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By John Helmer in Moscow

Russia’s new prime minister will reprice asset value in Russian mining, gold, and energy.

Madame de Montespan, the only one of French King Louis XIV’s mistresses to combine beauty and brains, used to say: “secrets add to the taste of things.” Intelligence officers don’t have to be either beautiful or smart to relish the same taste.

At the end of a surprising week in Moscow, President Vladimir Putin, and his new prime minister, Victor Zubkov, are enjoying their ability to have revealed a secret not a soul had anticipated. The best the political and investment communities have made of Wednesday’s appointment of Zubkov as prime minister is that a surprise had been anticipated — but not this one.

Zubkov is the second loyalist President Vladimir Putin has appointed as prime minister. He is also the second finance ministry man to rise to the top of the cabinet table; but a very different one from Mikhail Kasyanov, the prime minister Putin inherited from ex-President Boris Yeltsin, and then took three years to get rid of.

Kasyanov had previously served as deputy minister of finance, where he was known as “Misha Two-Percent”. Zubkov, whose name in Russian means “tooth”, has been serving as deputy minister of finance in charge of the Federal Financial Monitoring Service. He is not known to have a nickname, nor even a reputation, in public.

The way to learn the worst about a Russian official is to see what his enemies have planted in the press about him. Known as kompromat, there are just two bits of gossip about Zubkov that have surfaced since he came to Moscow in 2001.

One is that his backer in the Putin inner office is Victor Ivanov, a former KGB officer and senior figure running Putin’s personnel appointments. The other is that in the early 1990s, when Zubkov and Putin (along with Ivanov and Putin’s other senior aide, Victor Sechin) all worked together in the St.Petersburg mayor’s foreign relations department, Zubkov had helped Putin find a dacha in the Leningrad region. The dacha reportedly burned down; the tie between the two men did not.

“At least,” reported Kompromat.ru in 2004, “about Zubkov’s participation in large corruption scandals nobody has heard”. For Zubkov as head of the department on dirty money, from the medium on dirty money that is capable of making up what nobody has heard, this was quite an endorsement.

In his first press conference Thursday, speaking to the press after meeting parliamentary faction leaders at the State Duma, Zubkov demonstrated a degree of personal unassailability that is unusual in Russian politics, especially coming from a 66-year old with a career start in the farm sector. Mucking out the stables is clearly what Zubkov knows, and what he believes the Russian electorate wants to hear for the Duma elections, due in December; and the presidential election due next March.

In Greek myth, when Hercules prepared to clean the Augean stables, he was promised commssion — 10% of King Augeas’s cattle, if Hercules could do the job in a day. Augeas thought that impossible, but then reneged when Hercules managed the feat. And so Hercules killed him, and handed the kingdom, plus the cows, to Augeas’s son, Phyleus. Zubkov has positioned himself likewise. The stable he will start with, he said Thursday, is the cabinet of ministers. “The structure of the government, I believe, is not perfect and we will consider the issue of its members.”

Zubkov also hinted that if he succeeds, and if Putin and the electorate likes it, he may move on to the presidency. “If I achieve something in the post of PM, then such a possibility should not be ruled out,” he told the press.

The major Moscow investment banks will be obliged to raise the Russia risk discount, and contemplate a downward pressure on Russian share prices, if Zubkov turns out to be serious about corruption, and becomes powerful enough to do more than his predecessors about it.

Ronald Smith, strategist for Alfa Bank, which is owned by oligarch Mikhail Fridman, conceded that “if Zubkov proves to be anything more than a placeholder,” according to Alfa strategist Ronald Smith, “the most likely policy change, given his background, would be an intensified campaign on corruption and/or tax evasion. While such an outcome could prove beneficial for the economy over time, in the near term the most obvious outcomes would be quite negative for specific companies and businessmen who might fall afoul of new policies, particularly in the natural resource extraction industries (oil & gas, gold, etc).”

Renaissance Capital, whose profit this year depends in large part on fees for feeding the London market’s appetite for Russian share sales, has tried wishful thinking about Zubkov: “Our first reaction to this particular PM is that, while he is now among the front runners, we do not see him as the likely successor. More likely, we see him as another means of cementing some stability during the period of power transfer, a Prime Minister who will serve under both the current and the next President.”

UBS confirmed its belief that even if Zubkov pursues corruption as his policy priority, Putin remains in charge. “We think Zubkov’s nomination leaves all options open and keeps Putin very much in the driving seat.” UBS concedes also: “the political elite can all feel vulnerable.”

When that happens, Russia’s money makes for the door. Domestic assets are devalued by heavy borrowing and leveraging, while foreign assets are bought at premium prices as a hedge against Kremlin tax claims and nationalization. Vulnerable oligarchs who have been doing this include Vladimir Potanin (the Norilsk Nickel takeover of LionOre Mining); Victor Rashnikov (Magnitogorsk’s buy-in of Fortescue Metals Group); and Alexander Abramov (the Evraz acquisition of Oregon Steel Mills). Taking cash for initial placement offerings of shares on the London market is another Russian risk hedge, even if the share price drops immediately afterwards. Suleiman Kerimov’s Polymetal IPO in February is one example; the proposed Rusal IPO another.

Noone understands these processes better than Zubkov, and his son-in-law, Anatoly Serdyukov, who headed the federal tax agency until early this year, when he became Defence Minister.

The immediate test of what he intends to do is whom he chooses for the new cabinet over the next ten days.

Zubkov has served as a deputy to Finance Minister, Alexei Kudrin, but he wasn’t Kudrin’s choice for the job. The Kremlin overruled Kudrin to place Zubkov. Although a St. Petersburger by origin, Kudrin was a ministerial leftover from the Yeltsin period. His first protege was Anatoly Chubais, whose closeness to ex-President Yeltsin, and also to the American government, has frozen him out of the Putin circle.

If Zubkov decides to replace Kudrin, there will be a domino effect on Alrosa, Russia’s diamond miner. As Mineweb has reported, the personnel reshuffle at Alrosa, which brought Sergei Vybornov into the chief executive’s position last February, isn’t over. If Kudrin goes, then Vybornov may follow.

Change at the Finance Ministry and at Alrosa will intensify the government debate of what is to be done with Potanin and Prokhorov’s stakes in Norilsk Nickel and Polyus Gold.

Zubkov will also have the option of letting Natural Resources Minister Yury Trutnev stay, or go. Brought in from the governorship of Perm in 2004 by LUKoil, Trutnev has curried favour with several oligarchs, starting with Vagit Alekperov of LUKoil. He has obliged Gazprom in putting pressure on takeover targets held by Royal Dutch Shell and British Petroleum. He has promoted Victor Vekselberg’s schemes in South Africa, as well as Oleg Deripaska’s aluminium business.

If Trutnev goes, but Oleg Mitvol stays — Mitvol is the chief inspector of mining licences in Trutnev’s ministry — Zubkov will be sending a message to the international mining community, and especially gold and oil explorers listed on AIM: beware of reserve count and asset valuation fraud.

Then there is the largest Russian IPO of this year — Rusal, which is owned by Deripaska (66%) and Vekselberg (22%). Zubkov knows the details of the 2004 Tax Ministry report, which identified Rusal as paying a lower level of tax than any other major Russian metals producer and exporter. Zubkov also knows that the legality of Deripaska’s tax minimization schemes depends on the legal interpretation of aluminium tolling contracts, and on investigation of transfer pricing between Rusal’s smelters in Russia and the dozens of trading companies Deripaska controls offshore.

Mineweb reported recently on the attempt being made by Rusal’s bankers to secure from the Russian government a signed letter of assurance to Rusal shareholders in the London market, pledging there will be no tax shock or other claims against Rusal that might lead to devaluation, or renationalization.

While outgoing prime minister Mikhail Fradkov and industry minister Victor Khristenko may have been obliging, Zubkov’s appointment this week calls a halt. If the bankers have to start from scratch, the timing of the IPO may be postponed into the new year. This in turn will give Michael Cherney (Chernoy) and his High Court legal team more time to present the evidence they claim to show that Deripaska owes Cherney a slice of Rusal worth at least $5 billion.

The changeover in Moscow, with new public emphasis on combating corruption, tax evasion and money laundering, is also likely to encourage the British government to make the Rusal IPO a test-case of improved regulatory supervision in the London market by the Financial Services Authority (FSA) (aka the UK Listing Authority). Market sources tell Mineweb that a special team of investigators has already been appointed to study Rusal and the Cherney evidence.

Despite the wishful thinking currently being handed to clients by the Moscow brokerages and investment banks, Zubkov’s appointment should raise the Russia risk discount, and hold down Russian share prices. But note, this isn’t the way the Russian market has reacted. After the initial falloff in the RTS index of 0.58% on the afternoon of Zubkov’s nomination, yesterday the index rose by 2%. Polyus Gold is up 3% on the week so far; Norilsk Nickel up 0.5%.

UralSib Bank is one of the few Moscow investment houses to publish its scepticism, warning clients when it believes Russian assets on sale in the stock market are riskier than the consensus, or the publicity, might suggest. The house was the only one to report publicly its doubts towards the asset value of PIK, a Moscow real estate developer which went to the London stock market in June. Then, and since, PIK executives have attacked the bank’s analysts, and tried to suppress further reporting.

For UralSib, Zubkov’s appointment isn’t a case for scepticism, nor the anti-corruption campaign cause for apprehension. The new prime minister “is entirely consistent with the view that President “Putin will not only remain the dominant player during the next presidency, but that it is highly probable he will return as Russia’s fourth president…”

Stability remains “firmly intact”, argues UralSib strategist, Chris Weafer. The corruption campaign, he forecasts, is “unlikely to be far reaching. In practice, what that will probably mean is some senior ranking officials are arrested and charged…” As for policy changes, “in 2008 and most of 2009, very little.”

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