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DANCES WITH BEARS
Norilsk Nickel
learns to fly
By John Helmer
MOSCOW - In 1708 George Friedrich Handel was
just starting out on his brilliant career as a composer
when he spent a fortunate year in Rome. Fortunate,
because he was commissioned by a wealthy Roman to
compose music for regular performance on Sundays at the
patron's home.
One of the most beautiful pieces
Handel wrote at the time - one of the most beautiful he
wrote in all his life - was a cantata called "Tra Le
Fiamme" (Amid the Flames). The songs are about
unreasonable ambition, passionate love, and there is a
memorable line of warning to all: "To those who are not
born as birds, flying is a miracle, and falling comes
naturally."
The owner of Norilsk Nickel,
Vladimir Potanin, likes to be known as a man of culture;
and if composing music is beyond him, he has been
putting money where his talents might otherwise be. He's
bought a well-known painting for the Hermitage Museum,
and he's sponsored the St Petersburg opera in Los
Angeles. His property, Norilsk Nickel, is trying to be
magnanimous with its money, and more worthily, it is
trying to be transparent.
Now, transparency is
to shareholding corporations like walking is to bipeds,
and flying is to birds. Which is why Handel's fine line
ought to be a warning to those in charge of Norilsk
Nickel - if it can't fly, it is bound to fall.
The release of the company's annual report and
financial statements for the year 2001 last month led
this column to raise questions about some of the
disclosures, and about what remains hidden in the
corporate accounts. These questions in turn led Norilsk
Nickel to level criticism accusing the piece of being
"riddled with factual errors and fantastical
allegations". The one error that was identified was a
reference to "secret loans", when, according to the
company's head of investor relations, Sergei Polikarpov,
there was just one loan from the state. That loan,
Polikarpov said, "is not and never has been a secret,
its terms are".
Let's see if, as explanations
go, that will fly.
According to Norilsk Nickel,
the value of the loan repaid in 2001 and 2002 was 26.3
billion roubles, or a little less than US$900 million.
According to the company, the loan was to fund the
execution of the state program of fuel, food and other
deliveries to the northern region where Norilsk is
located. A state budget obligation in Soviet days,
performed regularly by Norilsk Nickel as a state
enterprise - and no secret at all. Nor was this function
a secret when the Russian state budget was unable to pay
it outright.
But if the state budget owed
Norilsk Nickel for carrying out budget functions,
Norilsk Nickel also owed the state budget for unpaid
taxes. The latter evidently exceeded the former, and
when the company reached an agreement in the mid-1990s
to resolve its budget obligations, the difference should
have been settled.
But a senior government
source has told this writer that the money was loaned to
Norilsk Nickel for quite another reason. According to
him, the loan was an advance against production of
precious metal - principally, palladium - and was
similar to the loans to gold producers which the finance
ministry's precious metals agency Gokhran regularly made
in those days. That, too, was no secret.
What
was, and still is secret, is the palladium and platinum
which Norilsk Nickel produces. Part of the reason for
the secrecy is that Norilsk Nickel is the largest
producer of palladium in the world, and with a handful
of South African companies, it is the international
market-maker in the metal. What the column suggested
about Norilsk Nickel's disclosure that it had repaid
nearly $900 million in palladium was that this was a
form of tax on the windfall profit between what Norilsk
Nickel was declaring to the government, and the
speculatively high price its palladium was fetching in
the international spot markets.
According to a
senior government source, the repayment in metal was the
usual way in which Gokhran advances were repaid. What he
omitted to explain was why the palladium was delivered,
according to Norilsk Nickel's financial report, in the
years 2001 and 2002. Gokhran gold loans are usually
repayable in metal at the end of the mining season in
which they are paid. Does this mean that Norilsk Nickel
has been transferring palladium to Gokhran's stockpile
ever since 1994? Does it mean that Norilsk Nickel should
have been making the transfer, but didn't, at least
until Valery Rudakov took over as head of Gokhran in
December 1999, and until he was forced to retire in June
2002?
Because the state stockpile of precious
metals and diamonds is covered with secrecy, the volume
of the palladium transferred by Norilsk Nickel can't be
disclosed. Depending on the metal price that was used in
the payback, it could have been as little as 1.4 million
ounces, or as much as 4.5 million ounces. For several
years, Norilsk Nickel has firmly denied that any
transfer of its palladium to the state stockpile was
taking place, and that it was selling all it produced on
the open market. Whatever the number, the disclosure has
firmly dispensed with that claim, and also with the
notion - common among Western precious metals analysts -
that the state stockpile of palladium was dwindling
rapidly.
There are many other questions that
arise out of Norilsk Nickel's attempt to be transparent
in its accounts. Its nickel report, for example, claims
to show that $1.3 billion was earned in revenues from
the export of nickel in 2001. According to the price
given in the report as the average realized export
price, the revenue total represents 235,000 metric tons.
But the company report also claims that only 182,000
tons were exported, out of just 223,000 tons produced.
That was a year in which Norilsk Nickel had been keen to
boost the nickel price by convincing the market it was
cutting its exports substantially.
So how did it
manage to export more metal than it produced? To be
precise, 53,000 tons more nickel, earning almost $300
million. The answer is guesswork. But in the marketplace
it is believed that Norilsk Nickel had shipped a large
volume of nickel abroad for stocking, before the metal
was sold. Thus, nickel produced in 2000 wasn't sold or
logged as an export sale until a year later. Hiding this
nickel, trade sources believe, was a sound corporate
tactic for holding up the nickel price. But was it
legal, according to Russian customs and Central Bank
regulations? Did Norilsk Nickel hide $300 million from
its 2000 accounts, in order to disclose it the following
year? And if that happened last year, what may be in
hiding this year, which we can't expect to know about
until 2003, or possibly even later?
Norilsk
Nickel is hardly the only major Russian corporation that
may be suspected of hiding large export flows for one
reason or another. It is happening in oil and in
aluminum, and in other resource exports as well. But ask
the international bankers who lend money against the
collateral of these resources, and they will tell you
this: if large volumes of output are being hidden, then
they represent the risk that, if sold, they could upset
the demand-supply equilibrium, and push down the metal
price. That in turn will diminish the value of the
collateral which secures repayment of the Russian loans.
Thus, hiding threatens the credit on which Russian
exporters depend.
Understanding this, and
answering commonsense questions, are how companies like
Norilsk Nickel learn to walk, and perhaps then to fly.
(©2002 Asia Times Online Co, Ltd. All rights
reserved. Please contactcontent@atimes.com for
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