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By John Helmer, Moscow

Oleg Deripaska’s (image right) associates inside Rusal say the company is so short of cash, the chief executive has no alternative but to squeeze the President of Tajikistan, Emomali Rahmon (left), and threaten to publish details of his offshore bank accounts, unless he comes across with almost $350 million. But Rahmon, Deripaska’s partner in a highly profitable metal trading scheme between 2004 and 2008, is sitting on a military card which may yet oblige President Vladimir Putin to tell Deripaska to back off. That card is Russia’s military base and arms agreement with Tajikistan, which waits for final ratification at the moment. Coincidentally, the Russian Ministry of Defense is promising to invest an almost identical sum if Rahmon agrees to terms.

Rusal has issued two recent announcements after Swiss arbitration tribunals ruled in its favour and issued awards amounting to at least $350 million; more as the interest accumulates while Rahmon and the Tajikistan Aluminium Company (Talco; aka Tajikistan Aluminium Combine, TadAZ) delays payment. The first of these was the Swiss ruling of October 9, 2013, which Rusal reported this way. “The tribunal granted in full Hamer’s claim that TalCo was in breach of two barter agreements concluded in 2003 under which Hamer supplied TalCo with certain raw materials, and ordered TalCo to pay Hamer damages of US$112,745,501, interest of approximately US$147 million, and costs, fees and expenses of the arbitration proceedings in the amount of US$14,579,385, for a total of approximately US$275 million plus post-award interest. The tribunal also denied in full TalCo’s amended counterclaims in the amount of almost US$400 million (exclusive of interest), which were based on TalCo’s assertions that the said contracts had been procured by corruption. The tribunal rejected such allegations.”

According to the Rusal release, “Hamer Investing, Ltd. (“Hamer”) [is] a subsidiary of the Company [Rusal].” But in 2003 and 2004 Hamer was a joint venture company established between the Tajik aluminium plant – then as now the leading industrial enterprise of the country and its principal exporter – and Avaz Nazarov, an aluminium trader and entrepreneur of Tajik, Uzbek and Russian background. It was at the urging of Deripaska that Rahmon ousted Nazarov in December 2004, blocking the Hamer venture, and exchanging Nazarov’s sources of raw materials for the smelter with Rusal’s. The new scheme of profit sharing between Talco and Rusal involved agreements between Deripaska and Rahmon, and companies Rahmon used as to collect his share in the British Virgin Islands (BVI).

The two BVI companies fronting for Rahmon were CDH Investments Corporation and Talco Management Ltd.

That the Swiss arbitrators were persuaded to dismiss Talco’s claim that Rusal’s terms in the Hamer deal had been “procured by corruption” is decidedly odd. That’s because Rusal financed a 4-year litigation in the UK High Court accusing Nazarov of running his side of the Hamer-Talco operations corruptly. Nazarov counter-claimed, accusing Deripaska, Rusal, Talco and Rahmon of doing the same thing.

The core of the allegation against Rusal was that it over-priced alumina and other raw materials the Tajik smelter was obliged to pay, and underpaid for the value of the aluminium Rusal took from the smelter and sold abroad. In the aluminium business, that is called tolling. In UK law it’s a conspiracy to defraud; under US law it’s called racketeering. The profit was shared outside Tajikistan by Rusal and companies belonging to Rahmon and his cronies. Rahmon also inflated the profit by making sure the price of electricity Talco used to create its aluminium was subsidized by the Tajik state budget, including the biggest state subsidy of all – Talco’s refusal to pay for its electricity.

As they read the witness statements and evidence, and began hearing courtroom testimony, more than one High Court judge expressed the view that Rahmon’s appointees had acted fraudulently and testified falsely. The diversion of cash from the smelter and corruption were also acknowledged by independent international investigators, including the World Bank, International Monetary Fund (IMF), the US Embassy in Tajikistan, and Norwegian members of parliament pursuing the involvement of Norway’s Hydro Aluminium.

In June 2008, the IMF went as far as accusing the smelter management, and indirectly thereby Rahmon, Rusal and the Norwegians of “most worrisome financial operations [which] remain nontransparent.” The European Bank for Reconstruction and Development opted for silence when the evidence suggested its bankers had been complicit in the corrupt schemes. Justice Sir Stephen Tomlinson called the Tajik aluminium business a “charade”; the EBRD bankers financing the country, “dupes”. As for the evidence of fraud and corruption by CDH, the judge noted: “the distribution [of costs] to the plant is all debited against TadAZ, not CDH. They do not seem to contribute to that… The longer the argument about it goes on, the more interested in it I become.”

Earlier in the case proceedings, Justice Sir Thomas Morison wrote, in an opinion dated May 18, 2006, that Talco/TadAZ “are not the victims of fraud, they have been the perpetrators of it in this litigation…. [Talco] has been involved in deliberate attempts to mislead the [Arbitration] Tribunal and have committed acts which in this jurisdiction are serious crimes [forgery and attempting to gain a pecuniary advantage by fraud].” Morison also pointed his finger at Rahmon when told that the smelter lacked the funds to meet its obligations: “If the Tajiks themselves do not have the funds, then that may be because, as was suggested in argument, [CDH] has been creaming off the profits for the benefit of people whose identities are as yet unknown.”

By publishing the financial data the IMF had gathered from Talco’s books on how little it was paid in tolling fees by Rusal in 2005, 2006, 2007 and 2008, when the global aluminium price hit record highs, and comparing them to the market value of Tajikistan’s aluminium exports, the IMF revealed that about $900 million per annum was being lost offshore. Under Rusal management, the value earned by Talco from smelting aluminium dwindled from 21% of the export value in 2005 to just 17% in 2007.

According to argument by Nazarov in the High Court, “TadAZ has lost potentially around $450 million of net income before tax from proceeding under the tolling arrangements, compared to what it could have achieved under the Ansol/Hamer [Nazarov] arrangements. While TadAZ has made a total profit of around $15 million in the period from 2005 to 2007, CDH/Talco Management’s profit has been over $500 million, and those sums are diverted to the owners of CDH/Talco Management.”

A report by the World Bank in 2004 tied everything at Talco to Rahmon. “The company is not governed by a board of directors or any other type of executive committee. Instead, it is under the sole command of its director, who reports only to [the] the Tajik President at a monthly meeting.”

Talco has made limited responses to questions asked during the litigation, while the domestic media in Dushanbe have attacked Rahmon’s critics in the affair.

The High Court case ended twice – the first time when Rusal reached an out of court settlement with Nazarov in May 2007, with an unconfirmed compensation of more than $100 million and an assignment of Nazarov’s 50% stake in Hamer to Rusal; that turned Hamer into a wholly owned subsidiary. As Rahmon then went to war with Deripaska, redirecting the smelter’s business away from Rusal, Deripaska decided to counter-attack Rahmon through lodging Hamer’s claim. As one of those involved remarked, “the poacher turns gamekeeper and vice versa in the same set of proceedings.”

The second time the case ended was on November 8, 2008, when Talco, lacking Rusal’s money to keep the trial going, withdrew its claims. Here’s that story.

In its latest version of all that has transpired, Rusal says it has won a Swiss arbitration tribunal judgement against CDH for almost $72 million. It has also won a subsequent order from a BVI court enforcing the Swiss award in the jurisdiction where CDH is registered. According to Rusal, “the arbitration award relates to the supply of alumina to Tajik Aluminium Company (“Talco”), the aluminium smelter located in Tajikistan formerly known as TadAZ.” The supplier of the alumina was the Rusal subsidiary, Alumina and Bauxite Ltd. (Albaco).

The Rusal release doesn’t say exactly when Albaco shipped the alumina at the purported price to Talco, but it is near-certain this was during the tolling period between 2004 and 2008, when almost everyone else who has investigated the circumstances is convinced the transaction pricing was a corrupt bargain.

Rusal says it is determined to expose Rahmon if he doesn’t pay up now. “CDH’s continued refusal to comply with the award and BVI court order will also likely compel Albaco to take other legal actions in support of its enforcement action. This will include an application to liquidate CDH, whereupon a court-appointed liquidator will open up CDH’s books and records. Furthermore, there will be an application for discovery of bank records of CDH’s dollar-denominated transfers in the United States and elsewhere, and other similar measures. We expect these discovery actions to lead to a network of offshore entities and accounts connected with Talco.”

Whether Rusal would want to risk exposing its own part in this business, especially in the US, is uncertain. According to a company insider in Moscow, “Deripaska is determined to make TadAZ pay both awards, which is natural in the current, bad financial situation of Rusal.”

A source close to the Tajik plant says “there is an irony in Deripaska and Rusal claiming these awards on grounds they once denied were lawful when Nazarov was in the Hamer joint venture. The Swiss arbitrations exonerate Nazarov and refute what Rusal once charged against him.”

The source also calls Albaco’s pursuit of CDH in the Caribbean “blackmail. TadAz is close to bankruptcy. If you put together all the requirements for producing aluminium in Tajikistan, and oblige TadAZ to pay its electricity bill, then the smelter must be lossmaking. Even with a production cut of 30% compared to peak, the cost of rail freight to export markets has sky-rocketed. TadAZ cannot pay the Hamer award. Maybe Deripaska is thinking that Rahmon is more cashed up these days than either the smelter, or Deripaska himself. Maybe that’s why the second Rusal release issues a personal threat against the President.”

Peak production at the Tajik smelter was in 1989, under Soviet administration, when output hit 460,000 tonnes. By 2011 this was down to 278,000 tonnes. Lack of cash to pay for electricity and also natural gas required for metal processing, and highly inefficient energy consumption patterns, were identified a year ago by the World Bank and a group of Norwegians as one of the reasons for the decline in production.

Talco has been advertising that it will raise annual output above the 330,000-tonne level this year.

Industry sources in Switzerland and elsewhere say that since Deripaska’s falling-out with Rahmon over the UK court proceedings, Talco has shifted the destination for its aluminium exports from the Russian Black Sea and Baltic Sea ports to Iran, China and Turkey. Iran has its own aluminium production and did not want to import Tajik metal before; but it may be trading the metal through the Persian Gulf. “Such cargoes may be swapped into and out Iran, through the Gulf ports,” claims a London trader. “It would be hard for Rusal to arrest cargoes there, or in China.”

Trade sources do not believe that as Rusal cuts its own aluminium production inside Russia, Deripaska would agree to resuming a tolling role at Talco, and take aluminium in payment for the Hamer or CDH debt claims. “Rusal’s releases show that Deripaska’s strategy is to put pressure on Rahmon. But the President also has a relationship with the Kremlin which, unlike Deripaska’s, is military in character and strategic in importance to Russia.”

In September Grigory Karasin, Russia’s Deputy Foreign Minister, announced the Kremlin was ready to spend $200 million in a variety of payments for a 30-year extension of term for the Tajik base of Russia’s 201st Motorized Rifle Regiment, plus the Ayni airfield nearby. Karasin also added other sweeteners — preferential treatment for Tajik migrants in Russia, and abolition of export duties on fuel supplies to Tajikistan. Karasin said the benefits would start flowing once delays on the Tajik side in ratifying the new base agreement are ended. “These agreements are fully ready for use. Their entry into force will take place simultaneously with the ratification of the new agreement on Russian military base, as it was agreed between the parties.” Karasin also acknowledged that Rahmon was asking for more concessions and more money.

The lower house of the Tajik parliament voted for ratification on October 1, but the process will not be complete until the upper house votes, and Rahmon signs. According to Karasin, there are additional Tajik “wishes”, but these should not be tabled as fresh preconditions before ratification of the base agreement.

Hostility towards the Tajik bargaining had been aired publicly by Deputy Defense Minister Dmitry Rogozin in April. At the time too there were threats in the Moscow press of a halt to rail transportation for migrants between Moscow and Dushanbe. Asked this week whether Rogozin believes Rahmon is also requesting relief from Rusal’s demands as part of the military base deal, his spokesman refuses to say.

At the end of May Rahmon met with Putin in Kyrgyzstan, and Putin let it be known that Russian spending in Tajikistan was part of the base deal. Putin didn’t say how much, however. “Russia remains your main trading partner and the biggest investor in the Tajik economy,” Putin told Rahmon. “I am sure that our mutual positions will only become stronger in the future, not just in the economy but also in the humanitarian sphere: as you know, a large number of Tajik students are studying in Russia, and there are branches of Russian universities in Tajikistan.”

At their next meeting on August 1 in Moscow, Rahmon and Putin trotted out how much they were already doing for each other. According to Putin, “Russia is one of Tajikistan’s main trade and economic partners, accounting for 21 percent of the republic’s foreign trade. True, as I discussed with the President, the figures dropped a little over the January-May period. We think this is a temporary decrease and we will do everything possible to change this situation. Indeed, this was one of the reasons for the meetings today. We agreed to decide on measures to improve the situation. We have real opportunities not just for returning to, but also surpassing, our previous trade level.”

“I note that money transfers from Tajikistani citizens working in Russia play a substantial part in supporting Tajikistan’s economic development. In this respect, we discussed with Mr Rahmon our cooperation on immigration issues. We agreed to work together and take timely action to settle problems that arise in this area.”

“Russia is the biggest foreign investor in Tajikistan with accumulated investment of $1.2 billion. The Russian mobile telecommunications companies Megafon and Beeline have invested around $200 million in joint ventures in Tajikistan and now offer the country fourth-generation mobile telecommunications services using new broadband technology. We are also carrying out big projects in the energy sector. Gazprom supplies 40 percent of the oil products consumed in Tajikistan. Gazprom is currently carrying geological exploration works at promising fields there. Financing for this project in 2013 comes to $15 million.”

“We want to make more active use of the potential that cooperation at regional level between the two countries offers.”

In October a special Russian negotiating team led by Sergei Naryshkin – formerly Putin’s chief of staff, now Speaker of the State Duma — went to Dushanbe to discuss terms for adding the lease of the Ayni airfield to the base agreement. Reportedly, Russia is offering long-term military-technical assistance, including the creation of a Tajik airforce with two squadrons of Mi-24 helicopter gunships and Mi-8 military transport helicopters.

On November 6, Rahmon won reelection for his third term as president, and two days later he got a telephone call from the Russian President. Ostensibly, all Putin said was congratulations. But did Rahmon ask Putin to intervene with Rusal, and get Deripaska to call off his threats?

Sources close to both Rusal and Rahmon don’t doubt that Rahmon will do all he can to ward off the Rusal threats and find an alternative to paying Hamer and CDH the cash which the Swiss have awarded. Putin’s spokesman, Dmitry Peskov, was asked to say whether the Rusal claims have come up in Putin’s communications with Rahmon. Peskov deliberated over the question for a day, and then refused to answer.

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