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By John Helmer in Moscow

The modern history of making money the easy way — by taking it from people who didn’t know they had it, and couldn’t notice when it was gone — is founded on the most elegant of the irreducible fractions, one third.

According to a series of reports this month by David Leigh and Rob Evans of The Guardian in London, the influential Saudi Prince Bandar bin Sultan, has been on the receiving end of a quarterly payment of GBP30 million, every three months, for at least 10 years. A rough calculation of the accumulated total is GBP1.2 billion. This purports to be an arranging fee for a series of arms purchases by the Saudi Arabian government from the UK arms manufacturer, BAE Systems. So far, the transaction series has been worth about GBP43 billion. The money for Bandar was not characterised as commission, but as quasi-official fees for marketing services.

In short, about 2.8% of deal value. The sums look enormous, and they are. But the percentage is paltry . It hasn’t proved to be illegal in the UK (bribery, fraud, perjury, racketeering money laundering, etc.), because the Prime Ministry put a stop to prosecution. The US government is about to decide if it wants to go further.

The Guardian also reports that “accidentally released UK documents reveal that the basic price of the planes was inflated by 32%, to allow for an initial £600m in commissions.” That means that the British got all the deal value they thought they were entitled to; the extra was actually paid out of the Saudi public purse. The announced transaction price was a cover for concealing the larceny from the Saudi man in the street.

Someone in BAE may one day be obliged to testify why 32% was selected, not 33% — the third. It looks like it was the simplest way to accommodate the round figures which Bandar, his pop and their mates demanded from BAE’s initial deal price. Possibly it was a religious decision — to avoid the third, and preserve the recipients’ good fortune. For pious Moslems revere the third no less than Christians and Jews – there are, for example, three holy cities for pilgrimage, Mecca,. Medina, and Jerusalem. Christians revere the Holy Trinity; and Jews divide themselves into three tribes, led by three patriarchs, chanting prayers three times a day; and so on. King Solomon made the point for all believers: “A three-ply cord is not easily severed.”

In Moscow, the Third is the orthodox rule of business – it’s the amount of deal value in Russian asset transactions which is generated over real or fair value, in order to pay arranging fees, intermediary fees, and shares. For example, when Roman Abramovich agreed in 2005 to sell his interests in the source of his fortune, Siberian Oil — the Sibneft oil company – to the Russian state company Gazprom, the deal price of $13 billion is understood to have included one-third for distribution to related interests. Allegations of personal corruption are rife, and spill into the anti-Putin western media from time to time. But when in 2006 Abramovich’s holding company bought a controlling stake in the Evraz steel group, Russia’s largest steelmaker, for an undisclosed price, the deal is understood to have been paid, in part, from the Russian Third. And when and if the Kremlin orders Abramovich to transfer that stake to a state-controlled steelmaker like Russpetsstal, a division of arms monopoly, Rosoboronexport, you can be certain that the valuation and deal price will be arranged to allow a third to be creamed off, and distributed to all sorts of people on all sides of the deal.

It is necessary to understand that in Moscow, as in Riyadh, the taking, and then sharing the Third is not wrong. More than that, it’s that fraction which makes the deal possible in the first place. It’s therefore normal business practice. Today, that is.

Russian asset history since 1991 is testimony to what the outside powers celebrated as the reform of all time, the destruction of Soviet economic, political, and military power. In the case of natural resources underground, like the world’s largest reserves of gas, or of oil, nickel, platinum, etc., the assets were taken by a handful of men whose names were on the A list for national day celebrations at the UK and US embassies. Their take was not 33%, but 100%. High-ranking government officials acquired nicknames reflecting what was supposed to be their shares in the process – ‘Pasha Mercedes’ and ‘Misha Two-Percent’ are well-known for doing financially better than their monikerssuggest.

Taking the assets back for the commonwealth of Russians has been President Vladimir Putin’s self-appointed task, and the one for which he is justifiably popular. (It should be remembered that the Russian Communist Party did not advocate doing to the oligarchs what Putin did – until after he had started.) It’s been a difficult task. If prosecuting the asset thieves according to Russian law, and confiscating the assets, had been Putin’s only option and modus operandi, there would not have been enough forensic accountants, prosecutors, judges, and jail space to sustain the process.

And so it has happened that the Third has been devised to make the return of assets relatively quick, and from an administrative point of view, relatively non-disruptive of the revenue, profit, and investment generating process, on which the revival of the Russian state depends. This is different from the Bandar Bang – that third is paid by BAE to keep supplying a commodity the Saudi state doesn’t need, for a price its people can’t afford, for the enrichment of the ruling family, whose corruption is the principal reason they are obsessed with military security, and incidentally, the principal reason that the man called Osama bin Laden exists.

The Russian Third is different. It pays the state’s administrators the premium that is needed to ensure that they have a greater incentive to return the assets than to allow the thieves to get away with their crimes. The Bandar Bang was enough for ex-President Boris Yeltsin and his family. The Russian Third is enough to pay for the transition.

Not to understand all this disqualifies a serious person from conducting business on the territory of Russia. Putin has been doing his best to educate those willing to learn. Last year, he taught Royal Dutch Shell, Mitsui, Mitsubishi, and the Japanese government that the Bandar Bang payments they had made, a decade ago, for their concession to produce gas from the Sakhalin-2 field, in the Russian fareast, weren’t a one-time transaction for profit-taking in perpetuity. They resisted at first, telling the world’s media that their budget overruns, environmental losses, and tax savings were legal, because Yeltsin and his gang had signed their agreement, and been paid for it. In time, they understood that resistance risked the loss of their entire stake. They therefore sold part down, in order to preserve the profitability of what was left.

Shell’s CEO, Jeroen van der Veer, was still not sure what the lessons was that he had learned, so early this week, at a closed session of the economic summit in St. Petersburg, he asked Putin to tell him again. Putin replied: “the rules of the game very simple – honesty.”

It is surprising that the management of British Petroleum, and the Russian shareholders of their highly lucrative production venture, TNK-BP, failed to realize that the lesson of Shell at Sakhalin would apply to them. However, just weeks after Gazprom acquired the control stake of Sakhalin-2, BP was prompting the Daily Telegraph to defend its Kovykta gasfield development licence from “Putin’s land grab”, and outgoing Prime Minister Tony Blair warned British investors in Russia that their positions weren’t secure.

Kovykta, located in the southeastern Siberian region of Irkutsk, has proved reserves of almost 2 trillion cubic metres, a volume so sizeable Putin has described it as equal to the entire gas stocks of Canada. But the reserves weren’t always so large. The licence for the Kovykta deposit was first issued in 1993, when reserves were about 600 billion cu m. Rusia Petroleum was the entity which acquired the licence. At the time it was controlled almost equally by BP Amoco (31% stake) and Interros, the holding of Vladimir Potanin (26%). The Tyumen Oil Company (TNK) controlled by Mikhail Fridman, Victor Vekselberg, and Len Blavatnik, bought 6% in 2000, and a shareholder fight then ensued, with each accusing the other of stealing. Those allegations were largely true, and have come back to haunt the successor company, TNK-BP, as well as BP and Potanin. The current shareholding in Rusia Petroleum is 63% for TNK-BP, 26% for Interros, and 11% for the Irkutsk regional government.

If BP’s charges against the Russian stakeholders were to be believed, when BP was lobbying in Washington against US government credit guarantees for TNK, it is hardly surprising that Rusia Petroleum, has broken a few Russian laws as well. But when Oleg Mitvol, enforcer of licensing regulations for Rosprirodnadzor, recently announced that Rusia Petroleum’s licence for Kovykta might be revoked, and then reawarded, BP pressed the London lobbying button to cry foul.

Noone can deny, however, that the stakeholders have been very reluctant to invest the money required to bring Kovykta up to the licence requirement of 9 billion cu m of gas in the year 2006. Output was a paltry 34 million cu m instead. Mitvol’s spokesman Anna Hitrova, told Asia Times: “we have not issued any press releases on Kovykta in recent time. Also, nothing is available on the list of violations [by Rusia Petroleum] from our agency. I can comment on only one, which is obvious and well-known – non-fulfillment of production level to the targeted numbers.”

The reality for the stakeholders is that they can hardly be expected to invest into the required output level, until they are sure they can pipe the gas to China for export sale. They cannot do that, however, because Gazprom holds the export rights for gas in Russia. Thus, BP, Fridman, Vekselberg, and Potanin have all understood that the price they paid for the concession in 1993 is not a binding one. Kovykta, like all the other assets they lifted from the Yeltsin state, is a Putin franchise. The difference is that unless they accept the franchisor’s terms, he will take it back. The stakeholders have spent about $500 million, and as a result, the franchise is now double its previous value. Are they plain lucky? Should they share?

Putin has made clear that he isn’t going to revoke the licence. That would delay investment and production even longer. But he is insisting that Gazprom receive a stake in the project. The resistance to that suggested for a time that Kovykta might become Gazprom’s entirely; and that TNK-BP and Interros would be ousted. That isn’t in Gazprom’s interest, because it would be obliged to come up with the financing to meet the same production and pipeline requirements.

And so the Kovykta negotiations have been about the Russian Third – how much TMK-BP and Interros should give up, how much Gazprom should acquire, and what investment obligations the existing and new shareholders will accept.

This is regular business in Russia. The only people who think it should be otherwise are those who think — like BAE and Bandar — that those who have been hugely disadvantaged by an asset deal almost fifteen years ago should continue accepting the disadvantage forever. One thing noone seems to dispute – if you are foolish enough to think the Bandar Bang can last forever, you are stupid enough to deserve losing the lot.

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