THE BIG CHILL VISITS DIAMOND TOWN

MOSCOW (Mineweb.com) — It was a year ago when the President of the Sakha republic in fareastem Siberia, Vyacheslav Shtirov, was summoned to :the Kremlin for a meeting with President Vladimir Putin. That was not a jolly exchange of seasonal cheer; and because certain New Year promises that were made then have not been kept, Putin is considering flying east to drop down Shtirov’s chimney for Christmas.

Actually, according to the Russian tradition, Dyed Moroz (“Father Frost”, aka Saint Nicholas, Santa Claus) uses the front-door when he makes his annual visit to children, as he is always accompanied by Snegourochka (“Snow Girl”). It can happen that she is late. Then Dyed Moroz is obliged to ask the children to call out aloud to summon her. Those who can shout the loudest are motivated by the idea of catching the old duffer’s attention, and if they are lucky, first pick at his bag of Christmas rewards. Once Snegourochka arrives, Dyed Moroz reviews who has been on his best behaviour for the past year. Asked who has been naughty, the children naturally scream their noes, and again, those who cry loudest hope to be rewarded first and best.

Putin is less impressed by no-screaming. Recently, Shtirov launched a local political initiative, gathering signatures of Sakha residents who say they want Shtirov to be appointed by Putin to a new term in office. Shtirov’s first term expires in 2006. He had been elected as the Kremlin’s candidate to replace the republic’s godfather, Mikhail Nikolaev, after the latter crossed Putin by trying to arrange local support to run for a third term, which wasn’t altogether legal at the time, and worse – it wasn’t what the Kremlin wanted.

For more than a decade, Nikolaev had arranged with former President Boris Yeltsin that, in return for supporting him against parliament, throwing the region behind him on presidential election day, and sharing such diamond revenues as Yeltsin needed or wanted, Nikolaev could run the republic, and manage its assets exactly as he saw fit. Since Sakha’s principal assets are its diamond-mines, and the cashflow of Alrosa – the largest producer of diamonds in the world after De Beers – Nikolaev naturally saw to it that his trusties controlled the company. Shtirov was one of them – first a republic administrator, then prime minister in Yakutsk, and finally chief executive of Alrosa.

Putin did not suffer from Yeltsin’s political insecurities. Believing he was safer if he put an end to these regional satrapies, and retrieved control of the cash that gave the satraps their power, he ordered Nikolaev to give up the presidency, and seated him, with a conditional immunity from prosecution, in the Federation Council, the upper chamber of the federal parliament. Shtirov was told he was to vacate his seat at Alrosa, and become Nikolaev’s successor as president of the republic. But there was a condition. Shtirov was to understand that he was the federal government’s custodian of the diamond assets, and that he was to return them to federal government control.

Shtirov is a bigger, burlier man than Nikolaev. But what he lacks in the agility of his former patron, he makes up for in stubbornness. As the years of his term have rolled towards its conclusion, Shtirov has done as little as possible to divest the republic’s asset, and return them to Moscow’s charge. He is also much tougher than the man Putin put officially in charge of the return of assets – Finance Minister Alexei Kudrin.

When Shtirov used to take the De Beers management out on fishing expeditions, he would always surprise with his fisherman’s good humour.Kudrin is about as charming as the fish. A protege of Anatoly Chubais from St.Petersburg, he rose through federal government ranks with the skills of a chartered accountant, and, by comparison with Chubais, Mikhail Kasyanov, and other predecessors at the federal treasury, slower fingers. Putin thought he could trust Kudrin to take charge of Sakha, Alrosa, and the diamond cash. But in the contest between Kudrin’s fingers and Shtirov’s feet, it is the latter which have been winning.

Kudrin has pressed Shtirov to sign one protocol of obligations after another, returning assets Nikolaev had squirreled away from Moscow’s control, in order to add them to the capital of Alrosa, and the federal revenue base. Shtirov has procrastinated with his signature, and then dug in his heels against implementation. The federal shareholding in Alrosa should already have reached 51%, according to the plans drafted by Kudrin’s subordinates in the federal Finance Ministry. But even as chairman of the Alrosa board, clearly out¬ranking Shtirov, Kudrin hasn’t been able to extract compliance from Shtirov, or the transfer of the assets.

In fact, Kudrin’s desk is now so stacked with orders from his superiors that he cannot discharge, he too is in danger of receiving a visit from an unwelcome visitor down his chimney. The failure of both Shtirov and Kudrin to bring the $2 billion annual revenue of Alrosa under the Kremlin control Putin wants would already have been the end of them, if $2 billion in diamond revenues could match the size of the sums Russia’s principal mineable resources currently fetch. Shtirov has thought that the sum was small enough to be overlooked, while he played his waiting-game.

A year ago, on December 28, 2004, Putin gave Shtirov his marching orders. After a proposed meeting of the two men in the Kremlin was recently called off, sources close to Putin indicate that he’s prepared to spend Orthodox Christmas in Sakha. According to Shtirov’s office in Yakutsk, and Nikolaev’s office in Moscow, there is no information about this possibility, and no confirmation that it will happen.

The Kremlin pressure continues to build up on Alrosa, and for Alexander Nichiporuk, the first chief executive of the company appointed by Moscow, not by Yakutsk, this is a severe testing time. For if Shtirov can defy the Kremlin, and Kudrin proves too weak to implement his orders, how can Nichiporuk pilot the company into next year’s enormous challenges?

Last week, at the traditional end-of-year press conference at Alrosa headquarters in Moscow, Nichiporuk did the best he could to emphasize the positive. Alrosa and its affiliated companies have lifted the value of their production this year by 17% to reach Rb72 billion ($2.5 billion). Cost of production rose slightly less fast at 15% to Rb53 billion ($1.8 billion), and profit after tax was Rb14.9 billion ($520 million). Total investment for 2005 was Rb14 billion ($486 million). This is to be cut to Rb12.3 billion for 2006.

Among the positives in addition to the balance-sheet, Nichiporuk cited the completion of the company’s social investment plan; expansion of diamond exploration in both western Sakha and northwestern Russia; and the launching of new ore-processing plants at Alrosa’s mining operations in Angola.

If he was discreet about the internal troubles brewing at home, Nichiporuk was forthright about the unprecedented external pressure Alrosa is facing on its export marketing system. He confirmed that the European Commission (EC) in Brussels has proposed a total ban on diamond trading between Alrosa and De Beers, to start in 2009. He added, however, that this is still to be negotiated, and is far from decided. “The idea is to cancel trading between the two named companies to create competition and avoid monopolization,” Nichiporuk acknowledged, after spokesmen for the EC have tried denying what the EC has formally communicated to both Alrosa and De Beers. “The background is that, even if one company [Alrosa] is not under EU jurisdiction and another [De Beers’s Diamond Trading Company] only by half, since the trading is happening on EU territory, the [EU] can apply the rules.” Referring to the changeover this year of commissioners and staffs at the EC headquarters in Brussels, Nichiporuk added: “We had a good understanding with the previous commissioner on that issue, and no discussions with the new one.”

At this point, the unprecedented attempt by the EC to order the two companies, the two largest producers of diamonds in the world, to cease trading with one another at the end of 2008, has produced no comment from De Beers, and no stated willingness by either side to threaten a legal challenge to the ban in court. In 2005, according to Nichiporuk, Alrosa has supplied $680 million worth of rough to the DTC, representing 45% of total export value. He said that the value of exports allowed by Alrosa’s multi-year export quota is 20% higher than actual value shipped this year.

In 2004, Alrosa warned that an EC decision forcing “an overly rapid or extensive reduction or termination of our sales to De Beers could have an adverse impact on our sales.” Negotiators for Alrosa and De Beers are now discussing in Brussels, not only the cut-off and the deadline, but also the value for trade allowable in the years that remain before the cutoff takes effect. The trade agreement between Alrosa and De Beers, which the EC is reviewing, was signed at the end of 2001 and anticipated five years of sales at an average of $800 million per annum. Internal pressure among Alrosa’s senior management, and from the federal government, to break out of these terms has curtailed this level of annual shipments by roughly 15% since the signing. If the EC goes ahead with the trade ban, the current value of shipments to De Beers may decline to $600 million in 2006, and then around $500 million per annum in 2007 and 2008. By then, roughly 25% of Alrosa’s rough production, or less, would go to De Beers. What has been an effort-free trading partnership for the Nikolaev-Shtirov regime is now a major management challenge for the federal managers. The deadlines imposed by the EC are naturally increasing the impatience Nichiporuk and the Kremlin feel towards Shtirov’s attempts to prevent the reorganization of shareholding control.

According to Nichiporuk, forward planning by the company anticipates the total elimination of annual diamond export quotas, issued by the federal government and signed by the Kremlin, which have caused repeated delays in shipment of rough from the new Nyurba mine in Yakutia. In addition, Nichiporuk said, the company plans to allocate up to 65% of its rough output each year to a stable list of sightholders, and the remainder to auctions and tender sales. Independent selling outlets will be multiplied, adding Israel and Dubai to the one already in operation in Antwerp. With international demand for rough expected to remain high, and supply short for the foreseeable future, Alrosa should be able to create an effective, independent marketing system in the time that is left. Putin, however, is unwilling to cede the benefits of the new scheme to the old gang in Yakutsk.

Nichiporuk must therefore demonstrate fresh loyalty, and imagination, onshore and abroad.

AUSTRALIA TRIES THE LEVEL-PLAYING FIELD TRICK ON RUSSIA, AND GETS BOOTED

By John Helmer in Moscow

The two dominant Australian vices are not indigenous.

Envy came with the Irish Catholics, who were at first the convict, then the indentured, and finally the working class. Hypocrisy came with the English Protestants, who began their economic enterprise in the country by declaring the land unoccupied (“terra nullius” was the pseudo-legal expression), the property of noone, and hence the right of the Crown and the colonial administration to distribute. That began one of the nineteenth century’s first and most methodical genocides of an indigenous people: their exit provides Australian farmers and miners today with their most under-valued asset, land. Whenever Australians preach to Europeans about state subsidization of their agriculture, they forget that, just two centuries ago, they obtained their farmland at zero-cost by killing the owners; and at marginal extra cost by employing prisoners to clear and tend the land thus acquired. It takes English hypocrisy to forget that; and Irish envy to claim that the resulting rural productivity is superior to Europe’s.
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AUSTRALIA’S TRADE MINISTER PLAYS CANARY TO WARN RUSSIAN MINERS

MOSCOW (Mineweb.com) –The two dominant Australian vices are not indigenous.

Envy came with the Irish Catholics, who were at first the convict, then the indentured, and finally the working class. Hypocrisy came with the English Protestants, who began their economic enterprise in the country by declaring the land unoccupied (“terra nullius” was the pseudo-legal expression), the property of no-one, and hence the right of the Crown and the colonial administration to distribute.

That began one of the nineteenth century’s first and most methodical genocides of an indigenous people: their exit provides Australian farmers and miners today with their most under-valued asset, land. Whenever Australians preach to Europeans about state subsidization of their agriculture, they forget that, just two centuries ago, they obtained their farmland at zero-cost by killing the owners; and at marginal extra cost by employing prisoners to clear and tend the land thus acquired. It takes English hypocrisy to forget that; and Irish envy to claim that the resulting rural productivity is superior to Europe’s.

Last week, in a fit of both, a former jackeroo and rural property speculator, currently Australia’s Minister of Trade, Mark Vaile, claimed that, although Australia supports Russia’s accession to the World Trade Organization (WTO), Australia is unsatisfied with its access to Russian markets. Indeed, Australia is one of the last four WTO member-states whose refusal to sign bilateral agreements blocks formal Russian accession. The other three are the US, Colombia, and Switzerland. By the end of last week’s Hong Kong round of WTO ministerial meetings, all 149 WTO members had agreed to accession, save these four.

What makes Australia’s position of interest to the international mining community is the repeated claim by Vaile’s ministry that Russian must grant access to Australian “mining-related services.” Australia’s international mining peers – Canada and South Africa, for example – have already negotiated their accession terms with Moscow, but without referring to “mining-related services”. Although US demands for access to the Russian services market are considerable, and financial services such as insurance and banking are the crux of the argument, mining services aren’t at stake for the Americans.

A year ago, a Canberra statement on the Russian WTO negotiations – which first began in 1995 – referred to the fact that “Australia is seeking commitments from Russia to guarantee levels of access to a number of sectors such as mining-related services”. In a more recent ministry paper entitled Russia Country Brief, it is claimed that “Australian mining and mining services companies are interested in prospects in the Russian far east, particularly Sakhalin Island’s oil and gas projects.” The only example of such a service trade referred to in the Brief is the sale of software by Mincom to Norilsk Nickel. But its principal mines are in northwestern Russia, not the fareast, and they are hard-rock, not oil and gas.

The dominant trade item in Australia’s relationship with Russia is alumina, produced by Comalco and others in Queensland, and sold to the Russian Aluminium (Rusal) group of Moscow, owned by Oleg Deripaska. Deripaska’s only bauxite mine is at Achinsk, in western Siberia.

The alumina trade has traditionally taken such a large proportion of Australia’s export aggregate to Russia – about US200 million in 2004-05 — that a precise figure is not cited in the trade statistics. Rusal is also referred to in the government’s trade papers as the dominant Russian investor in Australia – with the 20% shareholding stake it acquired last year from Kaiser in the Queensland Alumina refinery. Ever since then, Australian trade and provincial government officials have been falling over themselves to ingratiate Rusal.

If there is to be a market in “mining-related services” produced by Australian companies, the likelihood is that its principal Russian clientele includes Deripaska; the owners of Norilsk Nickel; and other resource giants of the Russian economy. With putative clients like these, it is understandable perhaps that Vaile’s brief on Russia hints at regret at losing a potential client in Mikhail Khodorkovsky, the fraudster whose Yukos oil company has been taken over by the state. But it was not commercial operators like Yukos, which had any interest in the capital-intensive projects of Sakhalin. There, state-controlled Russian oil companies are partners with such western majors as Shell and Exxon.

Understandable also that Vaile’s brief omits to refer to the biggest Australian investment loss in Russia. That occurred in 1997, when the Star Mining group’s right to mine the Sukhoi Log gold deposit was revoked, and its shareholding stake in local partner Lenzoloto diluted to non-significance. The current beneficiary of that misfortune is Mincom’s client, Norilsk Nickel.

Five years ago, when Vaile’s predecessor Tim Fischer was negotiating the terms Canberra wanted to see for Russian accession to the WTO, not a word was said about the ill-fated Star and its investors. The emphasis was clearly on agricultural products. Australia insisted that, after the collapse of the Soviet Union and the bankruptcy of the Kremlin treasury through the 1990s, Russia should commit to supporting its agricultural sector by the average budget value of the years, 1995-97. In fact, as Canberra acknowledged, so sharply had state funds (for energy, fuel, seeds, fertilizer, commodity price supports) fallen at the time, the Producer Subsidy Equivalent for Russia had become negative -minus 26% in 1993, minus 9% in 1994. That means the state was taking more money out of farming than it was putting in! Not even Australia could match that fiscal performance. Russian officials argued that those were exceptional years, and proposed the last years of the USSR, 1989-91, as the baseline, when the Producer Subsidyequivalent for Russia was 75%,

Of course, that was communism. The rural political party, which Vaile currently heads in Australia’s governing coalition, has made a career of winning votes on the basis of hating communists for their ideology, but catering to their appetites – especially for wheat, wool, meat, and sugar. It was, in fact, the Soviet system’s capacity to import Australian commodities, on which Vaile’s farm constituents all depended for their well-being. When the Soviet Union fell, the Australian government was left holding enormous bills for wheat and wool; huge unsellable stockpiles; and falling prices.

Today, Australia is far too marginal in the international meat and sugar trade to be in a position to hold up Russian accession to the WTO on behalf of beef offal and frozen lamb. As for sugar, Vaile’s ministry is on record as favouring the total dismantling of beet sugar production in the cold-climate countries of Europe, so as to allow cane sugar producers in the hot territories to prosper. And so, Vaile has become the miner’s friend, a unique canary whose warning of market access problems was apparently sung at Russian trade negotiators last week in Hong Kong.

They responded with uncharacteristic bluntness. Russia is “skeptical”, reported RIA-Novosti, a state news agency, that “Australia regards itself as a protector of moral standards in the WTO”. “Nobody asked it to play this role”, reported an “informed source in the Russian delegation.” Australian demands in the bilateral negotiation with Russia are “rather unfair”, the source is reported as thinking.

Russia’s import business has been such a hugely corrupt sector since Boris Yeltsin saw to the dismantling of the Soviet state, it has been impossible for Russia’s trade negotiators to represent anything like the national interest, let alone balance impoverished consumers against powerful traders, or vested producer interests. For one thing, for the entire decade of WTO negotiations, the Russian government has produced no detailed White Paper weighing accession’s benefits against its costs, and identifying those Russian sectors iikely to gain, or likely to lose. The government has not encouraged a public debate on trade policy. Nor has federal parliament taken the initiative to legislate the kind of trade supports and conditionalities, which are a feature of democracies like Australia and the US. Russia has been targeted for countless anti-dumping penalties in the international steel industry, but it has never retaliated.

But so dominant and powerful has Russia become as a global energy supplier, there is considerable sentiment in the domestic business community, as well as in the Kremlin, to suggest there may be little value in joining the WTO – at least not at the price demanded by the hold-out member-states.

And so, what exactly is Australia demanding from Russia on the commodity and resource playing-field, on which it likes to piay?

When asked by Mineweb to explain what he is after in the Russian market for “mining-related services”, and what Russian obstacles he would like to dismantle, Vaile refused to say. Instead, a spokeswoman claimed: “Unfortunately a number of the questions you raise relate to issues that are the subject of continuing bilateral negotiations between Australia and Russia as part of Russia’s WTO accession commitments, and we do not wish to comment on them at this time.” John Larkin, who heads a WTO negotiations section in the Australian Embassy in Geneva, also refused to be specific, either as to the Australian claim, or the Russian response.

Russian goldminers told Mineweb they had heard nothing of the Australian demand. A source close to the federal ministry in charge of licensing mining projects said the ministry had not been consulted on this issue, and could scarcely imagine what the Australians have in mind. Russian geologists and other mining professionals currently work with international mining consultancies, as well as western mining companies, to meet Russian regulatory and statutory requirements for mining projects. Bateman of South Africa has operated a Moscow office for years, as have Canadian and other international consultancies. According to a Natural Resource Ministry source, the market in feasibility study work is a professionally competitive one, and hardly the subject for foreign trade demands.

One Russian trade negotiator said he was reluctant to get into detail about the Australian demand “because we don’t want to warm up the situation.” His superior was no less solicitous, but revealed that what the Australians are really after is access to Russia’s enormous geological archives. “The key issue,” the source told Mineweb, “was the access of Australian companies (and other countries as well) to study Russian deposits, in order that Russia should obligate itself to give access for foreign companies to Russian deposits.”

This is a highly sensitive issue, and it is no longer surprising why Vaile is trying to hide it. In essence, the Australian government is demanding access to the accumulated capital of Soviet geology, covering the entire mineral wealth of the country. Implicit in the demand is the discovery that the communist regime produced a bonanza of geological studies which, according to the Australian concept of how the mining-game is played, should be made freely available to Australian mining companies or consultants. This is the new concept of “terra nullius”. Nothing the Soviets did should be deemed to have any property value to their successors, at least not once an Australian explorer or entrepreneur has set foot on the territory.

The Russians have no intention of agreeing, although, so far, they are being polite. “We were able to explain to the Australian side that this is impossible due to current legislation,” the trade negotiator said in Moscow today. He went on to add: “the situation will change somewhat after the new Subsoil Law will be implemented.”

That legislation – prematurely introduced in the State Duma a few weeks ago, and withdrawn for further amendment — sets out for the first time a set of strategic mineral and underground resource deposits which non-Russian miners will not be permitted to develop. It’s possible that BHP Biiliton, Australia’s biggest miner, may have told Vaile to use the WTO talks to lobby for access to Russian diamond deposits that BHP has spent three unsuccessful years pursuing. If so, Vaile will fail, as surely as BHP.

The outcome for BHP is unremarkable. The Melbourne management can at least comfort itself by noting that it lost far more money pursuing diamond, oil, and copper projects in Russia a decade ago, than it has done so far in this decade.

Vaile’s performance is a failure in quite a different class. As the Russian trade negotiators hinted in Hong Kong, the rhetorical role of moral guardian of free trade is a bad joke. What Vaile has been doing is lobbying the Russians for a narrow commercial mining interest he doesn’t dare reveal. Down with the level playing-field! Up with the fix! And a hearty cheer for Australian hypocrisy!

STEEL SALE MEETS RUSSIA’S CUTTING EDGE

MOSCOW (Mineweb.com) – At the start of Raymond Chandler’s last novel,the private detective Philip Marlowe is on watch at the Los Angeles railway station. “There was nothing to it,” he says to himself. “The subject was easy to spot as a kangaroo in a dinner jacket.”

Later, after trailing her to a hotel room down the Pacific coast, he observes: “She didn’t look like a tramp and she didn’t look like a crook. Which meant only that she could be both with more success than if she had.”

Two weeks ago, when we were on watch outside the London Stock Exchange, ts Vladimir Lisin was advertising to sell 420 million shares in his Russian steel company, Novolipetsk Metallurgical Combine (NLMK). A 7-percent shareholding in a company with revenues of almost $5 billion, its own iron-ore mines, and cash in the bank of almost $2 billion, and Lisin was as obvious as the kangaroo. With a little help from the BBC, his dinner jacket was also showing. “A former welder,” reported the epitome of British newsworthiness, Lisin is “already estimated to be Russia’s second richest man.” He was letting his shares slip, he told the BBC, to “raise Novolipetsk’s international profile.”

Two weeks later, after the Financial Times had trailed him to a hotel suite, Lisin complained that reporting of Russian business might be “scaring people away”. He added that he wasn’t selling because he lacked faith in Russia as a place to do business. And he was tired, he said, of the behaviour of foreign investors who “spend their time asking the [Russian] government what it can give them. What would you think of me,” he asked the FT, or none in particular, “if I came to the UK and concentrated my time on asking the British government for some sort of preferential treatment?”

Here was the innocent, to be sure, certain the FT reporter hadn’t read the small print in the NLMK prospectus. If he had, he might have spotted Lisin’s hostility towards the Russian government for not assuring him the preferential tax, transport, anti-trust, and power supply tariffs on which the profitability of his steelmaking depends. And also Lisin’s hostility towards the media, which “regularly published slanted articles in return for payment.” And then there are the disclosures of the two UK companies, through which Lisin trades much of his steel company’s metal, and possibly also its profit.

But wait – the appearances of things are getting ahead of the things themselves.

According to the official announcement, as of last Friday, December 9, the owner of NLMK (also called Novolipetsk Steel), Russia’s fourth largest steel producer, and also its most profitable steelmill, had sold his bloc of shares at $1.45 per unit, for a personal take of $609 million. Is this the dinner-jacket, or the kangaroo?

During year-long preparations for the share sale, Lisin had indicated that he wanted to raise more than three times as much, or almost $2 billion from the listing. In April, NLMK confirmed that it had secured permission of the Russian securities regulator, the Federal Service for Financial Markets, to sell 1.498 billion shares, or 25.1% of the existing stock, on a foreign exchange. At the time, Lisin’s holding was 95.6%. The big sale was scheduled for June, but then called off.

In August of this year, Lisin arranged for the sale of two blocs of shares,totaling 3.34%, to two companies, Costen and Akractos; these are in turn owned by members of the management or board of directors of NLMK, or its affiliated companies. Another 1.2% bloc was also sold to Trixton, a company indirectly owned by the steel trading companies Lisin controls for NLMK’s exports. These transactions appear to have been a form of untaxable share option distribution, with a purchase price below $1.20, and no payment required until December 31, 2006.

Another 1.2% was sold by Lisin, also last August, to unaffiliated investors. That left him in control of 89.85% of NLMK’s shares at the listing announcment, when it finally came on November 24. After the placement of the shares was announced last Friday, Lisin continues to hold at least 82% of the shares through Cyprus-registered and other offshore companies.

Disclosures in the NLMK prospectus, despite its highly restricted circulation, appear to have lowered the bidding price for the NLMK shares by 3%, compared to the Moscow stock exchange price on December 9; and by 8% off the peak which NLMK’s stock hit on the Russian stock index, just before the formal announcement to list on the London Stock Exchange (LSE) was issued. The market capitalization of the steelmaker has been cut by more than half a billion dollars since Lisin engaged investment banks UBS and Merrill Lynch, and Financial Dynamics, a London public relations firm, to promote the sale of his shareholding.

Neither NLMK, nor Lisin’s London spokesman, Jon Simmons, agreed to release the prospectus, nor answer detailed questions relating to the way in which Lisin has organized the steelmaking company, its raw material suppliers, and trading units.

Unlike the Russian steel companies which have preceded Lisin on to international markets – Mechel at the New York Stock Exchange in October 2004; Evraz at the LSE last July — the NLMK document of almost 300 pages was not prepared in pdf format, easy to transmit electronically from fund manager to manager, brokerage to client. Instead, it was circulated in a bound hard-copy that could not be easily machine-scanned or copied. Photo-copying the prospectus by hand requires several hours.

Once available, however, the prospectus makes the unusual statement up front that the principal risk to investors in buying NLMK shares from Lisin is “our controlling shareholder’s ability to exert significant influence over us [NLMK].”

That he had already done what he could to raise the selling price was also disclosed. In a note to the accounts, in 2002 an $85 million interest-free, 2-year loan of NLMK funds was issued to LKB Invest to facilitate purchase of shares in NLMK. The borrowing unit was then absorbed by LLC Rumelco, owned by Lisin, and the loan paid off in 2003.

Although considerable historical and financial detail is revealed for the first time about Lisin’s acquisition of the steel plant from the Trans World group of London, controlled by the Reuben brothers, a significant omission is the ownership and operation of three trading companies — Steelco Mediterranean Trading of Cyprus, Moorfield Commodities and Tuscany Intertrade, both of the UK.

According to the prospectus, these three are “independent wholesale traders”. There is a “long term strategic partnership”, agreed in October 2004 for three years, between these companies and NLMK for sale of at least 70% of NLMK’s steel exports. In 2004, the percentage was 90%; this year to September 30, the percentage has been 85%. Nothing about the ownership of the traders is disclosed, except that they are “under common ownership” and “unrelated parties to NLMK”.

By press time, Lisin’s spokesman did not respond to questions about who owns, controls or benefits from their operations. If, as industry sources believe likely, the trading companies are controlled by Lisin, then he is able to vary the export pricing of NLMK’s products, so as to enhance, or detract from, the cashflow and profitability of NLMK’s domestic operations and its balance-sheet. In current market conditions, that may be of little concern to investors – NLMK reports that as of September 30, it held cash and cash equivalent of $1.93 billion, with debt of just $19.9 million.

Precise financial details of the export revenues are not disclosed in the prospectus. However, data reported on export percentages indicate that exports amounted to 74% of NLMK’s sales revenues in 2004; or about $3.3 billion in value. This year, the proportion changed significantly, with just 58% of sales revenues accounted for by exports in the first nine months of the year; for a value of $1.9 billion. According to a note to the accounts, prepared by PriceWaterhouseCoopers, the three trading companies owed NLMK about $294 million at December 31, 2004; by September 30, this was $238 million. The prospectus reports that the traders must make payment within 60 days of delivery of goods, but concedes: “any failure by these international wholesale traders to satisfy their payment obligations to us may adversely affect our financial condition and results of operations.” The company also concedes that Russian law on transfer pricing between related companies could have a detrimental impact on the group’s financial results.

At the same time, and in parallel, NLMK reports that it has reduced the proportion of low-value pig iron and slabs in its export shipments, while raising the share of relatively high-value hot and cold-rolled steel, and grain oriented steel. NLMK’s export destinations have also shifted, with declines in shipments to the European Union and North America, and offsetting increases in shipments to Asia.

The consolidated structure of the NLMK company, as reported in the prospectus, includes three mining units, the most important of which is Stoilensky ore-processing combine (GOK), the iron-ore supplier, for which NLMK appears to have paid $659.3 million when it was consolidated into the NLMK structure last year. NLMK reports that it is now self-sufficient in iron-ore. On a stand-alone basis, before consolidation, Stoilensky reported profit in 2004 of $207.8 million; it is the target of an on-going Russian government investigation into price collusion in the iron-ore sector.

Coking-coal production, the second basic raw material requirement for steelmaking, is not consolidated in the NLMK structure as yet, although the prospectus refers to the acquisition in August 2005 of the licence to develop the Zhernovskoe-1 deposit in Kemerovo (Siberia). NLMK says it plans to invest $430 million in the mine over the next four years, and that when fully operational, it will supply 50% of the group’s steelmaking requirement. Who will own the coal mine is not disclosed. The prospectus reports that “we are currently in talks to acquire more than 90% of the shares of a Russian coke producer. As part of this transaction we may also acquire a number of coal producing companies.”

NLMK’s scrap supply requirement, another vital feed for the furnace, is 2.3 million tons, of which 1.4 million tons (60%) are supplied by third parties. Limestone and metallurgical dolomite come from consolidated subsidiaries, while ferroalloys come from third-party suppliers.

Control of transportation , especially maritime outlets for exports, is a key element of the group’s vertical integration, according to the prospectus. However, the document identifies only Tuapse port and related facilities, on the Black Sea, as consolidated within the NLMK group ownership structure. The larger-volume St.Petersburg port company, which Lisin acquired through offshore companies in the past two years, is not included.

Fresh steel assets are very briefly referred to in the prospectus. Lisin appears to have changed his mind regarding expansion abroad. Dan Steel, which he bought in Denmark several years ago, may be sold by him to NLMK, but no decision has been reached. After a period of disclaiming interest in foreign acquisitions, this year Lisin put himself in contention for the Erdemir privatization in Turkey, only to drop out when the bidding price exceeded his target.

NLMK also reports “we are currently in talks to acquire another Russian steel producer specializing in high value-added types of steel.” No details of the target are available.

The key to understanding why Lisin and his bankers and promoters are so furtive about the details of their business lies in their underlying lack of confidence that they can count on hanging on to it. Notwithstanding what he told the Financial Times, Lisin and the NLMK management don’t really enjoy the Russian business environment. Corruption is rife in the courts, NLMK declares in the prospectus – and not only there. Challenges to the way in which the steel plant was privatized – its employee vouchers bought up by Trans World, Cambridge Capital Management, Boris Jordan, and Vladimir Potanin -could still occur, and heavy back-tax claims could be imposed. “Signs of a breakdown in the consensus among key government officials are beginning to appear”, the prospectus concedes, arousing apprehension.

The case of convicted Yukos oil company fraudsters Mikhail Khodorkovsky and Platon Lebedev is reported in the prospectus as a serious omen for Russia’s largest asset holders. Lisin isn’t about to concede the folly of Khodorkovsky’s attempt to sell up to 40% of his oil assets to a US oil company, despite a Kremlin veto. But he has been careful to apply for government permission to sell his stake;and even more cautious to keep it small. Steelmaking, iron-ore and coal mining could be strategic to Russia’s economic security, the prospectus acknowledges, and thus the permissible scope of Lisin’s future ownership of these assets uncertain.

This, then, is the strategic problem for Lisin, and others with similarly large resource and commodity holdings. To acquire them, and then secure them from counter-attack, a decade ago, required vertical integration from raw material to production plant and transport outlet; with the shareholdings distributed in chains of offshore companies so numerous and complex as to defy investigation and defeat unravelling . To achieve market value, however, requires consolidation of shareholdings, assets and cashflows; audited financial reports and disclosure of related party transactions; the appearance of tax compliance; and market assessment of risk.

Lisin, like other major Russian asset-holders, can’t let go of the trading chain he created a decade ago, and the prospectus reveals how limited to date the consolidation process of the NLMK group has gone. Lisin is simply keeping some of his most valuable eggs out of the basket. Were there to be an attack by a domestic rival on the core steelmaking plant, or a squeeze on raw material or energy supplies, he could quickly transform his existing structure into a heavily indebted shell, with the profits exported to the safe havens he continues to operate offshore. That Lisin is less inclined to do this than some of his peers in Russian metals is to his credit.

But he also undermines the credibility of his ambition by one of the worst disclosure records in the Russian steel sector. The investment market, according to the NLMK prospectus – if you can find a copy, break open its spine, and analyze what is missing — should deliver a vote of confidence in Lisin’s share price. But he has structured his group, and his listing, in a fashion that suggests he takes more seriously the Russian risks adumbrated in the prospectus than he asks investors to accept. Anything discovered to the contrary must be “slanted in return for payment”. The kangaroo in the dinner jacket.

IF IT SMELLS ALLURING, IT’S RUSSIAN – IN WARTIME L’ORÉAL (FRANCE) AND ESTÉE LAUDER (US) MAKE A BAD SMELL



By John Helmer, Moscow
  @bears_with

The war plan of the US and the European allies is destroying the Russian market for traditional French perfumes, the profits of the French and American conglomerates which own the best-known brands, the bonuses of their managers, and the dividends of their shareholders. The odour  of these losses is too strong for artificial fresheners.

Givaudan, the Swiss-based world leader in production and supply of fragrances, oils and other beauty product ingredients, has long regarded the Russian market as potentially its largest in Europe; it is one of the fastest growing contributors to Givaudan’s profit worldwide. In the recovery from the pandemic of Givaudan’s Fragrance and Beauty division – it accounts for almost half the company’s total sales — the group reported “excellent double-digit growth in 2021, demonstrating strong consumer demand for these product categories.”    Until this year, Givaudan reveals in its latest financial report, the growth rate for Russian demand was double-digit – much faster than the  6.3% sales growth in Europe overall; faster growth than in Germany, Belgium and Spain.    

Between February 2014, when the coup in Kiev started the US war against Russia, and last December, when the Russian non-aggression treaties with the US and NATO were rejected,   Givaudan’s share price jumped three and a half times – from 1,380 Swiss francs to 4,792 francs; from a company with a market capitalisation of 12.7 billion francs ($12.7 billion) to a value of 44.2 billion francs ($44.2 billion). Since the fighting began in eastern Ukraine this year until now, Givaudan has lost 24% of that value – that’s $10 billion.  

The largest of Givaudan’s shareholders is Bill Gates. With his 14%, plus the 10% controlled by Black Rock of New York and MFS of Boston, the US has effective control over the company.

Now, according to the US war sanctions, trade with Russia and the required payment systems have been closed down, alongside the bans on the importation of the leading European perfumes. So in place of the French perfumers, instead of Givaudan, the Russian industry is reorganizing for its future growth with its own perfume brands manufactured from raw materials produced in Crimea and other regions, or supplied by India and China. Givaudan, L’Oréal (Lancome, Yves Saint Laurent), Kering (Balenciaga, Gucci), LVMH (Dior, Guerlain, Givenchy), Chanel, Estée Lauder, Clarins – they have all cut off their noses to spite the Russian face.

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THE WAR AGAINST FOOD – WHO IS TO BLAME



By Nikolai Storozhenko, introduced and translated by John Helmer, Moscow
  @bears_with

This week President Joseph Biden stopped at an Illinois farm to say he’s going to help the  Ukraine ship 20 million tonnes of wheat and corn out of storage into export, thereby relieving  grain shortages in the international markets and lowering bread prices around the world.  Biden was trying to play a hand in which his cards have already been clipped. By Biden.  

The first Washington-Kiev war plan for eastern Ukraine has already lost about 40% of the Ukrainian wheat fields, 50% of the barley, and all of the grain export ports. Their second war plan to hold the western region defence lines with mobile armour, tanks, and artillery  now risks the loss of the corn and rapeseed crop as well as the export route for trucks to Romania and Moldova. What will be saved in western Ukraine will be unable to grow enough to feed its own people. They will be forced to import US wheat, as well as US guns and the money to pay for both.

Biden told his audience that on the Delaware farms he used to represent in the US Senate “there are more chickens than there are Americans.”  Blaming the Russians is the other card Biden has left.  

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EXILE



By John Helmer, Moscow
  @bears_with

The problem with living in exile is the meaning of the word. If you’re in exile, you mean you are forever looking backwards, in geography as well as in time. You’re not only out of place; you’re out of time — yesterday’s man.

Ovid, the Roman poet who was sent into exile from Rome by Caesar Augustus, for offences neither Augustus nor Ovid revealed, never stopped looking back to Rome. His exile, as Ovid described it, was “a barbarous coast, inured to rapine/stalked ever by bloodshed, murder, war.” In such a place or state, he said, “writing a poem you can read to no one is like dancing in the dark.”

The word itself, exsilium in Roman law, was the sentence of loss of citizenship as an alternative to loss of life, capital punishment. It meant being compelled to live outside Rome at a location decided by the emperor. The penalty took several degrees of isolation and severity. In Ovid’s case, he was ordered by Augustus to be shipped to the northeastern limit of the Roman empire,  the Black Sea town called Tomis; it is now Constanta, Romania. Ovid’s last books, Tristia (“Sorrows”) and Epistulae ex Ponto (“Black Sea Letters”), were written from this exile, which began when he was 50 years old, in 8 AD, and ended when he died in Tomis nine years year later, in 17 AD.  

In my case I’ve been driven into exile more than once. The current one is lasting the longest. This is the one from Moscow, which began with my expulsion by the Foreign Ministry on September 28, 2010.  The official sentence is Article 27(1) of the law No. 114-FZ — “necessary for the purposes of defence capability or security of the state, or public order, or protection of health of the population.” The reason, a foreign ministry official told an immigration service official when they didn’t know they were being overheard, was: “Helmer writes bad things about Russia.”

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IN THE FOG OF WAR THERE’S THE GUTERRES CERTAINTY AND THE CADIEU CERTAINTY – GORILLA RADIO SEES THROUGH THE COVER-UP



By John Helmer, Moscow
  @bears_with

Antonio Guterres is the Secretary-General of the United Nations (UN), who attempted last month  to arrange the escape from Russian capture of Ukrainian soldiers and NATO commanders,  knowing they had committed war crimes. He was asked to explain; he refuses.   

Trevor Cadieu is a Canadian lieutenant-general who was appointed the chief of staff and head of the Canadian Armed Forces last August; was stopped in September; retired from the Army this past April, and went to the Ukraine, where he is in hiding. From whom he is hiding – Canadians or Russians – where he is hiding, and what he will say to explain are questions Cadieu isn’t answering, yet.

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DID UN SECRETARY-GENERAL GUTERRES COMMIT A WAR CRIME AT AZOVSTAL?

By John Helmer, Moscow
  @bears_with

Antonio Guterres, the United Nations Secretary-General, is refusing this week to answer questions on the role he played in the recent attempt by US, British, Canadian and other foreign combatants to escape the bunkers under the Azovstal plant, using the human shield of civilians trying to evacuate.

In Guterres’s meeting with President Vladimir Putin at the Kremlin on April 26 (lead image), Putin warned Guterres he had been “misled” in his efforts. “The simplest thing”, Putin told Guterres in the recorded part of their meeting, “for military personnel or members of the nationalist battalions is to release the civilians. It is a crime to keep civilians, if there are any there, as human shields.”  

This war crime has been recognized since 1977 by the UN in Protocol 1 of the Geneva Convention.  In US law for US soldiers and state officials, planning to employ or actually using human shields is a war crime to be prosecuted under 10 US Code Section 950t.  

Instead, Guterres ignored the Kremlin warning and the war crime law, and authorized UN officials, together with Red Cross officials,  to conceal what Guterres himself knew of the foreign military group trying to escape. Overnight from New York, Guterres has refused to say what he knew of the military escape operation, and what he had done to distinguish, or conceal the differences between the civilians and combatants in the evacuation plan over the weekend of April 30-May 1.May.

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THE LAST DITCH IS POLAND – RUSSIA’S PHASE-3 PLAN FOR WESTERN UKRAINE



By Vlad Shlepchenko, introduced & translated by John Helmer, Moscow
  @bears_with

The more western politicians announce pledges of fresh weapons for the Ukraine, the more Russian military analysts explain what options their official sources are considering to destroy the arms before they reach the eastern front, and to neutralize Poland’s role as the NATO  hub for resupply and reinforcement of the last-ditch holdout of western Ukraine.

“I would like to note,” Defense Minister Sergei Shoigu, repeated yesterday, “that any transport of the North Atlantic Alliance that arrived on the territory of the country with weapons or material means for the needs of the Ukrainian armed forces is considered by us as a legitimate target for destruction”.  He means the Ukraine border is the red line.

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THE MATLIN PLOT, THE BROWDER PLOT AND THE NEW YORK TIMES PLOT



By Lucy Komisar,  New York*
  @bears_with

Here’s a story the New York Times has just missed.

US politicians and media pundits are promoting the targeting of “enablers” of Russian oligarchs who stash their money in offshore accounts. A Times article of March 11   highlighted Michael Matlin, CEO of Concord Management as such an “enabler.” But the newspaper missed serious corruption Matlin was involved in. Maybe that’s because Matlin cheated Russia, and also because the Matlin story exposes the William Browder/Sergei Magnitsky hoax aimed at Russia.

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YELLOW COAL, THE FUEL MADE OUT OF RACE HATRED — MAY DAY MESSAGE FROM SIGIZMUND KRZHIZHANOVSKY, 1939



By John Helmer, Moscow
  @bears_with

In 1939 a little known writer in Moscow named Sigizmund Khrzhizhanovsky published his idea that the Americans, then the Germans would convert human hatred into a new source of energy powering everything which had been dependent until then on coal, gas, and oil.

Called yellow coal, this invention originated with Professor Leker at Harvard University. It was applied, first to running municipal trams, then to army weapons, and finally to cheap electrification of everything from domestic homes and office buildings to factory production lines. In Russian leker means a quack doctor.

The Harvard professor’s idea was to concentrate the neuro-muscular energy people produce when they hate each other.  Generated as bile (yellow), accumulated and concentrated into kinetic spite in machines called myeloabsorberators, Krzhizhanovsky called this globalization process the bilification of society.

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IS CAESARISM THE PROBLEM, THE SOLUTION, A FANCY DRESS COSTUME, OR A PROPAGANDA CARTOON?



By John Helmer, Moscow
  @bears_with

In imperial history there is nothing new in cases of dementia in rulers attracting homicidal psychopaths to replace them.  It’s as natural as honey attracts bees.

When US President Woodrow Wilson was incapacitated by a stroke on October 19, 1919, he was partially paralysed and blinded, and was no longer able to feed himself, sign his name, or speak normally; he was not demented.

While his wife and the Navy officer  who was his personal physician concealed his condition, there is no evidence that either Edith Wilson or Admiral Cary Grayson were themselves clinical cases of disability, delusion,  or derangement. They were simply liars driven by the ambition to hold on to the power of the president’s office and deceive everyone who got in their way.  

The White House is always full of people like that. The 25th Amendment to the US Constitution is meant to put a damper on their homicidal tendencies.

What is unusual, probably exceptional in the current case of President Joseph Biden, not to mention the history of the United States,  is the extent of the president’s personal incapacitation; combined with the clinical evidence of psychopathology in his Secretary of State Antony Blinken;  and the delusional condition of the rivals to replace Biden, including Donald Trump and Hillary Clinton.

Like Rome during the first century AD, Washington is now in the ailing emperor-homicidal legionary phase.  But give it another century or two, and the madness, bloodshed, and lies of the characters of the moment won’t matter quite as much as their images on display in the museums of their successors craving legitimacy, or of successor powers celebrating their superiority.  

Exactly this has happened to the original Caesars, as a new book by Mary Beard, a Cambridge University professor of classics, explains. The biggest point of her book, she says, is “dynastic succession” – not only of the original Romans but of those modern rulers who acquired the Roman portraits in marble and later copies in paint, and the copies of those copies, with the idea of communicating “the idea of the direct transfer of power from ancient Romans to Franks and on to later German rulers.”

In the case she narrates of the most famous English owner of a series of the “Twelve Caesars”, King Charles I — instigator of the civil war of 1642-51 and the loser of both the war and his head – the display of his Caesars was intended to demonstrate the king’s self-serving “missing link” between his one-man rule and the ancient Romans who murdered their way to rule, and then apotheosized into immortal gods in what they hoped would be a natural death on a comfortable bed.

With the American and Russian successions due to take place in Washington and Moscow in two years’ time, Beard’s “Twelve Caesars, Images of Power from the Ancient World to the Modern”,  is just the ticket from now to then.

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RUSSIAN REPORTING ON THE SECRETS OF THE COMMAND BUNKER UNDERNEATH AZOVSTAL



By Margarita Menshikova, translated by John Helmer, Moscow
  @bears_with

On the day before Good Friday (Orthodox), Russian Defence Minister Sergei Shoigu reported at the Kremlin to President Vladimir Putin that at Mariupol,  inside the Azovstal steel works, about two thousand troops remain underground, including foreigners. Putin issued the following order: “There is no need to penetrate these catacombs and crawl under these industrial facilities. Seal off the industrial zone completely.”  

Four days earlier on April 17, the Defence Ministry spokesman Major-General Igor Konashenkov told the press that “up to four hundred foreign mercenaries were trapped [at Azovstal]… Most of them are citizens of European countries, as well as Canada. We have already reported earlier that radio conversations between militants in Mariupol are conducted in six foreign languages”  

Today, an unusually detailed report by the Moscow internet broadcaster Tsargrad was published to signal the strategic significance and political value of the NATO officers in their command bunker under Azovstal.

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