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By John Helmer in Moscow

A Republic of Guinea tribunal ruled this week in Conakry that United Company Rusal, one of the largest bauxite, alumina and aluminum producers in the world, unlawfully acquired its shareholding control of the Friguia alumina refinery in the country in 2006, and should make restitution.

The judgement comes before the federal court in Nigeria rules on a parallel case, challenging Rusal’s takeover of the Aluminium Smelter Company of Nigeria (Alscon) in the same year. But before the Nigerian court decides, a report from the National Committee on Privatisation has already gone to Nigeria’s President Umaru Yar’ Adua (pictured top centre), concluding that violations of the privatisation rules and subsequent investment conditions for Alscon should lead to the revocation of Rusal’s concession in that country.

The West African decisions have come despite recent visits to both countries by Deripaska himself. He was in Nigeria in June, where he had, according to his company website, “a series of consultations with Nigerian government authorities and businessmen”. Nigerian sources claim he sought a meeting with Yar’ Adua, but was turned down. Six weeks later in early August, Deripaska was in Guinea. This time the company says he “had a series of meetings with the management of the company’s operations in Guinea and representatives of local communities.”

“Russia is back in Africa,” the Kremlin’s special emissary to the region, Senator Mikhail Margelov, declared in Khartoum, Sudan, at the start of this year. But when asked to comment on this week’s invitations to get out, a spokesman said “Margelov has no idea about this [Guinean] transaction. He knows nothing.”

The Guinean problem is not unique to the Russians, or to Rusal. Since Guinea’s 25-year ruler Lansana Conte died last December, and power was taken in an army putsch by Moussa Dadis Camara (pictured top left), government officials in Conakry have been pressing for a comprehensive review of resource concessions awarded in Conte’s time. On September 10, a government audit committee announced it would investigate the in-country operations of two international goldminers, AngloGold Ashanti and Kenor of Norway, in addition to Rusal. Rio Tinto is also facing a government challenge to its iron-ore concession in the country.

For Rusal, however, Guinea’s bauxite is a strategic link in its Russian production chain for aluminium; and this has been so since the Soviet period, before Rusal existed. Rusal’s concession to mine bauxite in Guinea was granted to Compagnie de Bauxites de Kindia (CBK) for a 25-year term, following a decision by President Conte in May 2001. Two-thirds of CBK’s bauxite is shipped to the Ukrainian alumina refinery at Nikolaev, which Deripaska took over, after a bitter contest, in 2000. Additional bauxite and alumina are produced by Rusal at a second Guinean concession, which was awarded in 2002, also by Conte, to the Alumina Company of Guinea; this operates the Friguia site. In 2006, Conte agreed to privatize the refinery in Rusal’s favour.

Camara has been talkative on the Friguia deal, claiming that Rusal paid $19 million for the asset, while it was worth $257 million. Camara is also alleging the deal was authorized by the wrong government official, and violated the requirement for parliamentary ratification. In this week’s announcements in Conakry, officials offered slightly different arithmetic, but the bottom-line remains the same. According to Habib Hann, reported to be a member of the new audit committee, Friguia was sold for $22 million, but if valued in line with the market price of alumina at the time of the asset transfer, its value should have been between $250 million and $1 billion, depending on the method of calculation used. In 2006, alumina supply was extremely short in the international market, and the spot price was over $650 per tonne. Now, three years later, cutbacks in smelter demand have driven the spot price below $330.

Rusal says it has invested about $400 million in its Guinea operations. The privately incorporated company does not release audited financial reports, and production results are missing from the public record for last year. The production capacity of the Kindia and Friguia bauxite mines is said by the company to be about 5 million tonnes per annum, or almost 30% of Rusal’s worldwide production of the mineral in the peak year for production, 2007. Most of the Guinean bauxite is exported within the Rusal company chain to Nikolaev, but no data are publicly available to show what prices the company pays for production in Guinea; for import to Ukraine; for reexport to smelters in Russia; and for export again of the aluminium metal to global markets.

Claims against Rusal for transfer pricing and tax avoidance are possible at any point along this chain. They have been discussed from time to time by the Russian parliament, and the Russian Accounting Chamber, because of Rusal’s use of tolling contracts. These provide for highly complex schemes of input and output price calculation, while preserving offshore ownership of the traded mineral and metal. Such schemes have come under official investigation also in the UK High Court, in connexion with Rusal’s takeover and operation of the Tajikistan Aluminium Plant (Talco).

If the Guinean audit committee were to open the issue of tolling and transfer pricing, in addition to the problems cited this week of privatisation and concession value, the liabilities that may be assessed would be confiscatory in size.

Friguia is reported in Rusal publications to have shipped 640,000 tonnes of alumina to Rusal smelters in 2007. The latest production results for the first half of 2009 do not single out the Guinean bauxite mines or the Friguia refinery. The company says only that its bauxite tonnage is down 36%; alumina output down 34%.
In a statement posted on the company website following the Guinea announcements this week, Rusal said it had “purchased Friguia in full compliance with Guinean legislation and we consider the plant to be our legitimate property. We have not received a formal resolution of the court. Further actions of the company will be determined in compliance with the applicable legislation upon the receipt of the court decision.”

Rusal’s confidence in court review of its operations in Guinea has proved misplaced once before — and it that case, the ruling was issued by the High Court in London. On November 24, 2003, Justice Sir Raymond Jack of the Queens Bench division of the court ruled in the case of Tekron Resources Ltd v Guinea Investment Co Ltd. Because the latter was a wholly owned affiliate of Rusal, this was the first open court trial, outside Russia, of the international business practices of Rusal. The judge also ruled on the veracity and conduct of three high-ranking Rusal executives – Alexander Bulygin, then chief executive (now a Rusal board director); Andrei Raikov, then head of Rusal’s raw materials group; and Pavel Ovchinnikov, then and now head of the alumina group.

Justice Jack ruled in favour of Tekron, a small company of consultants in Guinea, and singled out Bulygin (spelling the name Boulygine). Charging him with improper attacks on the Tekron consultants, he concluded: “It is apparent from these matters that under threat of litigation in London Rusal have done what they can to blacken the names of Tekron and its principals in Guinea. On the evidence before me, they have not only failed but have secured indirect evidence that the Government considers that Tekron have behaved properly in its relations with the government.”

The judge also singled out Raikov for the quality of his testimony to the court. “The last is nonsense,” Jack ruled, “which must throw considerable doubt on the rest.” The allegations from the Rusal side, Jack ruled, “do not readily fit the facts”. Regarding testimony from Ovchinnikov, and the absence of documentary evidence to substantiate it, the judge ruled: “For these reasons, and the reasons I have set out, I should place little weight on the relevant passages in the statements.”

Although Guinea experts had believed that Camara might reserve Rusal’s fate for himself, the move by the court and delegation of further action to the audit committee make reversing the tide now running against Rusal unusually difficult, though not impossible. Not long after Conte’s demise, and Camara’s takeover first threatened Rusal’s standing in the country, a leading African analyst in Moscow, Vadim Zaytsev of the Rosafroexpertiza consultancy, said he thought Camara was bluffing. “I seriously doubt they [the military government] will dare to change the terms of the original agreement, which was signed and ratified, as this will have serious influence on the investment climate there. Besides, they are not stupid, and know that Rusal has no money to pay. I think this that all has been done to get to a dialogue, and pressure Rusal into more investments for the ecology, water treatment facilities, and the like. Again, I doubt they will go that far [revocation of Rusal’s title], and change the agreement. There are other companies working in Guinea, too.”

If Guinea wasn’t trouble enough, in Nigeria a government source has leaked details of a report prepared for President Yar’ Adua by the National Council on Privatisation. This has been investigating alleged abuses of deals arranged during the administration of former Nigerian president, Olusegun Obasanjo. The latest report, excerpts of which appeared in the Nigerian press on August 26, has found fault with Deripaska’s and Rusal’s takeover of Alscon in 2006; and concluded there have been subsequent violations of investment, production, and infrastructure development conditions of its takeover. The report recommends the cancellation of Rusal’s concession, and open international bidding to replace it.

Court documents filed in the US, as well as in Nigeria, by the BFIG group of Los Angeles, charges that Rusal won the concession with an offer of $250 million, well under BFIG’s bid of $400 million. BFIG also claims that Rusal conditioned its payment on a series of demands that were illegal under Nigeria’s privatization law, but were granted to relieve Rusal of the obligation to pay Alscon’s debts, mostly for power; required the government to pay for dredging the river used to ship raw materials and products in and out of the plant; fixed the supply of gas to the plant at a concessional price; and allowed Rusal to export the metal free of tariffs. Altogether, it has been estimated that the value of these concessions was greater than the amount the Nigerian government agreed to accept from Rusal for the takeover. It is also unclear, according to BFIG, what money Rusal has actually paid.

Rusal denies the BFIG claims. The company says it “plans to allocate more than USD 150 million over three years to refurbish ALSCON and turn it into a state-of-the art facility. As a signatory of the UN Global Compact, we are committed to maintaining the best standards of environment and quality management. We also regularly meet with community leaders and other companies present in Akwa Ibom to jointly work out ways to improve the economic and social situation in the town of Ikot Abasi, home to ALSCON.”

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