DANCES
WITH BEARS Another oligarch to meet his Kremlin
maker? By John Helmer
MOSCOW
- In the snow, Russian peasants still say, the law is
like a sleigh. A clever judge can steer it either way.
Vladimir Potanin, the controlling shareholder of
Norilsk Nickel (NorNickel), Russia's largest mining
company and the world's dominant nickel supplier, ought
to know. In a decade of acquiring the assets that
comprise his Moscow-based, multi-billion dollar holding,
Interros, he has had his share of success in the courts
fighting off legal challenges to his takeovers. His
methods, which were accepted at the time by president
Boris Yeltsin, the magnitude of his fortune, and his
political clout have caused Potanin to be publicly
dubbed one of Russia's oligarchs.
According to a
filing last year with the US Federal Trade Commission to
support a takeover bid for Stillwater Mining, NorNickel
disclosed that Potanin and Mikhail Prokhorov, his
partner and chief executive officer (CEO) of NorNickel,
held joint and equal stakes amounting to about 57
percent of the company. A January 2004 report by
Renaissance Capital indicates that 62 percent of the
company's shares are held by Interros; 4 percent by
NorNickel employees; and 34 percent by institutional
shareholders. The free float was estimated at 34
percent. There is currently no state shareholding, which
was acquired by Potanin in 1995 for US$170.1 million.
Sales by NorNickel last year were $4.9 billion. The
market capitalization of the company as of April 30 was
$12.8 billion.
Last week, Potanin also got the
message that he might be on the receiving end of a
Kremlin investigation. A powerful rumor swept Moscow and
international markets that he had been called for
questioning by the procurator general, the chief federal
law enforcer for President Putin. Rumors about the
Russian oligarchs are common, but formal investigations
of their business activities by state prosecutors are
rare. The Moscow market believes that there can never be
smoke from the latter, the prosecutors, without someone
in the Kremlin stoking the fire.
In two days of
share trading, Norilsk Nickel lost more than $2 billion
in market capitalization. In the past two weeks,
following a drop in Chinese metal demand and a global
downturn in metal prices, NorNickel has shed $4.5
billion in value. Whatever is happening, Potanin and his
partner-CEO Prokhorov are decidedly poorer.
The
federal prosecutors at first officially refused to
either confirm or deny the rumor of a summons for
questioning. Then one of the prosecutors told Asia Times
Online in carefully chosen words that "currently we
don't have information that Potanin has been in our
office". That left open a map of other geographical
possibilities for the get-together - and it left an
ominous warning for Potanin, as well as Prokhorov and
NorNickel.
Not that this was their first
warning. In February, Putin intervened to halt the
implementation of a law, which he had earlier signed
into effect. If implemented, it would allow NorNickel to
declassify hitherto state secret data on reserves,
production, sales and stocks of platinum group metals.
NorNickel is the world's largest producer of palladium,
and the only rival to South African producers of
platinum.
This data release, promised for early
this year, is one of the requirements for NorNickel and
its two controlling shareholders to offer the company
shares on western stock exchanges, or for Potanin to
swap his shares for another internationally listed
company. For years, NorNickel had lobbied for
declassification. But state opposition to opening up the
company to foreign buyers blocked the legislative move.
It was rushed through parliament by Deputy Prime
Minister Alexei Kudrin, and signed by Putin last
November. But the president was preoccupied at the time
with parliamentary and presidential elections; he
changed his mind when he learned what was at stake.
Kudrin was demoted in the cabinet reshuffle a
few weeks ago.
When the law was suspended,
Potanin was warned that a major cash-out transaction
that would transfer sizeable wealth in NorNickel to
foreign hands - in return for the offshore enrichment of
Potanin - would not be permitted. Potanin apparently
didn't listen. Nor did he pay attention to a second
warning, also in February, that blocked the planned
issue of a $1 billion convertible bond by Interros. That
move would have allowed Potanin to take the cash, and
leave in the hands of foreign bondholders the right to
claim NorNickel shares.
Undeterred, Potanin and
his dealmaker, Leonid Rozhetskin, deputy chairman of
NorNickel, got the idea of buying into Gold Fields, a
leading South African mining house, using mostly
borrowed funds; and then later - they told banking
associates in Moscow - they planned to merge their gold
assets in NorNickel into a majority takeover of Gold
Fields shares.
The first deal was a boon for
Anglo American PLC, which had been seeking to sell its
Gold Fields stake for months. In five days Potanin had
agreed, and in 14 days Anglo had its cash. Unbeknownst
to Gold Fields, it was about to become a hostage in
Potanin's power play with the Kremlin.
Citibank,
lender of $800 million to fund most of the April
transaction, is also a hostage of sorts. If the
Kremlin's shadow falls on Potanin, it is unlikely
another bank would agree to join a lending syndicate
after Citibank's six-month deadline is reached. Citibank
would have to demand its money back. Potanin would have
no alternative but to sell out of Gold Fields, quickly.
Over the next month, the prosecutors do not have to say
any more to make credible their warning that Potanin may
not be permitted a cash-out deal.
Framing a
charge-sheet against Potanin, and then compiling a
multi-count indictment isn't necessary for this warning
to stick. Besides, there simply aren't enough staff to
prepare such documents, so heavily are they already
committed to the prosecution and upcoming trials of the
two leading Yukos oil company shareholders in prison
since last year - Platon Lebedev and Mikhail
Khodorkovsky. They are in prison, because they attempted
to cash out a stake of about 40 percent in Yukos by
selling it to ExxonMobil or ChevronTexaco. Putin warned
them not to; they ignored the warnings. The charges
against them, and against Yukos, are different. They
relate to a myriad of shareholding and cash transfers,
tax avoidance schemes, fraud, and forgery. An
independent legal assessment of the indictments suggests
the two men are likely to be convicted.
Since
February, Potanin has been courting the same fate. His
defense doesn't require much substantiation in order to
have the effect that high-ranking officials and advisors
to the president, and possibly Putin himself, want to
produce. The question for Potanin, therefore, is whether
he should reconsider the Gold Fields deal, or proceed
with the planned acquisition, and call Putin's bluff.
Potanin began by reassuring Gold Fields at
meetings last week with CEO Ian Cockerill in Moscow.
Next, Potanin must pacify Citibank, lender of the lion's
share of NorNickel's payment to Anglo American.
Questions about the security of the deal, and the lack
of government approval (which Potanin had sought, and
received, when he took over Stillwater Mining in the US
last year) have made it difficult for Citibank to find
other banks willing to take over the $800 million loan
when it expires in September.
The NorNickel
oligarch's biggest concern right now is to find out what
Putin is really thinking, and whether last week's rumor
and reports were started to test Putin's will, or
Potanin's nerves. In this game, as in last year's
Kremlin attack on Lebedev and Khodorkovsky, there is no
telling what Putin intends until after he has moved, and
the oligarch's assets are in danger. The Gold Fields
transaction may thus be no more than the trigger. What
is near-certain is that Potanin's control of NorNickel
may be about to change.
That some of Putin's
advisors want this to happen was signaled by Vladimir
Litvinenko, rector of the St Petersburg State Mining
Institute, and an advisor to the president on resource
policy. He recently said he favors giving the state a
"golden share" in NorNickel. He has yet to elaborate on
that. But if the precedent of Yukos' punishment is any
guide, that could presage the filing of billion-dollar
tax claims against NorNickel or other Potanin companies,
and criminal charges against him, and possibly Prokhorov
too. To save himself and pay NorNickel's bills, Potanin
may agree to sell at least part of his stake to the
government. The transfer of a 17 percent shareholding in
NorNickel, currently worth about $2.2 billion, would be
enough to deprive Potanin and Prokhorov of majority
control of the company, and allow the Kremlin to dictate
new management strategy.
It is the market's
understanding of this vulnerability that has given legs
to last week's rumor of trouble for Potanin. Whatever
Potanin says or does next, time will tell whether Putin
has already made up his mind; and whether NorNickel's
resale of its stake in Gold Fields will be either
necessary, or sufficient, to satisfy the president.
There are many shadows on the snow right now. An
investigation leading to a tax claim or an indictment
would be curtains for Potanin, though not for Gold
Fields. On their recent visit to Moscow, Gold Fields
executives hought they were meeting the man in charge of
their future and fortunes. But in reality, they missed
him because they didn't visit the Kremlin. Putin may not
mind the Russian government being an indirect
stakeholder in Gold Fields; he is unlikely to want a
takeover.
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