S. authorities preceded the court case and appears to be persisting, despite the efforts of well-known American lawyers he has engaged to clear him. In Zurich, Deripaska has lost an appeal of an arbitration panel’s award of $90 million to Krasnoyarsk archrival Anatoly Bykov. He faces more of the same in other European jurisdictions. In Frankfurt am Main, lawyers defending Germany’s leading financial newspaper, Frankfurter Allgemeine Zeitung, from a defamation suit filed by Deripaska have turned up more than he can have bargained for.

In Russia, Deripaska can also complain that he’s been maligned. In Moscow, he is the target of a recent petition to the Kremlin by paper and pulp producers who accuse him of using a variety of hostile-takeover tactics. His acquisition of the Ingosstrakh insurance company is under investigation by the General Prosecutor’s Office. Although he married into the Yeltsin circle, he hasn’t been able to put his Kremlin connections to much use in recent months. The four keys to his profit margin in the aluminum trade – electricity, alumina, freight rates and tolling privileges – have come under serious pressure. His attempts to secure shareholding control or regional political influence over the price of energy to his smelters have been less than effective. His control of the Nikolayev alumina refinery, the supplier of roughly one-third of his smelter’s raw-material requirement, is under threat from the government in Kiev and an ambitious Ukrainian metals magnate. Rail tariffs have recently been raised by 5 percent or more, and the possibility of special discounting has shrunk. Deripaska was able to lobby Finance Minister Alexei Kudrin to drop his attempt to halt the tax concessions conferred by tolling contracts – but he lost a similar bid in Ukraine.

Through RusAl, Deripaska has made big promises – to build a new smelter in Murmansk, a new bauxite mine in Guinea, a new partnership with the Chinese Aluminum Co., a new metals complex in Australia, a new smelter in western Ukraine – but there is little yet to show for any of them.

In its section describing investment plans for the next five years, RusAI’s Web site lists four priority projects that are quite different and a good deal less costly. A Ukrainian court recently appointed an expert to take inventory of what exactly has been done at the site of the promised Pervomaiskoye smelter in order to enable it to rule on whether Deripaska has broken the terms of the agreement with the Ukrainian government that allowed him to take over the Nikolayev asset.

To the question of why his fellow oligarchs are looking to cash out at least some of their assets, but not Deripaska, the short answer may be that he has looked for a multitude of exits, only to find that the way is blocked. He can’t list RusAI shares on the London or New York Stock Exchange, because the company’s assets have yet to be consolidated into a single shareholding company. Although Deripaska recently denied that he had made a deal with Roman Abramovich to buy the latter’s half-share of RusAI, sources inside Millhouse, Abramovich’s holding company, claim that Deripaska has been making a bid but lacks the cash to pay the $3 billion sale price outright and cannot come to terms with other shareholders at Millhouse who don’t share the desire to cash out of Russia. They may be biding their time for a counter-bid aimed at Deripaska’s half-share of RusAI. Then, on Oct. 3, Deripaska turned around and declared he had bought a 25 percent stake in RusAI from Abramovich. No price or payment terms were disclose.Deripaska has never revealed the price of any of his transactions, or how they have been paid for.

Borrowing to fund asset takeovers, leverage existing assets, or even pay for production upgrades and expansions, isn’t easy for Deripaska. Although he considers that a current debt portfolio totaling $1.5 billion – including last week’s $100 million loan from Credit Suisse First Boston – is a gilt-edged indicator of his international creditworthiness, he still trails behind his fellow oligarchs in being able to obtain unsecured credits. For every dollar RusAI borrows, international banks want their hands on a metal ingot.

It was therefore noteworthy when Deripaska, on a recent visit to the southeastern Siberian city of Irkutsk, announced that he wants to add to his stakes in the region’s Bratsk smelter, a new smelter site at Taishet and the regional electrical utility, Irkutskenergo. Deripaska said that he aims to bid for Sukhoi Log, the largest unmined gold deposit in Russia.

Now, goldmining would be a first for Deripaska, and Sukhoi Log nothing if not expensive. A few days before his remark, Deripaska had lost out in the bidding for a 45 percent state shareholding in Lenzoloto, the Irkutsk regional goldminer, which has been taken over by Vladimir Potanin’s Norilsk Nickel group at a price of more than $152 million. Potanin would like the market to think that, with control of Lenzoloto, he now has the inside running for the state award of the Sukhoi Log mining license, which will go up for tender after the presidential election next March.

Deripaska’s announcement suggests that he thinks that Potanin may be politically vulnerable and open to a Kremlin challenge to knock him out of the race. Other declared bidders for Sukhoi Log include Polymetal of St. Petersburg, led by Alexander Nesis, and Khazret Sovmen, former owner of Polyus, Russia’s largest operating goldmine, which was acquired a year ago by Potanin. One thing all of them have already learned is that the tender will not be issued by Natural Resources Minister Vitaly Artyukhov until he learns whom the Kremlin wants to win. And that decision won’t be made until after the election season is behind us.

So, Deripaska’s open bid for Sukhoi Log turns out to be a wager that, among the oligarchs and Yeltsin leftovers, he has a better chance of surviving than Potanin. It’s little wonder that Deripaska thinks he’s been maligned to date.

by John Helmer - Tuesday, October 14th, 2003
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