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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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