By John Helmer, Moscow
A federal US judge has dismissed a 17-year long attempt by Archangel Diamond Corporation (ADC) to recover damages for the alleged theft of its stake in a multibillion-dollar Russian diamond mine by two Russian oligarchs, Alisher Usmanov and Vagit Alekperov (lead image, left), and Alekperov’s company, LUKoil. The legal action protects LUKoil, which has been under US Government sanctions since September 12, from liabilities — if the ADC lawsuit were to succeed — of almost $5 billion.
On December 18, Judge Raymond P. Moore of the US District Court in Denver, Colorado, granted a request from LUKoil to dismiss ADC’s lawsuit on the ground that LUKoil has insufficient connection to the state of Colorado for the Denver court to take jurisdiction and try the case. ADC gave immediate notice of appeal in December; it is lodging the papers in the US Court of Appeal for the 10th Circuit in Denver this week.
Moore also ruled in favour of the Russian courts to hear ADC’s claim. “Russia is an available and adequate alternate forum to hear this case. ..the Court finds that Lukoil has met its heavy burden of showing that dismissal under forum non conveniens is appropriate, in light of Lukoil’s affirmative representation to this Court that it consents to the jurisdiction of the Russian courts and agrees not to raise the statute of limitations as a defense to the [ADC] Trust’s claims.” Read the full judgement here.
Moore (right), a local public defender until President Barack Obama appointed him to the federal court two years ago, has been sending explicit political messages in his recent judgements. This one, to endorse a Russian oil company which was punished by US sanctions last September, and to express confidence in the Russian judicial system, flies in the face of current Washington policy.
Last June President Vladimir Putin officially inaugurated the Arkhangelsk region mine. In the company of Alekperov, he inspected some of the largest of the gemstones already recovered.
Known as Grib, after the geologist Vladimir Grib who first discovered the diamond deposit in 1996, the mine was first developed by a joint venture led by ADC, a Canadian company in partnership with the global diamond miner, De Beers. ADC then moved its headquarters to Denver. De Beers attempted a joint venture to dig and operate the mine with LUKoil in 2008. This was abandoned in 2009. By then LUKoil’s Alekperov had bought out Usmanov, his original partner in the venture, and their private company had transferred its stake in the project to the LUKoil subsidiary, Arkhangelskgeoldobycha (AGD).
Usmanov has been accused by ADC of culpability in the affair. He has been pursued by ADC to give evidence, and his role has been detailed in the US court papers, as well as in a closed-door arbitration proceeding in Sweden. There has been no test or adjudication of this evidence because LUKoil has won a series of preliminary rulings in several federal and state courts; so far they have refused jurisdiction to see the case to trial. As the time has worn on, De Beers abandoned the case, and ADC went into bankruptcy, leaving a trust to continue litigating on its behalf.
In his summary of the case to be tried, Moore wrote that “in addition to actions taken in Colorado in connection with Archangel and the Illegal Scheme involving the Diamond License, Lukoil also allegedly had other contacts in Colorado. Lukoil allegedly did business in Colorado through DSE Engineering, Inc., a Colorado corporation which has maintained an office in Colorado since February 1999, and engaged in tax fraud… Lukoil also allegedly funded DSE though the “Slush Fund Companies,” i.e., Oldberry Investments, Ltd., Gilwood Investments, Ltd., and Lukoil Israel, Ltd. These Slush Fund Companies were shells and Lukoil used them as conduits for the “Cash Smuggling,” “False Expenses,” “Buy High, Sell Low,” and “Dividends” schemes.”
For more on these schemes, open sesame.
Bruce Marks (right) of Marks & Sokolov, a law firm in Moscow and Philadelphia, is the lead attorney for ADC. He says that Judge Moore made a mistake in law to open the facts of LUKoil’s Colorado operations and dispute ADC’s record. “The district court erred by failing to accept Archangel’s allegations as true for personal jurisdiction based on Lukoil’s 75 plus fraudulent communications and vast nationwide ties. We are optimistic that the Court of Appeals will reverse and permit Archangel to prosecute its RICO and other claims in Colorado federal court in order to recover the value of its 50% interest in a now operating diamond mine.” Marks is also challenging Moore’s ruling that the Russian courts will give ADC a fair hearing.
RICO stands for the Racketeer Influenced and Corrupt Organizations Act, enacted by the US Congress in 1970. It has both criminal and civil application; in civil cases the law allows treble the amount of actual damage or loss. ADC has been calculating its claim against LUKoil on estimates of the half-share in the project which it has lost since 1998. The sums in ADC’s initial court submissions were $1.2 billion in compensatory damages for the loss of investment and profits in the mine project, plus triple punitive damages of $3.6 billion for the alleged racketeering conspiracy.
In 2008 De Beers valued the Arkhangelsk diamond deposit between $8.2 billion and $9.7 billion, with estimates of the mineable diamonds ranging between 50 and 75 million carats at a rough diamond price of between $105 and $118 per carat. The diamond price has grown, peaking in the second half of 2014. Since then prices have fallen by 10%, and they are not expected to pick up again until the second half of this year. The full story can be read here.
In its latest Colorado federal court submission, ADC points to US law and earlier court precedents determining that “a single act can support jurisdiction… this is sufficient to establish minimum contacts, given Lukoil itself tricked Archangel into believing the [mine] License would be transferred, stating it ‘adheres to the principles of continuity and execution of the previously concluded agreements and commitments and obligations’ when it had no intention of doing so.”
According to Moore, “this case does have connections to Colorado as this is where Archangel [ADC] filed bankruptcy, where the Trust is located and where Archangel had its principal place of business until it was allegedly force[d] to move back to Canada. Nonetheless, the Trust’s claims and resulting damages arise from the alleged loss of its investment and interest in a Russian diamond mine and Diamond License, through the conduct of Russian companies located in Russia, and where most of the conduct complained of occurred while Archangel was in Canada. Thus, the dispute has much closer connections and greater interest to Russia. Similarly, although the Trust seeks damages and not the transfer of the Diamond License, the litigation necessarily will require the determination of whether there was a contract (the Agreement) between AGD [Arkhangelskgeoldobycha, LUKoil subsidiary] and Archangel for the transfer of the Diamond License to a joint venture in which Archangel has an interest.”
The oil company says it has invested more than $500 million to construct the mine, which began commercial production last year. This year it is planned to produce up to 1.5 million carats per annum; this is significantly less than the 4.5 million carats mentioned in LUKoil presentations in 2013. Accordingly the target of $600 million in diamond sales revenues has swindled. For more details, click here. Offers to sell out have been floated more than once by Alekperov, but no deal has been done with the only buyer in serious contention, state-owned Alrosa.
This Monday, February 2, Alekperov met Putin at the Kremlin to discuss LUKoil’s business, including the diamond mine. According to the Kremlin transcript, Putin said: “I know that you are in the process of diversifying your business. I visited one of your new facilities recently, a diamond mine. How is the work going there?”
Alekperov replied: “We have been increasing production there every year and this year expect to reach a figure of 1.5 million carats. This is not much compared to ALROSA, but the project is starting to pay for itself now. The project is not a high-profit venture and has an IRR of only 16 percent, but we are sure that it will prove its worth over 5-6 years. Most important today is that we have ensured the necessary social conditions for the workers and together with Gokhran [Russian State Precious Metals and Gems Repository] have developed a unique system for processing, valuing and selling the products. In other words, we are not taking care of the valuation ourselves. All of this is being done by the state. We therefore see this as a stable, conservative business that will bring money into the budget. Arkhangelsk Region is already feeling the effect of this project’s launch and is seeing the benefits for its budget. I am sure that this project will continue its stable development.”
There has been no explanation from LUKoil for the dramatic cutback in mine production. Alekperov’s diffidence is a hint that he still wants to persuade Putin to direct Alrosa to buy LUKoil out.
There is also no reference in the Kremlin record of the impact US sanctions are having on LUKoil’s Caspian oilfields. All Alekperov reportedly said was: “We opened another field in the Caspian last year and have nearly completed our geological exploration work there… Our company has built up capabilities that it must continue to develop of course, and development means exploring new fields and launching new projects. I therefore ask for your support so that we can begin this work without delay.”
The LUKoil sanctions notice was issued by the US Treasury’s Office for Foreign Assets Control (OFAC) on September 12, 2014. The targeted LUKoil operations, according to OFAC’s Directive No. 4, are “exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory.” This is aimed at LUKoil’s projects in the Caspian Sea.
“You will have our support”, Putin told Alekperov on Monday.
According to Judge Moore, “I need to send a message”. He was ruling on January 23 in the case of a young Colorado woman charged with trying to join the ISIS group in Syria, and with conspiracy to provide material support to a foreign terrorist organization. Moore sent her to prison for four years, declaring: “this is not a serious offense but an extremely serious offense. I need to send a message.”
A recent review in Moscow of Russian litigations moving through the US courts identified the ADC case against LUKoil as the largest in money terms. It is also the only one to test, indirectly, the political intentions of the Obama Administration towards sanctioned Russian corporations in the oil and gas sector.