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DANCES WITH BEARS
Nickel and
diming
By John Helmer
MOSCOW
- When there is trouble, Russians hide and hoard
whatever they can. And since there has always been
trouble in Russia, Russians are the world's biggest
hoarders.
In the 1930s, one of the legendary
heroes manufactured by Kremlin propagandists was Pavlik
Morozov, a young pioneer who denounced his own father, a
peasant landowner, for hoarding grain during a period of
famine. The fact that the doughty Pavlik was killed by
his angry family only added to the heroic luster with
which his act against hoarding was endowed throughout
the Soviet Union.
Nowadays, the hoarders have
become the heroes, whether they are ordinary Russians
who keep their savings hidden away in dollars, or men
such as Vladimir Potanin, the controlling shareholder of
Norilsk Nickel. Potanin's company is Russia's largest
mining group, and the world's largest producer of nickel
and palladium.
Potanin has been telling the
world that he wants there to be no secrets about his
company, so that lenders, bond buyers and eventually
shareholders will trust him enough to give the company
money. That ought to apply to cash on hand, as well as
inventories and stockpiles. Testing his truthfulness is
what Potanin obliges the marketplace to do.
Last
week Norilsk Nickel made its first big disclosure in
this direction, releasing what it calls its first
consolidated corporate accounts prepared to
international accounting standards. Deloitte Touche is
cited as having "reviewed" the accounts, but Deloitte
Touche officials explain that this means only what it
says. They reviewed the company's statements, but they
didn't audit them, nor will Deloitte Touche warrant that
what they contain is the truth.
One of the first
numbers to jump out of the accounts for 2001 is that
while production of metals grew, so did inventories,
whose value as of December 31 is given as 48.9 billion
roubles (US$1.6 billion). Another number of comparable
interest is described as outstanding loans on that date
of 37.6 billion roubles. And then there are a third and
fourth numbers, reflecting what the company claims is
the repayment of a secret loan or loans that it had
received from the state, amounting to 22.7 billion
roubles in 2001, and 3.6 billion roubles this year.
According to the company's statement, the secret debt
was repaid in the form of metal transferred to the
state. Perhaps - we aren't told - Norilsk Nickel intends
to repay the balance of its indebtedness to the state in
the same way.
If that were to happen, then
Norilsk Nickel's management needs the state stockpile,
and state secrecy, a great deal more than you would
think, if you believed the company's version of what it
told Prime Minister Mikhail Kasyanov in July. At that
time, according to the company's press claims, it wanted
to dismantle the elaborate system of state regulation,
stockpiling, export quotas and secrecy. Kasyanov had
agreed in principle, Norilsk Nickel also claimed.
Exactly why the loan of state funds to an
erstwhile private company - it was a state enterprise
when the loans reportedly began in 1994 - should be
covered by the state secrecy laws is not explained, and
Deloitte Touche, the likely auditor of the 2002 results,
doesn't have an answer. It is understood that in the
early 1990s, before Norilsk Nickel was handed over to
Potanin, it was obliged to conduct annual supply
operations to provide the remote Arctic territories in
which the company works with fuel, food, and the
necessary supplies for living through the long winter
period. That social welfare function was subsidized by
the federal government throughout the 1990s. Why the
government also loaned Norilsk Nickel money, at the same
time as the government was claiming that the company
owed enormous tax arrears, is something that has yet to
be explained.
Still, what appears to be
happening now is that Norilsk Nickel is paying the
federal government in palladium, the precious metal
which is covered by state secrecy. Very large amounts of
palladium, in fact, if you figure that the price at
which the metal is valued before transfer is either the
low and secret cost of production or a fraction of the
international market price.
In February 2001,
palladium hit a spot-market high of $1,100 per troy
ounce, and then started to fall. It is currently just
under $330, and, as Norilsk Nickel marketing executives
acknowledge, global demand for the metal is so weak that
they cannot sign long-term purchase contracts with all
their regular clients.
On the one hand, then,
Norilsk Nickel is producing more palladium, but isn't
able to sell it. So a stockpile of the metal has been
accumulating. The best estimates of its size at present
put this at about 2 million ounces. If that were
transferred to the finance ministry at the London price,
it would be worth $456 million. That is just one-third
of what Norilsk Nickel says that it still owes to all
its creditors, not only to the finance ministry.
On the other hand, if the statements released
this week mean what they say, the state stockpile of
palladium has been growing by sizeable transfers from
the company in repayment of the debts that were secret
until now. As Norilsk Nickel has been denying for two
years that it was transferring palladium to the state
stockpile, insisting that every ounce of palladium had
been sold, Potanin's latest disclosures amount to a
sharp reversal. Now we know that the company's most
precious asset has been transferred in secret to the
state. Instead of calling that a loan repayment, it may
be more accurate to call that the Potanin tax.
It is understandable that the Norilsk Nickel
management is trying to escape from this tax. In a good
palladium market, Potanin and his shareholder group
might be better off settling for cash. In the present
market, the finance ministry is doing them a favor to
take the metal, and to cover the transactions, past,
present and future, in state secrecy.
The
question that minority shareholders, banks and potential
investors in Norilsk Nickel must begin to ask now is how
much of an impact the Potanin tax will have on the
future of the company's ability to service its debts,
generate profits and distribute dividends to all its
stakeholders.
A related question is whether the
Potanin tax is the price that the Putin administration
has demanded for not reversing the illegal
loans-for-shares scheme through which Potanin took
Norilsk Nickel in the first place. If that is so, then
it is not only palladium's future, but Potanin's, that
must cast doubt on the company's financial statements.
Where is Pavlik Morozov, now that we need him?
(©2002 Asia Times Online Co, Ltd. All rights
reserved. Please contactcontent@atimes.com for
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