MOSCOW (Mineweb.com)-Despite the visit this month to Moscow of a 64-person delegation of South African government and corporate officials – the largest ever to come to Russia – the outcome appears to be a cooling in mutual sentiment. One-sided lobbying by Russia’s natural resources minister, Yury allies is one of the reasons. Reluctance to challenge him on the part of his SA counterparts is another.

On the Russian side, there is unspoken frustration at the year-long campaign by President Thabo Mbeki to secure a South African seat in the expanded UN Security Council, without sufficient consensus from other UN members.

Sources in Moscow are aware that Mbeki made the admission of South Africa to a permanent seat in the UN Security Council a personal priority this year.

High-level African sources, present at the G-8 summit at Gleneagles, Scotland, in early July told Mineweb that they believed Mbeki, attending as one of several African Union observers, had asked President Vladimir Putin for Russia’s support of SA’s Security Council plan. All that Russian spokesmen would say about their conversation was that “the development of bilateral economic relations was discussed.” Regarding talk of a UN seat for SA, the Russian Foreign Ministry said they “do not have such operational information”.

Mbeki then ordered Foreign Minister Nkosazana Dlamini-Zuma, to Moscow to meet her Russian counterpart Sergei Lavrov on July 12. In no uncertain terms, she was told that Russia would not support expansion of the UN Security Council unless there were demonstrable backing from the entire UN membership, a point which Dlamini-Zuma could not demonstrate. The Russian Foreign Ministry then issued a brief communique confirming that Dlamini-Zuma had made the UN Security Council her priority. But the diplomatic language treated the SA initiative coolly.

Dlamini-Zuma returned to the same issue again, when she met Lavrov in Moscow on October 6. By then, most UN representatives had concluded that seating African states in the Security Council had been effectively stopped by US action. Why then were Mbeki and Dlamini-Zuma insistently repeating their request for Russian backing?

Lavrov’s ministry issued a new communique, acknowleding Dlamini-Zuma’s visit, and repeating that “reform of the United Nations” should be carried out “on the basis of the widest consent, and what is even better, the consensus of member states.”

There was nothing new in the Russian position, and officials at the Department of Foreign Affairs (DFA) IN Pretoria claim the Russians are “still open” on Security Council reform, adding that “the situation is changing all the time,” Dlamini-Zuma and Lavrov are reported to be personally on the best of terms.

When great powers meet, there usually is no time for senior officials to address more than a handful of priority concerns at a sitting. For several years, the South African priority in Moscow was to lift a 5% import duty penalty which South African exports to Russia were trading under, compared to rivals in South America. That penalty was finally removed in 2002.

This year, the priority has been the UN Security Council seat, and Mbeki has obliged Dlamini Zuma to expend most of her time on that, aware that other African states with Security Council ambitions were dangling the possibility of oil concessions and other inducements to Russian oil companies who have clout with the Kremlin.

Nigeria, South Africa’s leading rival for the Security Council, has clashed with Minister Lavrov over the detention in a Lagos prison for two years, without trial, of Russian seamen caught up in an oil smuggling scheme, masterminded by Nigerian officials. On the other hand, the Nigerian government recently offered an oil exploration concession to LUKoil – a name that will appear again in this story. Egypt, another candidate for a Security Council seat, has already granted LUKoil a concession.

On the South African side, sources at major mining companies express concern that South African government officials, including the new Minister of Minerals and Energy, Lindiwe Hendricks, have done too little to deal with Russian restrictions on South African mining companies investing in Russia; and perhaps too much to endorse Russian involvement in the South African mining sector.
It has been customary for the two governments to issue a detailed report on the results of their annual inter-government commission on trade and economic cooperation (ITEC). At the conclusion of the last session in Moscow in 2003, the joint communique ran for four single-spaced typed pages. In one excerpt, the two governments “undertook to encourage South African business and capital investments in the Russian economy.” There was no reference then, or since, to the most obvious restriction on South African mining investment in Russia — the statutory 49% limit on foreign control of a Russian diamond-mining venture.

A source at DFA in Pretoria claimed that the minutes of the latest round of talks in Moscow were signed, and a press conference held to discuss the results. Lasting 12 minutes, this set a speed record.

Instead, Russia’s co-chairman at ITEC, Yury Trutnev, the Minister of Natural Resources since 2003, issued a summary of his own interests as expressed at a meeting with counterpart, South Africa’s Minister of Minerals & Energy, Lindiwe Hendricks. Trutnev repeated previous promotional statements he has made on behalf of the Renova group’s plan to mine manganese in the Kalahari.

DME’s head of licensing, Jacinto Rocha, told Mineweb in August that he had issued a manganese exploration and mining licence to Pitsa ya Setshaba, Renova’s BEE partner. It is unclear, however, whether Renova, owned by Russian metals oligarch Victor Vekselberg, intends to bring significant cash into South Africa for the project, honouring its pledge to DME to bring foreign investment into the country; or else borrow funds from South African banks.

DME appears to be unaware that in recent weeks, following a spate of disclosures in the Ukrainian media and statements by Ukrainian government officials, Renova has been accused of corruption to obtain shareholding control of the Nikopol manganese processing plant in the Ukraine. Action by the Ukrainian courts has blocked Renova’s manganese investment there, at least for the time being.Following his meeting with Hendricks, Minister Trutnev also announced that he had met with a delegation from De Beers. Russian sources confirm there was such a meeting; and that it lasted for a few minutes. Neither De Beers nor Alrosa has reported publicly on the meeting, and both were surprised when Trutnev did so.

The two world leaders in diamond mining are quietly assembling a work group to consider joint exploration for diamonds in northwestern Russia. However, a significant obstacle to cooperation remains existing, as well as new Russian legislation preventing foreign diamond-miners from mining any diamonds they
discover.

Hendricks did not issue her own communique.lt appears that she failed to ask Trutnev why Russian legislation is becoming increasingly restrictive, and how South African miners could be expected to pursue exploration in Russia, if they cannot be assured of the right to mine what they find.

Trutnev has already demonstrated that he is disinclined to respond to this concern. During last year’s ITEC round in Pretoria, Trutnev was hosted at De Beers headquarters, and asked what he was willing to do to resolve a long-running dispute over the Russian refusal to transfer the mining licence for the Verkhotina project and the Grib diamond pipe in the northwestern region of Arkhangelsk. Trutnev replied that the dispute was a “commercial” one, meaning he did not intend to take any action.

De Beers’s affiliate, Archangel Diamond Corporation (ADC), discovered the pipe with its partner, Arkhangelskgeoldobycha (AGD), in 1996. But the latter then seized the development rights for itself. AGD is controlled by Vagit Alekperov, the CEO of LUKoil, one of Russia’s leading oil producers. Russian mining sources believe Alekperov promoted Trutnev to his post, replacing a minister who was more troublesome for LUKoil than Trutnev has proved to be.

Trutnev hasn’t exactly done nothing, as he implied when speaking to De Beers a year ago. A few months ago, he arranged to replace the head of the supervisory agency responsible for monitoring licence compliance, when it challenged AGD’s performance at the Verkhotina project. Alekperov then went public to defend his pet company. Trutnev’s action eliminated the danger.

According to his public statement, Trutnev claims credit for the fact that De Beers and Alrosa “have agreed upon realization of joint projects in the field of search and prospecting works in the territory of Russia and other countries.” This is false. There is negotiation, but no agreement.

Trutnev went on to claim that his ministry is “developing criteria of reference for sites of sub-soil resources as ‘strategic deposits’.” Actually, Trutnev’s ministry had been doing this for years before he arrived, and the only reason the criteria haven’t been delivered to parliament for enactment is that Russian miners and their government allies have been unable to decide how to mine the treasure themselves.

If large enough to be purportedly strategic, foreign miners will not be able to develop the deposits. In addition to all diamond deposits under the current legislation, this new measure will extend to gold deposits, such as Sukhoi Log; the Udokan copper deposit; and possibly platinum, coal, iron-ore, and other minerals as well.

US, Japanese, Chinese and other government officials have already made clear their dissatisfaction with Trutnev’s arbitrariness, particularly in the oil and gas sector. But as a leader in the hard-rock mining community, the South African government has been silent.

Although it has been one of the proponents of transparent African resource development, the Mbeki administration is well aware of Russian efforts to enter oil and mineral resource exploitation in Angola, Nigeria, Guinea, and the Democratic Republic of Congo. Why the terms of their entry should be unreciprocated by the Russian government is the question Hendricks should have raised at ITEC, but didn’t. In short, she failed to do what Russian officials expect their counterparts to do, if they are to earn reciprocity – they should state their national interest, and be serious in pursuing it.

In one of his most detailed statements on Africa this year, President Vladimir Putin had this to say, following a meeting in Moscow with UK Prime Minister Tony Blair. One of the topics discussed had been forgiveness of African state debt. Another had been human rights. Putin agreed to Blair’s position on the former. Responding to Blair’s criticism on the latter issue, Putin remarked, according to the following translation: “We all know that African countries used to have a tradition of eating their own adversaries. We do not have such a tradition or process or culture and I believe the comparison between Africa and Russia is not quite just.”

Had Putin’s attention been drawn to Alekperov’s attempt to swallow the diamond deposit he seized from ADC, or Norilsk Nickel’s part in trying to eat Gold Fields, he might have been dissuaded from employing his metaphor at the expense of Africa. In the mineral resource world, eating the adversary is a standard operating option, if not always the wisest procedure. Unless Hendricks and other SA officials demonstrate otherwise, Russians like Trutnev are bound to conclude that there is no objection in Pretoria to the Russian appetite, or their eating habits.

by John Helmer - Friday, October 21st, 2005
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MOSCOW (Mineweb.com) –Among the world’s top producers of aluminium, all are public companies regulated by the laws, securities market and anti-trust regulations, and disclosure requirements of the United States and the European Union, save one. The exception is Russian Aluminium (Rusal), which is owned by Oleg Deripaska, a young Russian.

What Deripaska allows to be known is that Rusal sells about 3 million tons of primary metal per annum for about $5 billion in revenues, and carries more than $2 billion in debt. In output volume and market value, Rusal ranks third in the global aluminium league. Alcoa of the US ranks first, with a current market capitalization of $20 billion. Alcan of Canada – which acquired Pechiney of France – ranks second with a market cap of $12 billion. Although the commodity price of aluminium has been climbing, the share price of these two companies has been falling – by roughly 30% apiece so far this year.

Rusal is privately owned by Deripaska. But when he bought out the 50% stake owned by Roman Abramovich and his friends at Millhouse, a London holding, over the past three years, the exit price (still secret) put a valuation of about $8 billion on the entire company. A year or so later, and Moscow investment bankers believe that Rusal is currently worth $10 billion, a purported gain of 25%.

How to realize this value, and enjoy it at the same time, is Deripaska’s biggest problem. How to get him to share it with Russia is the problem to which the Kremlin has been giving attention recently.

Aesop once told the fable of the man who turned his earnings into gold, and buried it. Every day he went to the spot to contemplate how rich he was. But a passing labourer spotted him, dug up the gold, and made off with it. When the owner returned and discovered his loss, he started to tear out his hair. A wise passerby told him not to despair. “When you had all that gold,” he said, “you didn’t really have it.” He advised burying a stone, and imagining it to be gold, for that would serve the same purpose. The moral of his story, Aesop thought, was that possession is nothing – without enjoyment.

Deripaska’s contemplative and recreational habits are a matter of rumour, but his financial strategy is straight out of Aesop. This was made clear by his friend, junior shareholder, and chief executive of Rusal, Alexander Bulygin. He has suggested that the best way to hang on to the gold would be to take it away from Russia, and leave a stone in its place. A few weeks ago, he told the Sunday Times of London – the city where everyone goes to bury their gold, and display their enjoyment – that Rusal is thinking of making a share flotation to foreign investors.

Exaggerating the value of the assets left behind in Russia, and minimizing their indebtedness, he claimed “we are very close to announcing that our company is fully compliant with the principles required by the stock exchanges with regard to issues such as corporate governance, transparency and accounting.”

Bulygin came closer to the truth when he added that Russian “companies are using floats to hedge against political risks. They hope foreign investors will defend them against any politically motivated tax risks.”

As show ponies go for these foreign investors, Deripaska is something of a piebald. He produces the aluminium metal in Russian smelters, but as his former spokesman, Yevgenia Harrison once admitted, most of the value (read profit) in Rusal is earned offshore. “To a very large extent,” she said, “we are processors of imported raw materials. Thus, a relatively large portion of Rusal’s value added is created outside of the Russian Federaton.”

This is done through what are known in the metals trade as tolling schemes. Tolling is a chain of contracts, according to which raw materials, such as alumina, are supplied to a smelter, which electrolyzes it into metal. This is then returned to the owner of the alumina and the trading chain. In Russia, this scheme eliminates 18% internal value-added tax and other taxes payable when the alumina enters the country, and the metal leaves it. But if the scheme is owned and secretly controlled by a single Russian owner, with the objective of avoiding tax, then, according to the letter of the law, it is illegal. The perpetrator of such a scheme could thus be vulnerable to back-tax claims, penalties, and interest.

Deripaska’s domicile and Rusal’s also have enormous tax implications because Russian law on transfer pricing and on tax residency could be interpreted and applied in such a way as find Deripaska, Rusal and Basic Element, Deripaska’s Moscow-based holding, liable for hundreds of millions, if not billions of dollars in obligations to the government. That’s what Bulygin has admitted he is afraid of.

It is possible to make a rough calculation of what Rusal avoids paying in tax through its tolling schemes by estimating the difference between the price at which Rusal aluminium is declared when it enters an import market with reliable customs statistics, like the United States; and the price it was declared at for export, when it left the shores of Russia. For the first half of 2004, for example, there was a difference of $423 per ton. Multiplying that by the 525,000 tons imported in the period to the US produces a value of $222 million. The US is not the most significant of Rusal’s export destinations, and if you were to multiply the differential by Rusal’s full export volume, you are likely to guess that the gold Deripaska is burying outside Russia may be worth about $1 billion a year.

That is a lot to gloat over, and enjoy. But it is far too much to hide from passersby. And so, a flotation in London for Rusal is only one of the two big options which Deripaska must now consider, if he is to preserve his fortune. His second option is to follow the example of his fellow oligarch Roman Abramovich, and sell Rusal to the Russian state. Selling, you should understand, is much better than having the property confiscated as the outcome of a tax and fraud claim and a federal prosecution. That has proved to be the fate of the Yukos oil company oligarch, Mikhail Khodorkovsky, and his fellow shareholders. Deripaska has been taking pains to ensure he does not follow them into exile or prison.

He has, however, acquired a residence in Belgrave Square, London, establishing himself there as England’s 6th richest man. For a time, Downing Street and the Home Office were obliged to issue Deripaska a waiver of the visa ban which had been applied by the US Government, and which, under UK visa rules, is generally applied to the same people the US blackballs. According to an Australian government official, Australia, which belongs to the US-UK intelligence-sharing network, also granted Deripaska a waiver to visit there too.

Then on October 1, Deripaska announced through a brief posting in the Financial Times that he had been granted a visa to enter the US. According to the newspaper, the restriction on Deripaska had just been raised “after the American immigration authorities lifted a long¬standing visa ban. Georgy Oganov, deputy director general of Basic Element, said yesterday US officials had not given any reasons for lifting the ban.”

Oganov should not have said this, because it implied the reasons the ban had been imposed in the first place.

Deripaska has been trying to lift this US visa ban for almost a decade, and he has employed well-known US law firms and Republican Party politicians to lobby in Washington for him. But he has never admitted there was a visa ban – until Oganov did so. This could be why for the past two weeks Oganov has refused to answer questions from Mineweb to clarify what he told the Financial Times. Oganov also ordered his deputy Eleanora Vaitsman, and everyone else in the Basic Element office in Moscow, to pretend that they were not on the receiving end of telephone-calls or emails, seeking clarification of the matter.

For if Deripaska is now free to cross the US border, he is also free to enter US legal jurisdiction to answer the charges the FBI and other investigative and law enforcement agencies have deemed credible enough to block his visa for so long. What these charges are can be found in federal US court documents stretching back for several years. Although the US courts have so far ruled that they had no jurisdiction to try the civil claims, the American press, along with the US stock market regulators, have yet to assess these charges publicly.

Just how damaging this review could be for Deripaska’s prospects of floating Rusal shares to US investors was signaled in a ruling of the federal US District Court for the District of Columbia on September 27. In that case, Deripaska’s fellow Russian oligarchs, Mikhail Fridman and Pyotr Aven, controlling shareholders of the Alfa Bank group, lost a libel suit they had waged for five years against the Center for Public Integrity, an investigative journalism group in Washington, and two journalists who had reported that Fridman and Aven had acted criminally in the acquisition of their Russian assets and fortune. The initial publication had relied on a variety of evidence, including Russian government agency documents, as well as US intelligence agents’ testimony and US government reports.

But federal judge John Bates ruled to dismiss the case without trial, and without cross-examining the documentary evidence or witnesses. In his ruling, the judge declared that, under the US constitution and decided case law, Russian businessmen like Fridman and Aven are “limited public figures for purposes of the public controversy involving corruption in post-Soviet Russia.” The very extent of Fridman’s and Aven’s effort, through media they have sought out, and public relations they have paid for, established themselves as appropriate targets for investigation, criticism, and public opinion. “Serving as the target of criticism -sometimes false — is the burden our system of laws quite consciously places on the shoulders of public figures,” the judge declared.

Now criticism is not something Deripaska tolerates. But he has also found that the best way to deflect, or inhibit criticism is not to sue for libel – he has tried that in Germany – but rather to persuade the managements of publications that Rusal can be a generous donor, sponsor, or advertiser. The effect is a demonstrable loss of editorial interest at several publications in investigating the charges against Deripaska, Rusal and their companies, which have been aired in courts around the world, or settled out of court by payments from Deripaska.

Deripaska has also tried to remove some of the reason for the criticism – the claims that have been lodged in court alleging he stole the assets currently making up Rusal’s value, or defrauded his partners on trading and import-export contracts. A few days ago, the Sunday Times began reporting the most recent case, currently before the High Court in London. “According to court documents seen by the Sunday Times, Ansol [the plaintiff] alleges that Deripaska unlawfully broke the terms of the joint venture by personally brokering a new deal with the president of Tajikistan in which Rusal was granted complete control of the lucrative smelter [in Tajikistan].” Stealing assets is not a new charge Deripaska, Bulygin, and Rusal have faced, and which they consistently deny. But they have settled the other claims, and this is the first time the charges may be tried in an English court.

The Sunday Times went further, reporting the counter-claim in the court documents which contains “serious allegations, including details of a plot by Deripaska’s office to kidnap Nazarov [the smelter’s former supplier and investor].” According to the initially talkative Oganov, “we want to develop our involvement in Tajikistan…Our lawyers are looking at the allegations in the counterclaim. It will take some time but it is a matter for the court.”

Another misspeak by Deripaska’s spokesman, for the London judge has already intimated that he has grave doubts about Rusal’s veracity. According to a court transcript of proceedings in July, Justice William Blackburne said that “on the face of it [Rusal] is as involved in all of this as is Ansol.” That being the case, he surmised, “Rusal is at the back of this and it is the pot calling the kettle black.”

Is Deripaska ready to invite the readers of a Rusal prospectus to put on Blackburne’s judicial wig, and decide whether to put their money in a black pot?

For any man to put his reputation on trial in a court of law, or in the stock market, there is always the risk of adding to his notoriety, and thus, win or lose on the legal issues, to reinforce the impression that he is the very bad man he has been made out, so wrongly, to be. After all, it is not the exoneration, or esteem, of the man in the street, or the reader of newspapers, that an oligarch is seeking when he goes to court. His target is a bankers’ head of risk, the chairman of the credit committee, the insurer of officers and directors’ liability, the independent auditor, and the legal drafter of his next prospectus for an unsecured Eurobond or American Depositary Share. That’s a small, sophisticated audience, who know the unprintable truth. They are not greatly influenced by guilty or innocent verdicts in libel cases.

Deripaska’s men can make mistakes as bad the one Aesop warned of , in the case of the man who stared too hard at the gold he had hidden. Entering the High Court in an attempt to launder the takeover of the Tajikistan aluminium smelter may be recognized as one. Instructing his spokesman to announce his US visa may be another. Both are a funny way of preparing investor sentiment for a Rusal IPO.

But there is an alternative, and it is plain that Deripaska has begun pursuing it.

A direct sale to the Kremlin – I mean the Russian state – is more straightforward to accomplish than selling an IPO to foreign investors. For one thing, there are no international regulations, no disclosure requirements, no accounting rules, no transparency required. The state buyer is also in a position to agree relatively easily to the asking price, if international lenders like Citigroup, BNP Paribas, Morgan Stanley, and so on, are willing to put up the loan money. Securing multi-billion dollar loans for a deal like this has already proved swift and uncomplicated for the banks when the state-owned oil company Rosneft recently took over Yukos; and when Gazprom proposed buying Abramovich and the Millhouse holding out of Sibneft. You might say that so long as President Vladimir Putin appears to be pledging the full value of the state’s credit, and commodity prices can be expected to remain high enough for the payback period, then the banks are only to happy to open their ATMs.

What has yet to happen, however, is that the Kremlin will decide to apply their model of state interest beyond the oil and gas sector of the economy to the metals. That, too, is what Deripaska has had reason to be afraid of, at least until now, not least of all because he is just one of two proprietors of aluminium in Russia; and it might seem to a commonwealth-minded policymaker that everyone would be better off if they were consolidated under control that was invulnerable to offshore supply manipulation, paid taxes, and complied with the law.

Kremlin officials have also noted that Deripaska has appeared to have political ambitions for himself, regionally perhaps to start with, and then perhaps nationally. Then he tried to sell two of his aluminium finishing plants to Alcoa – a deal that offended the national interest lobby in the government for months, until Deripaska found the way, and the means, to persuade officials that they could share in the transaction, and in the offtake of metal, once Alcoa took over producing it.

The cool sentiment towards Deripaska on the part of Putin’s men has also ensured that he was barred from several transactions which he tried to take over on his terms – hydro-electricity generation and heavy-machine building were two in which he has recently failed.

But that does not mean that Deripaska does not have a deal to offer for selling Rusal that would be difficult to refuse – more difficult, that is, for Russian officials than for foreign investors.

by John Helmer - Friday, October 14th, 2005
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Sukhoi Log (in Russian the name means “Dry Gulch”) is no longer an asset in which Kremlin and other government officials see value in mining. Value for themselves, that is.

Russia’s largest unmined gold deposit, and the second largest unmined deposit in the world, Sukhoi Log is located in remote forests northeast of Lake Baikal, in Irkutsk region. The nearest habitation is the old miners’ settlement of Bodaibo, a 30-minute helicopter ride away. Equally far away are electricity, roads, and fuel.

Containing at least 33 million troy ounces of gold, distributed awkwardly underground, there is little that is not already well-known to international goldminers about the deposit. This is because it was the principal asset of the now defunct Sukhoi Log Mining Company (SLMC), which in turn was a 50/50 venture of the Australian junior, Star Mining, also defunct, and the local alluvial mining association, Lenzoloto (“Lena [River] Gold”).

At a gold price of $475/oz, Sukhoi Log’s reserves are worth almost $16 billion. But if the gold price slips below $300, for those who have studied the project carefully, the mine’s profitability begins to look chancy.

The Star group invested more than A$50 million in prospecting, drilling, and preparing a feasibility study of the Sukhoi Log project between 1993 and 1997. Having engaged SRK and other consultants, Star reported on the deposit to several stock exchanges, investors, potential mining partners, and lenders, such as Standard Bank. Star also loaned Lenzoloto US$5 million.

But in 1997 Lenzoloto backed the revocation of the mining licence which it had held in partnership with Star through the SLMC. Lenzoloto then defaulted on the Star loan, which has never been repaid. Star defaulted in turn on financing it had received from Standard Bank. Star’s shareholding in Lenzoloto was subsequently diluted for the reason, claimed by Russians involved, that Star had not met investment targets in the project. At the time, Star was partnered by JCI of Johannesburg, when it was run by Bill Nairn, now of Anglo American.

The government official who arranged Star’s exit was Boris Yatskevich. At the time he was both deputy minister — later minister – of the federal ministry of natural resources, and chairman of the board of directors of Lenzoloto. After he had evicted Star, Yatskevich awarded a temporary exploration licence to Barrick Gold, enabling the big Canadian to drill its own holes, mapping the deposit and estimating the grade. The drill-core samples which Star had obtained were shipped to the SRK consultancy in Johannesburg, where they were assessed for both their gold and platinum value.

Having drawn what value he could from Star, Yatskevich’s action devalued Star’s feasibility study, and opened up new possibilities for, and with, Barrick. However, before he was fired for reasons never disclosed by the incoming President Vladimir Putin, Barrick had turned on Yatskevich, publicly accusing him of “favouritism”. By the middle of 2000, there was no-one in charge at the federal ministry who stood to benefit from the award of the Sukhoi Log licence. Yatskevich’s fate was a signal that there was much at risk in awarding the licence to anyone at all.

For five years, the Sukhoi Log licence remained in limbo, along with the gold price, and Yatskevich was forgotten. Then in May 2004, Putin appointed Yury Trutnev, a wealthy entrepreneur who had served as governor of the central Russian region of Perm. Presidents appoint, but others promote, and also pay. In Trutnev’s case, he was lifted from obscurity by LUKoil, one of the most powerful of Russia’s commercial oil companies, and its dominant shareholder, Vagit Alekperov. His interest and financial clout overwhelmed an alternative candidate proposed by Putin’s personal advisor on mining policy, Vladimir Litvinenko.

Litvinenko is Rector of the St Petersburg Mining Institute. As an academic, Litvinenko supervised Putin’s postgraduate study of natural resource policy. He has been called upon to advise ever since. These days, as Putin moves towards the end of his term in 2008, his subordinates compete for the cash to tide them over the succession. Litvinenko may have Putin’s ear, but he does not have Alekperov’s cash. Sukhoi Log, on whose future Litvinenko has a clear opinion, contains future gold, but does not produce current cash. Litvinenko’s opinion, therefore, has been ignored, while Trutnev sought to exercise whatever decision his constituents wanted, and his ministerial authority allowed him to make.

Within days of his appointment in 2004, Vedomosti, a Moscow newspaper then part-owned by Norilsk Nickel controlling shareholder, Vladimir Potanin, reported that tender conditions were being finalized for Sukhoi Log that would bar foreign-controlled goldminers from competing for the property. This was an obvious sop for Norilsk Nickel to win the bidding. Other contenders, such as Polymetal of St Petersburg, qualified on the national criterion, but lacked the cash to bid and then develop the project. Still others, like Highland Gold, were foreign-listed and tied to foreign miners.

Among other conditions of the proposed auction for Sukhoi Log, the newspaper reported that the winner would be obliged within four years to produce not less than 10 metric tons (320,150 oz) of gold, and in three further years to ramp production up to 25 tons per annum (804,000 oz).

This upped the cash requirement for first-stage development of the mine. Total investment obligations in the project were estimated at between $800 million and $1.5 billion, according to the newspaper report. Star had calculated similar numbers eight years earlier, proposing a mining plan that would have concentrated the initial pit excavation at the site of the highest-grade ore, and used the proceeds to move across the vast tract of the deposit to the lower-grade ore bodies, keeping the initial costs down. One of the biggest up-front costs, however, remained the infrastructure of power and roads, which the site lacks.

A compensation payment was reported to be included in the tender conditions. This purported to indemnify costs of development already incurred by Lenzoloto. In fact, it had been Star, which had done that work, not Lenzoloto, which is primarily an alluvial operator. This proviso was ostensibly also a payback to Norilsk Nickel itself, which had acquired Lenzoloto in 2003 – or to any other beneficiary Norilsk Nickel and Lenzoloto had in mind. Neither Norilsk Nickel, nor Lenzoloto had any intention of compensating Star.

Vedomosti‘s press leak came from Trutnev’s new team at the Ministry of Natural Resources in Moscow, where he had evicted as many officials, cooks, and drivers as he deemed to be potentially disloyal, or who stood in the way of the patronage he intended to award. That produced disgruntlement, and it was therefore no surprise when officials at the Ministry’s licensing division refused to confirm what they were intending to do with Sukhoi Log.

For several years there had also been serious differences between this Ministry, the federal Ministry of Economic Development and Trade, and the regional government of Irkutsk over the terms of the Sukhoi Log tender. The latest press leak suggested that Trutnev was trying to force an award in Norilsk Nickel’s direction, but could not quite pull it off.

Litvinenko, for example, hinted that he did not favour Norilsk Nickel, so long as Potanin and partner Mikhail Prokhorov controlled the shareholding. Litvinenko had told Mineweb that Norilsk Nickel’s shareholding should be restructured, and a controlling “golden share” vested in the government. He was silent on how he thought to do this. The mechanism was probably a back-tax or fraud claim against Norilsk Nickel, repayable in equity and assets, along the lines of the claim the Kremlin had pursued against the Yukos oil company and its principal shareholders.

Litvinenko also told Mineweb that, since Sukhoi Log had initially been discovered during the Soviet period, it was a state asset from which foreign miners should be excluded, since they had contributed nothing to find or prove it. Litvinenko was dismissive of Star’s role in the 1990s.

A senior Irkutsk region official in charge of mineral resources suggested that the compensation provision in the tender terms was to be divvied up with the governor and his men. “Currently, the volume of the compensation is uncertain, but it is written down in the project [terms]”, he said.

In Russian licensing practice, the region where a mineral resource is located must agree with two federal government ministries, the Ministry of Natural Resources and the Ministry of Economic Development and Trade, before a tender can be officially issued, and bidding commence. Try though Trutnev might, with encouragement from the Irkutsk governor, the Ministry of Economic Development was reluctant. And behind them all, Kremlin officials were reviewing what reward they might draw from the process if they used their power to select the winner.

The “compensation” payout was far too little for them, not least because there were too many people already standing in line for it. Asked if the compensation were proposed as a fixed amount, or as a percentage of the winning bid, the Irkutsk official told Mineweb “there are too many ways to calculate, so I don’t think I can tell you now how it will be counted.” He also added that “the amount should be not more than the winner will pay for its license.” He indicated that in the draft terms agreed by the Irkutsk regional government, the starting bid price for the license would be Rb960 million (US$33 million).

Some of those who did not stand to share in the payout complained publicly. A senior official in the Ministry of Economic Development and Trade told Mineweb that his ministry has not agreed to compensation for past works at Sukhoi Log. “Currently this question is under review,” the source said. “The decision will be made by the end of the May, hopefully. Currently, we cannot announce the Ministry’s position for that question.”

A few days later, in June of 2004, Trutnev made his first public move. If the Irkutsk governor had been modest in arranging a share of a relatively low auction price, Trutnev was more ambitious. He went public, critizing the Irkutsk tender proposal for setting too low a reserve of between $10 million and $15 million in rouble equivalent. “Preliminary calculations show the lowest starting price at the auction is unlikely to be less than $150 million,” Trutnev announced.

He then proposed to change the licensing law, so as to favour the one bidder with enough cash to bid almost immediately, Norilsk Nickel. At the time, government and miners agreed, Russian law required six months between the official announcement of a tender for a mining licence award and the award itself. Accordingly, it was thought in the Russian mining community that the award of the project could not be effected until 2005. But Vladimir Sklyarov, head of the Irkutsk regional department of natural resources, told Mineweb that the six-month waiting period could be shortened to 45 days by an amendment of the law. “If the changes will be applied in July-August and results of tenders will be given not within six months but within 45 days,” Sklyarov said, “we will be able to manage the tender even this year.”

It was a clever move, but the Irkutsk men had not lined up all their ducks in Moscow. The Committee on Natural Resources of the State Duma, which has jurisdiction over mining legislation and must approve such proposed amendments before they can go to a vote in parliament, had not seen the Sukhoi Log speedup coming.. Anatoly Fedorenko, deputy chief of the committee staff, told Mineweb: “maybe it exists as a project in the Ministry of Natural Resources. But it has not come to us yet.” According to Fedorenko, his committee had been reviewing an amendment to simplify licensing procedures, and eliminate the role of the regional governments in setting tender terms. Proposed by Trutnev’s ministry, this amendment was naturally opposed by the regional governors. “There is nothing about changing the timing of tenders,” Fedorenko said. But he conceded that the timing issue could still come up. ” It depends on volume of lobbying from all sides, and the work of Duma.”

Trutnev showed how responsive he was to the lobbying when he issued a statement in July of 2004: “we cannot commission a lot of large deposits for this simple reason, that, under the current law, from the date of the announcement of tender conditions to the award, it is necessary to wait about one half-year…We want to reduce these terms to 45 days.fThere is an]other problem – the interaction between regions and the federal authority.”

But Trutnev also conceded that not everyone was agreed, and that he needed more time to persuade them. He therefore acknowledged that his proposed amendments to shorten the tender period and reduce regional involvement in mine licence awards could not be finalized by the government before “the end of this year”. Trutnev’s spokesman, Nadezhda Kleymenova, confirmed the ministry view that “the earliest realistic time for the [amended] law to start working is spring 2005.”

The timing in mid-2004 was particularly difficult for Norilsk Nickel. Although not admitted until later, it was then that Kremlin officials were reviewing the activities of Norilsk Nickel shareholders, Potanin and Prokhorov. In the forefront of the review was their acquisition of a 20-percent stake in South African miner Gold Fields on March 29 for $1.16 billion; and a bid that followed by the German firm Siemens to take a controlling stake in Potanin’s heavy engineering firm, Siloviye Mashiny [“Power Machines”]. Kremlin officials told Potanin they did not approve either, and for months Potanin was not sure how things would turn out – for his assets, or himself.

In time, Siemens was not allowed to make its takeover bid, and the state-controlled utility, Unified Energy Systems, took its place. In parallel, Kremlin officials were putting two even more valuable state takeovers in place — the takeover of the Yukos oil company by Rosneft for $9 billion, and the takeover of Sibneft by Gazprom for $13 billion.

The model for these takeovers is simple. It converts the bureaucratic power to regulate commercially owned assets into personal stakes in the current and future cashflow of state controlled assets, with commissions demanded, and paid up front for the deal arranging.

For Norilsk Nickel to win Sukhoi Log, Potanin’s and Prokhorov’s bid would also have to be approved by the Kremlin. Norilsk Nickel spokesman Elena Sherbinina has said she has no information on when the company’s management believes the Sukhoi Log tender will be issued. From this it can be understood that Norilsk Nickel, and its gold spinoff Polyus, do not have Kremlin support for the acquisition. Without that, Trutnev can do and say whatever he likes – he is impotent to make the licence award.

For Polymetal, the St Petersburg-based goldminer which has been Norilsk Nickel’s main rival for the project, the bidding is altogether too costly, and the outcome too uncertain. Polymetal is now for sale. But if Barrick and Anglo Gold Ashanti, two of the contending buyers, were to acquire Polymetal, Trutnev and Litvinenko are likely to rule them out of contention for Sukhoi Log, albeit for different reasons.

Just how powerless Trutnev is was evident from a statement made by an erstwwhiie subordinate this past March. Anatoly Ledovskikh, head of the Federal Agency on Sub-Soil Resources (Rosnedr), told Mineweb that the auction of the mining licence for Sukhoi Log will not be held this year.

Sources in his agency told Mineweb that although, bureaucratically Rosnedr is a part of Trutnev’s ministry, Ledovskikh has autonomous powers, and in this matter he was not acting as Trutnev’s subordinate. Trutnev’s spokesman, Rinat Gizatullin, was under orders from Trutnev not to respond to Mineweb questions.

The announcement from Ledovskikh indicated, not so much that Trutnev had had a change of mind regarding the future he has wanted for Sukhoi Log; but rather that, despite his ministerial rank, he lacked the power to overrule what others think best for the Russian gold sector. The move by Ledovskikh also indicated that it was higher authority in the Kremlin, which is now refusing to agree to hand the deposit over to anyone, least of all to Potanin and Prokhorov. At least not this year.

Several days ago, a reporter from Reuters was told to repeat the message. Dutifully, she claimed that “a source close to the Kremlin” had said that “officials in Putin’s office are focusing increasingly on projects linked to the 2007 parliamentary and the 2008 presidential polls – mainly in the oil, media and telecoms sectors. The Kremlin has concentrated on a number of projects that cannot be left unfinished before the election. They do not have time for other things.”

The literal and the commercial meaning of what was said are almost identical, though unprintable, with one qualification. In the sale of his stake in Power Machines, Potanin demonstrated the willingness to share his profit, and pay the price required for Kremlin approval to the buyer designated by Kremlin officials. That he and Prokhorov (gold is more Prokhorov’s line of business in their partnership) have not succeeded with Sukhoi Log, as Trutnev and the Irkutsk government wished for them, suggests that the real obstacle is the reluctance of Kremlin officials to agree on the price and conditions of the deal, and the future structure of Norilsk Nickel and Polyus.

If the obstacle were any lower in the Russian government, the deal would already have been done. But at the Ministry of Economic Development this week, the press spokesman replied to Mineweb‘s questions about the future of Sukhoi Log, saying: “we have no reply to your questions. We delivered your questions to the office of [Deputy Minister] Andrei Sharonov, who should be in charge of mineral sector decisions and business, but we received no reply.” He conceded that the decision on the Sukhoi Log licence is being taken elsewhere.

Litvinenko’s influence with Putin has been ebbing, and he has nothing to gain from making public his disagreements with Trutnev. He and Trutnev are both silent on the question of Sukhoi Log. The parliamentary Committee on Natural Resources declined to respond to the same questions for want of anything to add.

Valery Braiko, a veteran goldminer himself and head of the Russian Union of Goldminers, concedes the obvious: “The delay was expected. We are already not waiting with impatience, and if the question will wait for review until the next government [2009], then the delay could be even further. It is really difficult to identify the background for all of this, so I prefer not to form any hypotheses.”

Braiko is being understandably cautious. For the time being, there is no telling what further mining assets will be restructured for the benefit of state officials in the course of the Putin succession.

Silent though Trutnev himself has become on the subject of Sukhoi Log, his talkativeness on other mining prospects indicates how far afield his interests have ranged. Avoiding once again the questions of Mineweb, Trutnev authorized the text of the following communique to be issued, following his meetings last week with South African minister of minerals and energy, Lindiwe Hendricks.

“On October 5th the Minister of Natural Resources of the Russian Federation Yury Trutnev has held a working meeting with the Minister of Minerals and Energy of the Republic of South Africa, L[indiwe]Hendricks. During [the] meeting there have been spelled out directions of cooperation between Russia and the Republic of South Africa in the field of use of mineral resources. They include, first of all, training of professional geological staff, realization of joint projects on extraction and processing of nonferrous metals, and also an exchange of technologies. Yury Trutnev has supported active development of these directions of cooperation.

The [Russian] Minister of Natural Resources also has emphasized that interaction within the limits of the mixed Intergovernmental committee on trade and economic cooperation between the Russian Federation and the Republic of South Africa [known in Pretoria as ITEC] has allowed to realize successfully projects on investigation, extraction and processing of manganese ores in the Kalahari Manganese Field.”

This last reference is Trutnev’s endorsement of a project by the Renova company, a US-registered holding of Russian metals oligarch Victor Vekselberg. Trutnev has promoted Vekselberg’s bidding at every opportunity, acting as Renova’s lobbyist in South African to ensure that Hendricks’ ministry would issue manganese exploration and mining licences to Renova’s black empowerment partner, Pitsa ya Setshaba.

Trutnev was over-enthusiastic in his communique. The licences were issued in July, but to date there has been little exploration, and no extraction or processing. Of course, Trutnev’s reference is a reminder to Hendricks to keep up the good work.

If Hendricks were aware of the Sukhoi Log saga, there is no sign that she mentioned it to Trutnev as of interest to her constituents, such as Anglo Gold Ashanti, Gold Fields, Harmony Gold, or JCI. Her subordinates at the Department of Minerals and Energy (DME) are well aware that Trutnev has been promoting Russian entry into South African mining, at the same time as he backs the exclusion of South African mining companies from the bidding for Sukhoi Log.

The DME officials qualify their inaction on the matter by telling Mineweb that South African goldminers have not requested them to seek reciprocal access to mineral deposits from Trutnev on parity with Renova. If, however, they have been exchanging technologies with their Russian counterparts, as Trutnev’s communique suggests, then there could be another, technological explanation.

by John Helmer - Tuesday, October 11th, 2005
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BRITISH VIRGIN ISLANDS – Roman Abramovich, Russia’s and England’s richest man, quietly lost a court case in the British Virgin Islands (BVI) last week. But the sound of the judge’s ruling is about to toll right round the world, For the first time in one of the most successful careers in the world of what Karl Marx once called primitive capital accumulation, Abramovich is facing a court order, outside Russia, to explain how he and his oil companies seized control of a Russian oilfield the owner has accused him of stealing.

At stake in court is a group of oilfields in Khanty-Mansiisk known as Priobskoye, worth about $4 billion. The value of the theft, allegedly masterminded by Abramovich two years ago, which the court has said it will now adjudicate, is about $2 billion.

Before the court will rule on the evidence, however, and most embarrassing and serious for Abramovich personally, he has been ordered to reveal where he has hidden the proceeds – along with every asset he owns worth more than $1 million.

Until now, Abramovich has been able to evade all claims of fraud and other illegalities alleged against
Millhouse, his UK-based asset holding company, Sibneft, the oil company that serves as his principal cash cow, or the myriad of associated companies registered in tax havens across the globe. Abramovich’s spokesman John Mann publicly claimed this month, in a remark to an English newspaper, that “any attempt to drag Mr. Abramovich into litigation would be misguided, since he is not on Sibneft’s board and had no role in its dealings with Sibir.”

Sibir Energy Pic, an oil producer listed on the Alternative Investment Market (AIM) in London, has already filed charges of massive fraud against the Abramovich group in Russian courts. These are proceeding, although Abramovich has been winning on his home ground. Sibir’s financial statement for 2004 indicates that, minus the benefit of the Priobskoye oilfield, it had revenues of ” about $320 million, earning a pre-tax profit of about $40 million.

Sibir is principally owned by Chalva Tschigirinsky, a Moscow entrepreneur. The Priobskoye oilfield is a vital asset in a partnership which Tschigirinsky has with the Mosdcow city government and the Moscow oil refinery to create a vertically integrated structure supplying the city with petroleum products refined from its own crude oil. Sibir is accusing Abramovich and his companies of fraudulently diluting, and converting its 50% stake in Priobskoye asset to less than 1%.

In August 2002, in a fierce battle between Abramovich, D Tschigirinsky and Moscow Mayor Yuri Luzhkov, Abramovich’s Sibneft tried, but failed to take control of the refinery. For a time Sibneft cut off part of its crude oil supply to the refinery. Abramovich has personally made no secret that his subsequent takeover of Sibir’s stake in Priovskoye was, as he personally told Luzhkov, was retaliation for losing the refinery battle.

The High Court of the British Virgin Islands has taken jurisdiction over Sibir’s claim against the Russian oligarch, because, in his effort to spirit the asset out of Russian control, Abramovich used several BVI companies he secretly controls. They are listed in the court order as Gregory Trading, Richard Enterprises, Shaw Invest & Finance, and Carroll Trading. All are said to be located at the same address: Trident Chambers, Wickhams Cay, Road Town in Tortola. The court order has appointed an independent receiver to take over the shares of three of the BVI companies that are a part of the fraud claim. The other companies, including entities registered in Cyprus and Panama, as well as Abramovich himself, have been ordered not to make any move to shift the shares outside the BVI court’s jurisdiction, or the control of the companies that presently hold them. The proceeds from oil sales currently under way from the oilfield have also been frozen in place.

Details of Sibir’s claim in the BVI court, and Abramovich’s lawyers reply are still under court seal. What has already been publicly disclosed by both sides is that Sibir and Sibneft were equal stakeholders in a joint venture called Sibneft Yugra to develop the Priobskoye area. Sibneft was to fund the development, and Sibir and its Russian operating company Yugraneft, were to repay Sibneft, and then share the proceeds of oil sales equally. However, according to Sibir, Abramovich, his associate David Davidovich, and their subordinates secretly converted Sibir’s and Yugraneft’s stakes into holdings of the BVI companies and others, for Abramovich’s benefit.

Speaking for Abramovich, Mann has claimed that “everything that Sibir has done related to Sibneft Yugra has been within the framework of a set of agreements between our shareholders and their shareholders.” Sibir’s CEO Henry Cameron is reported in a Moscow newspaper as saying this is “all nonsense. We would like them to disclose to us what those agreements are.”

In order to rule on Abramovich’s defence, Judge Charles has ordered the Abramovich companies to produce these agreements in court. The court order also instructs the companies to reveal “when, from whom and for what consideration it acquired the interest in the share capital of Sibneft-Yugra presently registered in its name”. In addition, the companies have also been ordered to hand over their banking details. Although Sibneft makes its financial accounts public, the others are not. If forced to comply with the BVI court, the elaborate system through which Abramovich directs billions of dollars of oil revenues will be exposed for the first time. The evidence may then be used by UK authorities in London to investigate whether the money-laundering statutes have been violated by Abramovich’s high-profile spending in Britain. “We have not acted in any way illegally,” Mann has also claimed in a London newspaper interview. “All the court cases so far have confirmed that.” He was referring to the courts of the Khanty-Mansiisk region and the Moscow Arbitration Court. The decisions, which have gone both ways, are still pending on appeal.

In her ruling on Sibir’s claim No. 174/05, issued last Wednesday, and obtained from the court record in Tortola late Friday, Judge Indra Charles requires Abramovich to file an affidavit “stating the value, location and details of all his assets exceeding US$1 million in value wheresoever situated and whether in…his own name or not and whether solely or jointly owned, giving the value, location and details of all such assets.” The judge has set a deadline of July 22 to comply. If he fails, Abramovich and his companies face serious contempt of court claims, which can be enforced in England.

According to the court order in BVI, Abramovich has two personal UK addresses: Flat 2, 39 Lowndes Square, London SW1, and the Fyning Hill Estate, Rogate, Petersfield, Hampshire. The judge has given Abramovich until July 22 to hand over the information, or face contempt of court penalties. The safe haven Abramovich apparently thought he was acquiring from the long hand of Russian law turns out to be vulnerably to legal action in the British legal system.

The Sibir charge that Abramovich is a fraudster is not the first of its kind against Abramovich. In September 2003, Abramovich had been behind a transaction in which a company he secretly controlled sold a gold deposit called Maiskoye to Highland Gold, a London goldminer also controlled by men close to Abramovich, on terms that had been financially sweetened by the Chukotka regional administration, which Abramovich headed as governor. At the time, Abramovich’s spokesman Mann claimed that the seller of Maiskoye “is not connected in any way whatsoever with Abramovich”. Subsequent admissions by executives of Highland Gold revealed that Abramovich was the seller of Maiskoye. Russian and UK officials reportedly examined the charges in 2004, but took no action.

by John Helmer - Sunday, July 17th, 2005
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By John Helmer

Richard Cheney, the outgoing vice-president of the United States, is the modern version of Mime, second in command of the Niebelungs, the bad dwarfs of the mythical German underworld. It was Mime who forges a magical helmet to give his brother Alberich, the chief dwarf Niebelung, the power to change into anything he desires.

You don’t have to subscribe to pagan witchcraft; be a fan of Adolph Hitler; or enjoy Richard Wagner’s Ring cycle of operas, to know how badly the Niebelungs turn out, their thievery and thuggery bringing on the fiery destruction of themselves, and the gods who patronize them. But that’s only on stage. Having launched two wars the US is now losing in Afghanistan and Iraq, Cheney intends to launch the third, and most destructive of all, the war against Iran. To divert Americans from opposing this folly, Cheney is now denouncing Russia for the very disruption of global oil supply which Cheney and his Israeli friends intend to unleash themselves – in less than a year’s time.
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by John Helmer - Monday, May 30th, 2005
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By John Helmer in Moscow

The English comedian, and co-founder of the Goons, Spike Milligan, once said that Americans are the new Germans.

He wasn’t exactly joking, but he was being selective. Not every American, he meant, was susceptible to the type of fascism that everyone who has ever been jack-booted by the Germans recognizes. But all too many are, the English jokester thought.

In these days of Russia’s remembrance of the 60-year old victory over Hitler’s Germans, there is one American who, if not cognizant of Milligan’s warning, might have been sensitive to current perceptions in Russia. But Condoleezza Rice, the US Secretary of State, who visited Moscow ahead of President George Bush’s attendance at the Victory Day ceremony, was having trouble with the difference between “da” and “nyet” in one of her interviews. It’s unsurprising, therefore, that she mightn’t be able to hear that what she was saying sounded to Russian ears not at all unlike what Hitler had thought best for Russia, before he was driven back into his bunker.
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by John Helmer - Tuesday, May 10th, 2005
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MOSCOW (Mineweb.com) – For at least a few hours on Monday, Harmony Gold’s Bernard Swanepoel knew more about Norilsk Nickel’s plan to spin off its gold assets in an offshore placement than Norilsk Nickel itself.

“Harmony wishes to advise”, a company announcement declared in Johannesburg, “that it has consented to the transfer by Norilsk Nickel of all its snares in the issued share capital of Gold Fields to an indirect wholly-owned subsidiary of Norilsk (“Subco”) and to cede all its rights and delegate all its obligations in terms of Norilsk’s irrevocable undertaking to Subco.”

In Moscow, the spokesman for Norilsk Nickel told Mineweb she didn’t know anything about Subco. Neither did the spokesman for Polyus,Norilsk Nickel’s principal gold-mining unit, although he admitted he had just seen Harmony’s announcement.

According to Harmony’s version of the correspondence it has just received from Norilsk Nickel, “the transfer by Norilsk of its Gold Fields shares to Subco is in accordance with its strategy to consolidate all of its gold assets into one vehicle and does not have any impact on the obligators under the irrevocable undertaking.”

Exactly who has authority to speak for Norilsk Nickel n such binding terms, and to plan what to do next, has been unclear since January, when Vladimir Potanin and Mikhail Prokhorov, the co-owners of Norilsk Nickel, decided to fire Leonid Rozhetskin, their principal strategist for the C oldfields deal. Since then Rozhetskin has been unable or unwilling to return to Moscow, where awkward questions from state investigators probing other dea s await him. An associate told Mineweb that he believes Rozhetskin is comfolable abroad with a well-known Italian partner, and that currently, he is talking with Merrill Lynch about the future of what is now called Subco. According to documents that surfaced in a New York court late last year, the spin-off gold company was first codenamed I for “new international goldco” by RozHetskin and his advisors at HSBC. According to HSBC’s presentation of “Project Golf, if Harmony Gold and Norilsk Nickel succeeded in their takeover of Gold Fields, “I” was to be created out of the international gold assets of all thiiee companies, and “listed as a new ‘major’ in North America attracting premium valuation.”

Potanin and Prokhorov have refused all opportunities to speak, or requests to answer questions in public, about the Gold Fields acquisition, or their “1” plan. Notwithstanding, Potanin has told Gold Fields CEiO Ian Cockerill that Rozhetskin continues to have his authority to negotiate on the fate of the 20-percent shareholding, and the last stages of Swanepuel’s ill-fated bid. Gold Fields’s management, and other major stakeholders in Harmony, expect the bid to expire on May 20. In the meantime, is the disclosure of Subco by Swanepoel a last-ditch move to expose Potanin and Prokhorov ttji the commitment they once made to the takeover?

For one Moscow investment banker, who has been at different times close to all sides and a consistent backer of the “I” strategy, Subco was a surprise name for no surprise at all. “As far as I know,” he told Mineweb, Norilsk Nickel “can do what they like with their holding of gold asset.” If he were advising Norilsk Nickel at the moment, and he says he is no:, he would advise the company not to sell the Gold Fields stake, “There is ncl pressure to sell now. I know of no [government] pressure to sell.”

Late on Monday afternoon, Norilsk Nickel issued u press release citing Prokhorov for the announcement that it intends to create a new gold asset company, and then sell its shares abroad. “At its meeting on April 15th, 2005,” the fresh announcement reads, “the Board of Directors: of MMC Norilsk Nickel (“Company”) resolved to initiate steps which should leatjl to the demerger of the Company’s Russian gold assets consolidated under |ZAO “POLUS” and its subsidiaries (“Polyus”) and the Company’s 20% interest in Gold Fields Limited (the “Transaction”).

The contemplated Transaction, if implemented, shoLId create a new large independent gold major (Newco) with the potential for substantial organic growth and a window into one of the world’s most prospective gold regions: Russia. The Transaction, if implemented, would, in the (opinion of the directors, provide investors with direct exposure to this unique Investment, and should allow Newco to realize its inherent growth options, enhance gold business’s direct access to the financing opportunities and unlock substantial value for all Company’s shareholders.”

“The initial step in the Transaction will be to consolidate! all the Company’s gold assets (including its 20% interest in Gold Fields Limited) under Polyus.lt is the intention of the Board of MMC Norilsk Nickel that tsewco would seek both domestic and international listings as soon as practicable, following the Transaction.”

Prokhorov is cited in the announcement as saying “we.; see the demerger as a means to unlock substantial value for all Norilsk shareholders and to create a platform to build a new global gold major centred around existing gold assets.” Deutsche Bank is listed as financial advisor for the new scheme, and its legality assigned to Debevoise & Plimpton.

For investment bankers and lawyers, there can never be a political obstacle so high that it cannot be climbed to sustain their clients’ willingness to pay lucrative placement and arranging fees in the hope of seeing their cash safely out of Russia.

And so, when Brian Gilbertson, CEO of SUAL International, the Moscow-based resource company, announced last week that the Kremlin will not allow the large-scale sale of SUAL shares abroad, a Moscow resource banker claimed Gilbertson was talking his book, not telling the truth. SUAL is not ready for a placement, the banker told Mineweb. Gilbertson was passing the buck to the political leadership, he claimed.

The banker also claimed that his institution has three mandates from Russian resource companies on the go at present, and that none of them has been blocked by Kremlin fiat. Accordingly, he was emphatic that Norilsk Nickel’s owners are free to plan to move their gold assets offshore to “I” or Subco or Newco. Naturally, the banker didn’t concede that his firm’s access to know the Kremlin’s mind has been limited recently; especially since a share-buying scheme of a closed company the Kremlin is trying to eform was discovered to have been one of his bank’s inventions, and to have led to an investigation of its legality.

But is there a contradiction between what Gilbertson iiaid is impermissible, and what Potanin, Prokhorov, deutsche Bank and Debevoise & Plimpton would like to get away with?

In remarks to the Russian Economic Forum in London April 11, Gilbertson is reported to have said that Kremlin policy currently prohibits large-scale share listings or initial public offerings for Russian resource companies. He also acknowledged with apparent approval legislative and regulatory provisions in Chile, Brazil, and South Africa to assure state control of resource companies like his own, SUAL, Gilbertson assured, “accordingly will develop its strategic opportunities with its feet firmly rooted in the soils of Russia and the CIS.”

Yevgeny Ivanov, CEO of Polyus and the principal strategist of Norilsk Nickel’s gold strategy, followed Gilbertson at the same conference. But his remarks suggested that there are wings to his feet.

In response to questions about offshore listing plans, Ivanov said that he and his colleagues are considering listing in either Toronto or New York, or buying a company already listed there. Norilsk Nickel already owns the London-listed Norimet, and the New York-listed Stillwater Mining. But for the gold spinoff, Ivanov evidently has in mind something new. He was not asked directly about “I”, but acknowledged that a reverse takeover into Gold Fields was another “theoretical” possibility. At the time, noone had ever heard of Subco or Newco.

A few days earlier, Ivanov had told a Russian audience that these options could not be implemented for another two years. His spokesman told Mineweb that “all decisions could be made not earlier than in 2007.” What exactly must happen in the next two years is unclear. When asked if he favours Kremlin approval or disapprovasl of such an offshore listing plan, Vladimir Litvinenko, President Vladimir Putin’s advisor on resource policy, signaled that he is negative. Local bankers believe that the Newco will require at least a year of technical work to prepare. Two years may be required to overcome the Kremlin objections that are visible now.

Gilbertson’s acknowledgement of a Kremlin bar to IPO’s for major Russian resource companies is the first of its kind. Other Russian executives are sensitive to the requirement for Kremlin approval of their schemes, but they never discuss them openly. Once before, when Norilsk Nickel first announced, a year ago, that it had acquired the Gold Fields stake from Anglo American, it claimed publicly that no Russian government approval was required, and none had been sought. Central Bank action, and Kremlin advice, began to change that position several weeks later. However, it is still not clear what Kremlin officials have demanded, and what Potanin has promised in return.

I, Newco, or Subco are names that have a temporary ring to them. Why Norilsk Nickel’s board did not announce its plan immediately after deciding it last Friday, and waited until after Harmony Gold had disclosed it today, suggests that neither the board, nor the company owners have the confidence that their plan will be anything but temporary also.

by John Helmer - Monday, April 18th, 2005
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MOSCOW (Mineweb.com) –On the eve of Good Friday, President Vladimir Putin called the leaders of Russia’s major businesses to meet with him at the Kremlin. The oligarchs were hoping that Putin would go long on resurrection, and short on crucifixion, at least of the type that has kept their colleague, Mikhail Khodorkovsky, in prison, and destroyed his Yukos oil empire.

At last Thursday’s meeting, Oleg Deripaska, the oligarch who controls Russian Aluminium (Rusal), had his head down as Putin spoke, busy taking notes of the speech Putin was reading from three closely typed pages. Deripaska is the most active of the Russian oligarchs in Africa, with a big bauxite and alumina operation in Guinea, and ambitions to start aluminium smelting plants in Nigeria and the two Congo republics. He has also been trying to gain footholds in India, Venezuela, Jamaica, Australia,Rumania, and Montenegro.

Since the Kremlin issued a full text of the speech immediately, and Deripaska lacks short-hand notetaking among his skills, perhaps he was scribbling to show Putin how attentive he was.

Although Putin made one tentative concession to the assembled oligarchs — to cut the statute of limitations on illegal privatization to three years instead of ten – this can help Deripaska in no way, since he seized his aluminium assets and export revenues, not from the state, but from other Russian businessmen, plant managers, and workers.

“I consider it possible to support the idea of reducing the statute of limitations on privatization deals from 10 years to three,” Putin announced, paying careful attention to the word “possible”.

Putin did not say that he was shortening the statute of limitations on back-tax claims, something of much more urgent concern to most of the oligarchs, especially Deripaska. His Rusal group was identified last September in a report by the Tax Ministry to the cabinet as paying an abnormally low rate of tax on its booming aluminium export business.

This, the report said, was achieved by use of tax minimization schemes, such as tolling, regional tax-offset zones, and transfer pricing. If Putin wants to unleash the tax men, he could deliver a tax bill for Rusal of more than $1 billion per annum for each of the past five years. According to Rusal, in 2004 its aluminium sales, mostly for export, totaled $5.4 billion. Its accumulated debt -an undisclosed figure – stands at over $1.5 billion.

Putin cannot easily change the Civil Code, even if Deripaska wanted him to. Even a concession on privatization violations is of doubtful value legally, because it is not the rigged privatization, in which the Russian government itself was involved a decade ago, that opens up the oligarchs to prosecution. It is their fraud, grand theft, embezzlement, money-laundering, racketeering, forgery, and other crimes, for which the statute of limitations cannot be reduced by a presidential decree.

In the remarks which Deripaska also dutifully copied down, Putin added that “a healthy competitive environment also depends on the appropriate corporate standards and effective self-regulation mechanisms within the business community itself.” That was another warning, less ambiguous than the remark on privatization, that the oligarchs must clean up their acts.

Was this what Deripaska was doing when, a day later, it was announced in Moscow that he had settled claims against him and Rusal by Mikhail Zhivilo of Paris, former owner of the Novokuznetsk Aluminium smelter, which Deripaska seized five years ago?

It was that takeover, and the subsequent conversion of aluminium trading contracts signed between the smelter and the Base Metal Trading and Alucoal group of companies, controlled by Zhivilo, that were the basis of a billion-dollar damage claim in the US federal courts of New York. The subsequent reporting of Deripaska’s record identified him as an alleged racketeer unable to obtain an entry visa for the US. Although the substance of the allegations was never tested in the court, because it refused to accept US jurisdiction, international lenders to the Rusal group have been preoccupied ever since by the risks associated with loans to Deripaska’s offshore companies and the Rusal group in Russia.

Despite the vindication claimed by Rusal from the refusal of the US courts to try the Zhivilo case, and from a parallel rejection of jurisdiction last year by a Stockholm arbitration panel, Deripaska has now agreed to pay Zhivilo between $50 and $60 million, according to a source close to the deal. In the Stockholm arbitration, Zhivilo had sought $325 million in a trading contract claim.

When the US Court of Appeals upheld a lower court’s rejection of US jurisdiction over the Zhivilo claims, Alexander Boulygine, Rusal’s CEO and close friend of Deripaska, said publicly: “each new ruling demonstrates there was never any case to begin with. Plainly, the plaintiffs thought that by generating negative publicity and raising our legal costs they could force us to pay them to leave us alone. We refused to be held to ransom.” Michael Burrows, his lead counsel, went further, attacking Zhivilo for making “false claims disguised with sensational allegations and far-fetched tales of intrigue. The plaintiffs sued without evidence or proof.”

Deripaska’s payment to Zhivilo goes a long way toward suggesting otherwise. It is the third major payment in the past 12 months by Deripaska and Rusal to claimants who had gone to court around the world, accusing his companies of contract violations, or worse.

Last year, Rusal was obliged by a Zurich arbitration tribunal and the Swiss high court to pay a $100 million claim from Aldeco, a trading company controlled by Deripaska’s arch-foe in Russia, Anatoly Bykov, the former head of the Krasnoyarsk Aluminium smelter. Deripaska and Rusal have also paid off a group of consultants in the Republic of Guinea, who won a UK High Court judgement against them for $3.5 million.

Rusal refuses to respond to questions about the settlement with the Zhivilo group, or the earlier deals. A spokeswoman noted that, according to a written order issued by ex-Rusal official Yevgenia Harrison, company executives are forbidden from speaking to Mineweb’s correspondent, and will be punished if they do.

Harrison, and her London-based husband Fred Harrison, recently lost their contract to represent Rusal. They were behind a series of attempts to induce editors of aluminium industry publications, notably McGraw-Hill’s Platts newsletter, into publishing only the good news about their group. After receiving a promotional payment from Rusal, Platts recently invited a Rusal executive, Peter Finnimore, to announce that among the “lessons” Rusal has learned in trading aluminium with the rest of the world, a “high level of customer service” and an “increased emphasis on social responsibility” are important, along with “governance”.

Finnimore glossed over the internal argument over Rusal’s public image. Late last year, this had led to a clash between the Harrisons and others in the company’s public relations division, who argued that negative tactics were continuing to damage Rusal, and that a respected international PR firm should be engaged to remedy the problems.

It will not be easy for Rusal to demonstrate it is turning over a new leaf. A claim for more than $300 million by Deripaska’s original offshore partner, David Reuben’s Trans World group of London, remains to be adjudicated in the courts of the British Virgin Islands. There are other conflicts heading for the courts as well.

Again, as with the Zhivilo claim five years ago, the potential damages of the new litigation are not only substantial, financially. If they reveal Deripaska as unrepentant, his business tactics unchanged, and his potential domestic tax liabilities uncertain, they will continue to cast a shadow over Deripaska’s efforts to persuade foreign governments otherwise. This is vital for him in the Ukraine, where Deripaska is dependent on alumina supply from the Nikolaev refinery, whose privatization is already under government review in Kiev; and in Montenegro, where Deripaska’s payment guarantees for a plant takeover were rejected last month.

In Guinea, and elsewhere in western Africa, the competition for bauxite and alumina is heating up with Alcoa, Alcan, Canada’s Global Alumina, Chinese companies, and others. This rivalry is unlikely to be decided by what goes on as Deripaska wages battle in the courthouses of Europe, or at the Kremlin in Moscow. But if he is to hang on in Africa, let alone expand, Deripaska must be able to convince his Guinea, Nigerian and Congolese partners that he can be trusted.

by John Helmer - Saturday, March 26th, 2005
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AND the Academy Award for best fascist dictator goes to Adolph Hitler! Woody Allen cracked the joke at the ex- pense of the US habit of making awards out of self-congratulation of the least worthy type. Were anyone to dare in the same spirit, they might award the new US nominee to head the World Bank, Paul Wolfowitz, the title of worst American to hold such a global post.

But wait a minute. Wolfowitz is hardly American at all, having spent much of his time as a career Washington warmonger under investigation by US counterintelligence and security agencies as an agent for a foreign power — for whose benefit he is suspected of supplying intelligence, cash, weapons and other favours.

In US law books, these may be crimes against the state, possibly espionage, even treason. But not the crimes against humanity which he has encouraged his favourite small state to commit, nor those which he encouraged his addled — if not yet treasonous — president to commit in the first of the great Middle Eeastem wars, which US forces will lose.

For Russia, against whom he has been waging war since he got out of short pants, his nomination as World Bank president presents something of a dilemma — and opportunity. During the first post-Sclviet decade, the bank under James Wolfensohn was one of many tools the US, as the bank’s dominant shareholder, used to destroy the economic: foundations of its rival superpower.

It paid stipends to Russian quislings; obliged the Russian government to incur sizeable debts for the privilege of being advised to dismantle its systems of command and control; and transferred the nation’s most valuable resources into the hands of a dozen individuals eager to betray their country for personal profit.

Not without reason was Wolfensohn’s favourite Russian counterpart Victor Chernomyrdin, the prime minister who enriched him self through creating Russia’s largest company, Gazprom.

Wolfensohn waged war by other means — Chernomyrdin was his collaborator; and the Russian treasury paid in full for its defeat

This arrangement could not last, and when the revival of the feeble Russian state began to challenge the value and terms of the bank’s operations in Russia, Wolfensohn decided to commission an assessment of the effectiveness of the programmes he had promoted in Russia.

He could have engaged Joseph Stiglitz, for four of the preceding years the bank’s chief economist, Nobel Prize winner and former chairman of the US President’s Council of Economic Advisers.

But by the time Russia had grown sceptical of Wolfensohn, and called a halt to new borrowings from him, Stiglitz had become a ferocious critic of everything Wolfensohn had done, or tried to do.

Wolfensohn preferred to hand the assessment job to a minor academic who had enriched himself selling Russians the very adviot Wolfensohn asked him to evaluate. The hungry fox invited to call the roll in the henhouse was US-employed Swede Anders Aslund.

“We don’t necessarily take his advice,” commented Julian Schweitzer, the bank’s Moscow representative at the time, on the appointment

Aslund’s defence of everything Wolfensohn had done in Russia did not , encourage the Kremlin to resume borrowing. Instead, it resolved to pay Wolfensohn off, a task the Russian treasury completed just a few months ago.

From Wolfensohn’s point of view, the evaluation may have helped salve the wounds Stiglitz had inflicted on him and the institution

More practically, it encouraged him to try to evade the Kremlin’s veto on borrowing, and recruit thin Chernomyrdins in the Russian provinces.

These were governors, local warlords and corporate magnates as keen to leverage themselves with the bank as fat Chernomyrdin — and President Boris Yeltsin — had been 10 years before.

With tactics like these, Wolfensohn has hung on for another four years after the Aslund report, but in Moscow he has remained a has-been, the banker no one serious wants to borrow from.

Wolfowitz’s nomination ought to remove any possibility that Russia — now a greater oil power than Wolfensohn or Wolfowitz thought possible — would borrow itself, or recommend that anyone else should

The dilemma posed by the Wolfowitz nomination turns out to be an opportunity for President Vladimir Putin to conclude that, from Russian experience, the bank does more damage than good, and should be isolated and ignored by those countries and economies mos: in need of development financing.

This should not be interpreted as anti-Americanism.
If the Federal Bureau of Investigation were permitted to disdose all it knows, Wotfоwitz may not be the American he claims to be. And with a record like his, it may be a violation of the American statutes to borrow from Wotfowitz.

In US jurisprudence, it is not just immoral to make covenants with war criminals, it is criminal.

by John Helmer - Friday, March 18th, 2005
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Although Russian steelmaking is booming, so too is iron-ore mining. As the only one of Russia’s steel mills without a significant supply of iron-ore of its own, Magnitogorsk Metallurgical Combine, Russia’s largest steelmill, is unhappy to have discovered this week that a domestic rival may take control of most of its iron-ore supply.

In the short history of commercial steelmaking in Russia, grabbing control over raw material supplies –iron-ore or coking coal — has been the shortest route for a raider to take control of the steelmill itself. In December, after the management of Magnitogorsk beat off one hostile takeover bid by the Mechel steel and coal group, and won a rigged privatization of the last state shareholding in the plant,Magnitogorsk had seemed impregnable

This week, Alisher Usmanov, a controversial Moscow entrepreneur, who recently abandoned a raid on Anglo-Dutch steelmaker Corus, announced that he is looking to buy the Sokolovsko-Sarbaysky ore-processing combine (GOK), known as Sokolovka for short. The mine, which is located in Kazakhstan, supplies about 70% of the iron-ore which Magnitogorsk needs annually. In all, Magnitogorsk needs 16 million tons of iron-ore to turn out 10 million tons of steel products per year.

Although Usmanov, who is short of cash, may be bluffing, Magnitogorsk, which has been negotiating itself with Sokolovka before, is not concealing fresh concern. A Moscow press report on Wednesday, claiming that Usmanov’s Gazmetall group is negotiating with Magnitogorsk over the future ownership of Sokolovka has been rebuffed by Magnitogorsk sources as a hostile signal. Still, acknowledging the extent of its dependency in an announcement last week, Magnitogorsk’s CEO, Victor Rashnikov said he will step down from his post in April, and will concentrate on developing new sources of iron-ore and coking coal for the mill.

Six months ago, Rashnikov and his colleagues announced that they were exploring for iron-ore from the Kiryabinskoye deposit in the Bashkirian republic of central Siberia. But rated at just 20 million tons in reserves, this is too small to satisfy the steelmaker’s long-term requirements. According to Rob Edwards, metal analyst for Renaissance Capital in Moscow, “the critical mass needed for Magnitogorsk to develop a greenfield iron-ore mine is 30-40 million tonnes of reserves.” The mill also has a licence for the development of the Techenskoe deposit in the Chelyabinsk region of central Russia, with estimated reserves of 50 million tons. In another two years, Magnitogorsk says it is hoping to produce 2 million tons of iron-ore from this source in order to boost steel a output to 12 million tons in the same period.

This week, a Magnitogorsk source said: “we have heard that Gazmetall has had negotiations with Sokolovka. Knowing the ambitions of Mr. Usmanov I think the meaning of the term negotiations is acquisition.” The source did not say that Usmanov has been negotiating this deal with Magnitogorsk.

Usmanov and his associates now control the Lebedinsky and Mikhailovsky GOKs with a total yearly output of almost 40 million tons, making them the dominant iron-ore producer in Russia; a quarter of that volume is exported. The other major domestic iron-ore mines are each controlled by top-10 Russian steelmakers –Severstal (Karelsky Okatysh, OlenegorskyiGOK); Novolipetsk (Stoilensky GOK); Evraz (Kachkanarsky GOK); and Mechel (Korshunovsky GOK). In all, Russia produces about 100 million tons of iron-ore per year.

Until recently, the steelmakers used their control of the mines to hold prices down, and depress the profitability of the GOKs. But the global shortage of iron-ore has set Russian iron-ore prices free to rise, and as they have done so, they have threatened unprotected mills like Magnitogorsk with serious cost pressure. Usmanov’s group also controls two top-10 steelmills, Oskol and Nosta.

Usmanov and partner Vasily Anisimov, a former aluminium smelter owner, are currently in the process of buying Mikhailovsky GOK from the Metalloinvest group of Boris Ivanishvili. A 29.9-percent stake Ivanishvili owns in the pig-iron producer Tulachermet is also included in the deal. Usmanov and Anisimov have said they will contribute $1 billion in cash, and borrow another $1 billion from a state-controlled Russian bank. Usmanov has disclosed that he has raised about $614 million in recent sales Of his shares in Corns; he is estimated to have bought them for about $295 million.

To fund another major purchase like Sokolovka, Usmanov and Anisimov may view Magnitogorsk as a necessary partner. However, the Magnitogorsk source says the plant is not in favour of joining this bid.

The source implied that, should Usmanov take over Sokolovka, iron-ore prices inside Russia would rise above the level currently offered by Australian and Brazilian exporters to Russia. In that event, the source said, Magnitogorsk is likely to upgrade port facilities it already controls at Vladivostok, in the Russian Fareast, so as to facilitate importation of iron-ore from Australia or elsewhere. “The problem with iron-ore delivery is Russian ports,” the source said. “They are not designed tor the unloading of such cargo. But that problem could be solved if need be. And I think that time will come soon, because if Usmanov will accumulate all iron-ore mine shares, and lift the prices, we will have nothing to do besides searching for alternatives.”

BHP Billiton and Rio Tinto have been assessing the Russian market for sales for some time, while local steelmakers acknowledge that the cost of rail transportation across Siberia has been a deterrent for as long as local iron-ore prices remaned constrained.

Usmanov confirms through his spokesman that there have been negotiations relating to the iron-ore mine, and that Usmanov is interested in acquisition.” He did not say that Usmanov has discussed the deal with Magnitogorsk.

Alfa-Bank metal analyst Maxim Matveyey said he believes Rashnikov may try to outbid Usmanov for Sokolovka. “While almost all major ferrous metal companies in Russia have ensured their raw materials supplies, Magnitogorsk controls only 10% of its iron ore and entirely lacks its own coM. We estimate that Magnitogorsk currently buys 15% and 10% of its iron ore from Mikhailovsky and Lebedinsky GOKs. Any news about a possible solution to Magnitogorsk’s raw materials problems would be a strong catalyst for the company, but we do not expect such news anv time soon.”

by John Helmer - Monday, February 21st, 2005
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