By John Helmer, Moscow

Nathaniel Rothschild’s (centre) libel lawsuit against the Daily Mail and Associated Newspapers, due to commence on January 23 in the High Court in London, is now unravelling even more Russian oligarch secrets. As they crack open, so do suspicions of even more inexplicable involvement by Rothschild’s friend, Lord Peter Mandelson, than the lawsuit was intended to stop.

The point on which the entire tale hangs, at least for Rothschild, is that in January 2005, Mandelson was the European Union’s trade commissioner. The events reported by the newspaper in its initial publication, and now in new evidence before the court, suggest that Mandelson was involving himself in Russian business deals which he knew, or should have known, created the appearance of a conflict of interest with his official position.

Rothschild’s claim is that it was libelous to suggest that he put Mandelson in that position. Mandelson’s position is that he wouldn’t countenance a conflict of interest, or the appearance of one.

The Rothschild claim was first filed in July 2010, relating to a newspaper article published the previous May. Read that story here. The original article remained on the newspaper website in the UK for almost 18 months before it was removed. However, it has been submitted to the federal US court in Manhattan, and can be read in conjunction with other US court documents. Read them here.

The newspaper submitted its defence in September 2010. But since then it has dug up new evidence. This substantially changes both its defence in court, and the vulnerability of the principals – Rothschild, Mandelson, Oleg Deripaska (image second from left), Alain Belda, chief executive of Alcoa, and Peter Munk, executive chairman of Barrick Gold.

The new details of what they were doing together over several days in January of 2005 were filed in the London court on December 8, 2011. They then became part of a hearing on December 15, and a ruling by Justice Sir Michael Tugendhat on December 21. Rothschild tried to stop the new defence, but was overruled by the judge. Here is that story.

The first of the secrets is that when Mandelson was airlifted by Rothschild from Davos to Moscow on January 30, 2005, to meet Deripaska, Belda had already started talking over another deal with Deripaska than the one which had been in negotiation for almost a year and was closing that month – Alcoa’s acquisition of the Samara and Belaya-Kalitva (Rostov) aluminium sheet rolling-mills for $240 million. The original newspaper publication had focused only on the sale and purchase of the rolling-mills.

Mandelson, it is now revealed, was involved in Belda’s deal discussion on the evening of January 29 the day before the dinner in Moscow, which was the focus of the original Daily Mail report. Mandelson was also on a tight official schedule. When he sat down to dinner in Davos with Deripaska, Belda, Rothschild and Munk on the 29th, he knew, according to the the judge’s recital of the evidence, he was “required to be back in Brussels for a series of official engagements and meetings early in the morning of Tuesday 1 February 2005.”

What steely stuff Mandelson seems to be made of. According to Rothschild’s advocate in court, Hugh Tomlinson QC, Mandelson was doing do more than riding along with his friend for a dinner outing to Moscow on January 30, and for a further trip to Abakan, Siberia, on January 31. There the temperature on the day was between minus 27 degrees Celsius and minus 34. Mandelson and his friend, along with Deripaska and Munk, had less than nine hours of daylight in Abakan. Mandelson had to be aboard the Rothschild jet at 5 in the following morning, Abakan time, in order to make it to Brussels on the same morning.

Shivering timbers! According to Rothschild’s lawyer, this programme was what one innocent pal does for another on the spur of the moment, and should not be slurred by the newspaper as a conflict of interest. All the Daily Mail and its new defence have got up, Tomlinson told the judge, is “that a person is to be criticised for inviting a friend to accompany him on a trip to visit a potential joint venture project, even if the friend is a person in Lord Mandelson’s position.”

The second of the secrets, which newly appears in the High Court record of December 21, is that the business deal the fearless five were discussing in Davos on January 29 wasn’t about Russian aluminium, but about Russian gold:

“At this dinner Mr Rothschild, Mr Deripaska and Mr Munk discussed a potential joint venture into which they were contemplating entering and which was later to culminate in a joint bid made by their respective companies for Polymetal, a leading Russian gold producer. At the relevant time, the issue as to whether foreign owned companies should be allowed to compete for the rights to exploit the country’s strategic natural assets was a matter of considerable political sensitivity in Russia.

“At the suggestion of Mr Deripaska, the parties to that joint venture agreed to continue their discussions in Russia the following day with a view to taking a site visit of industrial plants in Siberia which were relevant to that proposed deal.

“Mr Rothschild invited Lord Mandelson to accompany the joint venture party on that trip. According to Mr Rothschild’s pleadings he did so because he knew that Lord Mandelson had not been to Siberia and was keen to see the area.”

Only, and this is the third secret to spill from Rothschild’s kitbag, there was nothing in Abakan or the vicinity which the group visited on January 31 that was “relevant” to gold or Polymetal. Instead, according to two sources familiar with the matter, Deripaska showed his guests the Sayano-Shushenskaya dam and hydro-electric power station and the Sayanal aluminium foil factory. The power station, at the time the largest hydro-power source in Russia, had been controversial for its faulty construction and illegal privatization throughout the 1990s. The problems were to come to a head in a fatal turbine failure and flooding in August of 2009.

Back on the frozen day in January of 2005, it was the source of cheap energy for Rusal’s Sayansk aluminium smelter, 100 kilometres from Abakan airport, and also for the Khakas smelter Rusal was building at the time of the visit, also 100 kilometres from the airport. It would come on line at the end of 2006.

Regional administration officials and goldmining experts claim there is nothing in the area Deripaska showed Rothschild, Mandelson, and Munk which is part of an active gold mining and production chain. Officially, the region’s government claims to hold substantial gold reserves, but it also admits these are unexplored and unproven. The regional ministry of industry confirms there is no Polymetal plant, mine, or even mining licence in Khakassia. The four goldminers licenced to prospect and mine in the region work on a small scale. In 2004 they produced just 58,000 oz of gold — 1% of the national total.

If a takeover of Polymetal was what Deripaska and his guests had on their minds, Abakan was the wrong place to fly. Then and now, Polymetal’s prospects and mines were far to the east, in Magadan and Khabarovsk regions. Also, if Munk wanted to convince the group of the lure of Sukhoi Log, the group had landed 1,500 kilometres short of his goal in Irkutsk region.

The evidence of the flight to Abakan was not reported in the original Daily Mail article. But Justice Tugendhat’s ruling allows the newspaper to defend itself against Rothschild’s defamation claim by substituting the intimation of one specific conflict of interest, relating to Mandelson’s presence at the rolling-mill deal dinner, with another, more general conflict of interest.

But just what was the deal Rothschild was allegedly involving himself in, and his friend Mandelson?

At the start of 2005, it was already known that the controlling shareholders of Polymetal, Alexander Nesis, Nikolai Dobrinov and their partners, wanted to sell out. Polymetal was for sale, they let it be known at the time, because they lacked the capital-raising energy, the political clout, and the cash to prevail in the fight for Sukhoi Log. They also believed that after years of sub-$400 prices for gold, the rising price at the time gave them the best exit opportunity they could see.

Munk had also been after Sukhoi Log for several years, estimating that if successful in acquiring the mining rights, he could almost double his company’s global gold reserves and resources, and do the same for his share price and personal worth. At the start of 2005, Barrick Gold claimed its proven and probable gold reserves amounted to 89 million troy ounces. Sukhoi Log’s official total at the time was 33 million oz, but Barrick Gold’s exploration of the deposit already suggested much more, possibly as much as 60 million oz. On January 29, 2005, Barrick’s share price was $22. Over the next five years it was to peak at over $53.

Munk was calculating that the swiftest, surest way to get hold of the Sukhoi Log deposit was in partnership with an oligarch. He made his first attempt with a takeover of Highland Gold in 2003 when the small fareastern mining company was controlled by Roman Abramovich and the Fleming family of London. But Munk underestimated the mining company’s problems with the Khabarovsk region governor and rival Russian goldminers. He also overestimated Abramovich’s influence. His private deal with Abramovich for Highland Gold also took his own company’s executives and experts by surprise. They stalled the deal, and watered down its terms and Barrick’s financial exposure.

Munk kept trying. But when he started to focus on a takeover of Polymetal he ran into vigorous competition with Anglo American Ashanti, the South African goldminer, and Centerra from Canada. The story of that contest can be read here.

By October of 2005, Suleiman Kerimov (image far left) had emerged as an all-cash bidder for Polymetal, but not the only bidder. The cash pot — $930 million according to Polymetal sources – proved to be the winner over the combination of share swaps and cash offered by Munk and the other internationals. At the time, the Polymetal shareholders admitted they suspected Kerimov’s bid was put together by a group. They also suspected that Deripaska might have been one of Kerimov’s group. They claimed not to know, nor to care. By January of 2006, one year after the events and facts Rothschild is now taking into the London court, Nesis and Dobrinov had their money, and Kerimov was the new owner.

If Munk and Deripaska had been discussing in front of Rothschild and Mandelson a scheme to acquire Polymetal, and conceal their role in financing the acquisition and controlling the Polymetal shares; and if the scheme was to position the group to take Sukhoi Log, then why would they have done so in front of Mandelson in his official position? These make a lot of hypotheticals which remain to be tested in court shortly.

And why did Deripaska fly his friends to Abakan? Mandelson lacked a visa to enter Moscow the night before, according to the original Daily Mail report. It’s also likely that he lacked the traditional dublyenka thick enough to withstand Siberian cold. So why didn’t he retire cosily in Moscow for the night of the 30th, and take his time the next day to return to Brussels? What was the big deal for Mandelson in Abakan?

Supposing the evidence fails to substantiate the Abakan journey as relevant to the Polymetal gold deal, is the story of what was about to happen to Polymetal an attempt to camouflage another Alcoa-Rusal deal which Deripaska and Rothschild were attempting?

So far Rothschild’s side has presented 7 witness statements to the court. Associated Newspapers, the publisher of the Daily Mail, has yet to present any, and will not finalize the list of witnesses it aims to call to testify until January 9. Until they start answering questions in court at the end of the month, it isn’t possible to guess what brought Belda and Munk together twice in front of Rothschild and Mandelson, and led the men to continue on to Abakan.

The timing suggests Deripaska may have wanted Rothschild and Belda as sources of cash, and was ready to sell more Rusal assets if he could camouflage what he was doing. From the evidence recently disclosed in the High Court trial of Boris Berezovsky v Roman Abramovich, it is now known that between September 2003 and September 2004, Deripaska had to empty the till at Rusal of more than $2 billion in order to buy out the 50% shareholding which Abramovich controlled in the company. Even an associate of Abramovich’s, who was supervising Rusal at the time, confided that he thought Deripaska was paying too high a price. But then Deripaska didn’t have an alternative, if Abramovich wasn’t to let Deripaska’s rival shareholder in Rusal, Mikhail Chernoy (Michael Cherney), get the better of him.

Just how empty the Rusal cashbox was at the end of 2004 is also indicated by evidence Abramovich has given in the High Court that he took dividend payments out of the company of $425 million in 2001; $417 million in 2002; and $529 million in 2003. It can be assumed that Deripaska was taking comparable amounts out of Rusal himself. It helped Rusal’s cashflow that Deripaska was managing to arrange a very low rate of income tax. Still, by the autumn of 2004, this had attracted the attention of the federal tax ministry and the Accounting Chamber, as the Russian state auditor was called.

That Belda was considering a share swap and cash deal for Alcoa to acquire Rusal assets has been disclosed a year after the Abakan trip. It is possible that the process had commenced earlier than the US Embassy in Moscow discovered it. Rothschild is now bound to be asked about the details and the timing when he takes the stand.

As for the Polymetal takeover, between Kerimov’s purchase of the goldminer for $930 million in January of 2006 to his sale in March 2008 for $2.1 billion, did Rothschild, Munk and Deripaska participate, and did they share out the profit among themselves? That too Rothschild is likely to be asked to clarify.

by John Helmer - Friday, December 30th, 2011