When Oleg Mukhamedshin, head of investment strategy for United Company Rusal, was in London recently, he complained the stock market isn’t giving Rusal’s share price a fair valuation, taking into account how much profit the non-aluminium line of business – that’s the dividend to be paid to Rusal by Norilsk Nickel— is likely to generate this year for Rusal’s loss-making bottom line.

What Mukhamedshin didn’t mention is that the market suspects Oleg Deripaska, chief executive and manager of the controlling shareholders’ trust, of operating a scheme to protect asset value and income for an inner circle of Rusal shareholders, and let all other shareholders suffer the worst.

Initial evidence of the inner circle scheme was first uncovered in the records of RTI Limited (aka Rusal International Trading), a Jersey Island-registered entity which appears to be the next to highest control entity in Rusal’s corporate organization. Registered on October 27, 2006, one day after the parent company was incorporated in Jersey, RTI’s carefully worded articles of association contain a code which provides privileged treatment for one class of Rusal shares at the expense of the founding shareholders; the latter include Mikhail Prokhorov, Victor Vekselberg, Len Blavatnik, and Glencore; and the shareholders who “anchored” Rusal’s Hong Kong Stock market listing in January of 2010, including the Russian state banks.

Decoding the RTI documents and uncovering the inner circle scheme, is also an objective of legal challenge to Deripaska’s compliance with the shareholding agreements which Vekselberg and Blavatkin have taken to court in London, where they are charging Deripaska with violations. Although that case is proceeding behind the closed doors of the London Court of International Arbitration (LCIA), there is suspicion on the part of Rusal’s free-floating shareholders that their paper is already discounted to the cashflow of the company. That suspicion is one reason Rusal’s share price falls more deeply in the commodity troughs than its aluminium-producing peers, Alcoa and Chalco, and fails to gain by as much value when they take off.

Last week, while the listed aluminium companies were enjoying an improvement in share pricing, Rusal shares were trading 15% below their peak for this year. Alcoa is 10% below its peak; and the Aluminium Company of China (Chalco), down by 27.5%. On a one-year rate of return calculation, Alcoa is down 8.7%; Chalco, down 16.6%; and Rusal down 25.4%.

Market sources in London ask whether Rusal shares remain weaker than its peers because the shares themselves are subordinated to a secret class of shareholders.

Research in the publicly accessible records of the Jersey company register reveals that when Rusal was first incorporated in October 2006, the articles of association anticipated that there might be more than one type or class of shareholding in the new company. This was just weeks after President Vladimir Putin had put a stop to Vekselberg’s independent effort to list his Siberian Ural Aluminium Company (SUAL) in London, and ordered a merger (takeover) between Rusal and SUAL. Glencore also participated in the formation of the new company, adding alumina refining assets in return for shares. At the time of the merger announcement, Deripaska was said to hold 66% of the new shares; Vekselberg and his partners, 22%; and Glencore, 12%.

The October 2006 Rusal formation documents indicate share capital of $10,000 divided into 10,000 shares of $1 apiece. Article 8 of the Rusal articles, dated October 26, 2006, refers to “special rights for the time being conferred on the holders of any class of shares." These may “be issued with such preferred, deferred or other special rights…whether in regard to dividends, return of capital, voting or otherwise, as the Company may from time to time, by special resolution, determine.”

Article 18 allowed Rusal – meaning Deripaska, the control shareholder at the time – to create “different classes of shares”, with “special rights attached to any class”. These special securities, according to Art.18, “may be varied or abrogated”. Then follows several rules for this, including “consent in writing of the holders of the majority of the issued shares of that class”, or “a resolution passed at a separate meeting of the holders of shares of that class.” The Rusal rules allowed a quorum of such a decision-making meeting to be “two persons holding or representing at least one-third in nominal amount of the issued shares of that class.”

When it came to paying out Rusal cash from the profit stream, the 2006 articles allowed different classes of shares to benefit, including some with “preferential rights with regard to dividend.” There is nothing in the articles on dividends which obliges Rusal to publicly declare how much in dividends may be paid to the holders of the preferential rights. It also isn’t obvious from the articles that Deripaska was obligated to inform the SUAL and Glencore shareholders of such payouts.

The day after Rusal was formed in Jersey, RTI Limited was incorporated separately. This was directly connected to Rusal; the importance of that relationship has been reported here. Nine months later, in July of 2007, RTI registered a change of name to Rusal Trading International, and then another change of name back to RTI. This was at the time Mikhail Prokhorov was negotiating with Deripaska to sell the former’s stake in Norilsk Nickel to Rusal for a combination of Rusal shares and cash. That deal wasn’t finalized until April of 2008.

According to the Jersey record of RTI’s articles of association dated July 2007, the three forming principals of the company were Deripaska acting through the EN+ holding, SUAL and Glencore. Article 8 of the RTI charter is the same as Article 8 of the Rusal charter of October 2006. The 187 RTI articles are almost identical to the 181 Rusal articles, except for several provisions relating to shareholder meetings and advance notifications to shareholders.

RTI’s share capital, again according to its Jersey records, consisted of 20,000 shares, twice the number of the parent’s shares. Denominated in US dollars, just two RTI shares were paid up; they were registered as owned by Rusal. At the same time, the Jersey record shows that 1,600 redeemable shares were issued and paid up, way outnumbering those owned by Rusal. They are the quasi-control shareholders of RTI.

On February 10, 2010, RTI’s articles were changed. The timing was less than a month after Rusal shares were publicly listed for the first time, and share sales commenced on the Hong Kong Stock Exchange. According to the prospectus for that listing, RTI had an exchangeable claim of $1 billion with Rusal. That suggested RTI’s redeeemable shareholders constituted a special class with preferential right to a billion-dollar share of Rusal. At Rusal’s present market capitalization, this represents about 12%.

The Jersey records reveal that on February 9, 2010, someone named Dzianis Sidarkevich signed on behalf of Rusal a special resolution of RTI. This altered the capital of RTI, increasing it, according to a new Article 6 of RTI’s memorandum of association. Now “the share capital of the Company is US$21,600 divided into 20000 ordinary shares of US$1.00 each and 1,600 redeemable shares of US$1.00 each.” Sidarkevich’s name does not turn up in a search of Rusal documents or of the internet.

The RTI articles were also changed to reflect the identification of the redeemable shareholders as a special class – the inner circle.

The old Art. 8 comprised 7 lines allowing for the possibility of a special class of shareholder. The new Art. 8 runs for 44 lines, and spells out exactly what rights the inner circle is holding. It also implies that between 2006 and 2010 Deripaska had been handing out special shares in RTI, with claims upon Rusal, to a variety of trust holders. The new Art. 8 attempts to limit who these are and what claims they can make. It begins with the statement that the new class of shareholders may hold their interest through a trust. But RTI won’t recognize claims by persons or trustees, or recognise “any equitable, contingent, future or partial interest in any share…except an absolute right to the entirety thereof in the registered holder”.

Art. 8A defines the “absolute right” this way. The “special rights attaching to the redeemable shares are as follows: (a)…at any time after 6 December 2013 the Company may redeem all or some of the redeemable shares. (b) …at any time after 6 December 2013 the Company shall at the request of a holder of redeemable shares redeem all or some of their relevant redeemable shares.”

The difference between the two sub-sections apparently gives Deripaska the discretion to pay out what is owed to a redeemable shareholder if he or she isn’t asking for a payout. But if the shareholder insists, files a redemption notice four weeks in advance after the operative date next December, and supplies the certificates for the redeemable shares to be cashed in, RTI and Rusal don’t have any choice. They “shall…redeem all or some of their relevant redeemable shares.”

There is no doubt about the meaning of the words, because Art 2 explains: “the word ‘may’ shall be construed as permissive and the word ‘shall’ shall be construed as imperative.”

For the next twelve months Rusal’s financial position improved significantly over the results for 2009. Sales revenues jumped 35% to $11 billion; operating profit multiplied by 140% to reach $3.5 billion. On the bottom line, Rusal reported for 2010 that its profit was $2.9 billion, three and a half times the profit for 2009.

But the good times weren’t to last. In 2011 sales revenues were up, but profit collapsed to just $237 million, less than a tenth of what it had been. In 2012 the financial results are even more parlous, with a bottom-line loss of $55 million.

Whether or not Deripaska was anticipating the downturn, he ordered a fresh change in the RTI articles. On January 20, 2011, the Jersey records reveal a new “special resolution” voted by “we, being the sole member of the Company [RTI] who would, at the date of this resolution, have been entitled to vote upon it if it had been proposed at a general meeting at which we were present”.

The change is reported this way: “That the articles of association be and are hereby altered by the deletion of the word ‘shall’ in the second line of article 8A(b) of the articles of association in substitution therefor by the words ‘may, at its sole discretion’.”

In other words, even the privileged RTI redeemable shareholders, have now been told by Deripaska that he may be unable to pay out what he owes them on December 6 – the deadline the inner circle had been counting on for a payout of up to $1 billion. Their reaction has not surfaced, at least not directly; though the formula the Kremlin devised last December to channel Norilsk Nickel dividends to Rusal shareholders may be one sign of their insistence on a payout. Evidence of the discrimination in payout sums between the classes of Rusal shareholders is being readied for the London arbitration case.

Note: The revised RTI articles also warn the inner circle to settle family, marital or legal disputes they have among themselves before asking for the payout next December. According to the new Art 18, “in respect of a share held jointly by several persons, the Company shall not be bound to issue more than one certificate, and delivery of a certificate for a share to one of several joint holders shall be sufficient delivery to all such holders.” Art. 20(a) limits the number of persons holding a share jointly to four.

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Pavel (Pavlik) Morozov, aged 14, was murdered on September 3, 1932, along with his 9-year old brother, Fyodor. They were stabbed to death.

Four people were convicted of the crimes – their grandfather Sergei and cousin Danila did the stabbing; uncle Arseny plotted the crime beforehand; grandmother Kseniya covered it up afterwards. The four were executed on April 7, 1933.

Retrospectively, the forensic evidence in the case was too weak to substantiate premeditated murder, but of hatred, manslaughter, and criminal concealment there is no doubt the four accused were guilty.

Of the importance of what Pavlik Morozov’s death stood for at the time and for the all-Russia, all-Soviet generation to follow there is also no doubt. He was, as his British biographer has documented, the Soviet revolution’s boy martyr.

That’s because Pavlik Morozov was reported to have been killed because he had informed on his father, Trofim, chairman of his village soviet, as well as on others in the village, whom he accused of hoarding grain from the harvest, hiding a gun and a horse harness, plotting against the new collective property rules.

When his murderers were brought to trial, the charge against them wasn’t conventional homicide, but anti-state terrorism. Thus, Pavlik’s death came to symbolize far more than could possibly have been true.

Just so the Russian children who have been murdered by Americans since 1991, when adoptions by foreigners were first permitted. The violence led to the enactment late last December of a law banning Americans from adopting Russian children. It’s known as the Dima Yakovlev law, after the 3-year old Russian who died in 2008 after his foster father left him in a closed car during heat-wave conditions. At his trial in a Virginia state court the father was acquitted of negligent homicide. The Yakovlev case has come to symbolize in Russian public discourse American violence against Russians. In fact, just one article of the new law – article 4, the shortest of the operational articles in the text – deals with the problem of child adoptions by Americans. The targets, along with the political ideology, of the law are much broader. As in the Pavlik Morozov case, for the time being it’s the ideology, not the facts, which count.

The paradox of this type of child violence is that it has become a preoccupation of the national media, and a political priority, nearly nine years after foreign adoptions had begun to decline, American adoptions quite sharply. The dynamics of the Russian baby business explain the trends, according to most Russian expert sources. But something else explains the public perception, or misperception of the violence. That’s because the statistics gathered by private and public Russian agencies responsible for child welfare suggest that Russian violence against Russian children in institutional or adoptive care is vastly greater than the American cases. The national indignation about this is much quieter.

Since 1993 the Russian statistics on adoptions indicate that domestic adoptions have totalled almost 196,000. Adoptions by foreigners over the same period come to 95,261; that’s about one in five. By the close of 2011, domestic adoptions had fallen to about half of what they had been at the start of the period. Foreign adoptions were also falling from their peak in 2004, but by a smaller magnitude. As of 2011, foreign adoptions comprised just under 32% of the aggregate. According to Pavel Astakhov, appointed Children’s Rights Commissioner for the President of the Russian Federation in 2009, by the start of 2012 the number of Russian orphans counted in institutional care was 665,987. For reports of what Astakhov’s office does, click here. Privatization of orphans isn’t proving to be a growth business.

As the chart also shows, the lines cross between 2004 and 2005. The reason for that isn’t as well documented in the research or in government and media reports. It’s clear nonetheless. As the Russian standard of living collapsed during the 1990s, the volume of Russian adoptions fell, and foreign adoptions grew. But over the past five years or so, two things have happened – Russian family income has recovered, and with it the capacity of Russian families to acquire children by adoption.

At the same time the price for foreign adoptions has sky-rocketed. Much of the latter price is bribery and corruption of the regional and federal bureaucrats involved in supervising the permit process. But price inflation for foreigners to adopt Russian children has apparently accelerated much faster than the price of comparable children in China, Poland or Moldova.

In the early 1990s Americans have reported paying between $2,000 and $3,000 to adopt a Russian child. This had grown to $10,000 by 2000. Today, some sources report the going rate is around $30,000 per head. But since many of the adoptees have been classified in Russian institutions as invalid, retarded, or disabled – prolonged institutionalization in a Russian orphanage tends to aggravate, if not cause many indicators of cognitive disability or psychopathology — the price of a certified healthy child can be as high as $150,000.

By the time therefore that Russian legislators got around to introducing a ban on American adoptions last year, they were late. The lower-cost Russian children most at risk of lower-income family violence abroad were dwindling. Shut out were the relatively wealthier, psychologically more stable Americans least likely to commit crimes of violence against their children.

AMERICAN ADOPTIONS OF RUSSIAN CHILDREN COMPARED TO DOMESTIC ADOPTIONS

Shut in at the same time is an apparently growing number of Russian orphans subject to a combination of state budget and family income pressures. In December 2011, according to then President Dmitry Medvedev, “there is nothing wrong with foreign adoptions of our children… the fact that foreign citizens do it does not tarnish them in any way, and on the contrary shows their desire to help these children.” Two weeks later, Astakhov announced during a nationwide broadcast by then Prime Minister Vladimir Putin that he is an “absolute opponent of international adoption”, and that foreign adoptions should be banned – all, not only American. The Dima Yakovlev law bans only American adoptions. Late last month, Astakhov repeated his advocacy of a total ban on foreign adoptions.

Following the enactment of the law, Medvedev announced: “We have quite a prosperous society, we already have enough wealthy people. They are able to give, and to shelter and care for our children. This”, added Medvedev regarding Article 4, “ is the meaning of the decisions taken.”

Statistics of reported violence against children are notoriously unreliable within countries, and comparisons between country data are even more suspect. Since the commencement of Russian adoptions by foreigners, about 20 criminal deaths have been recorded from the US. From Italy, France and Spain – the next most common destinations for Russian adoptees – there is no evidence, at least not in the Russian media. For a summary of the US cases since 1996, read this.

But according to child welfare reports in Russia itself, American violence against Russian children comes to a fraction of Russian violence against Russian children. Russian statistics of violence against children in institutional or foster care are rough estimates; there are no official data. Still, according to this source it is far more dangerous for a Russian child to be in domestic care than abroad.

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Igor Zyuzin is almost entirely dependent on the Russian government for the solvency of his Mechel steelmaking and coalmining group.

With between $9 billion and $10 billion in debt, Zyuzin, who owns 65.49% of Mechel’s shares and controls the company as chairman of its board, is now the steel and coal sector’s most heavily indebted proprietor.

If not for a series of cash loans, bond purchases and guarantees from state-controlled banks – Sberbank, VTB, Gazprombank, Eurasian Development Bank (EDB), and Transcreditbank – he would be bankrupt.

That is, Mechel, with a bottom-line loss last year of $1.7 billion, would be as bankrupt as the Estar group of steelmills, which Zyuzin took over in 2009, when Estar’s proprietor Vadim Varshavsky went bankrupt.

Varshavsky was consigned by state officials and the state banks to go belly up for debts of about $3 billion. Zyuzin has been preserved in his place for three times that debt. He has also been permitted to buy Varshavsky’s old assets at a fraction of their value, using tolling schemes which may be considered asset stripping, a form of larceny, outside Russia — if their terms were known. In other words, Varshavsky’s insolvent steelmills appear to be paying Zyuzin to take them over for Mechel.

The more state debt Zyuzin racks up, the richer in assets he seems to grow. The company admits there may be a conflict of interest in this arrangement.

Mechel, one of the very few Russian companies to be listed on the New York Stock Exchange and subject to the US regulator, the US Securities & Exchange Commission (SEC), acknowledges in its latest SEC filing: “We have also engaged and will likely continue to engage in transactions with related parties, including our controlling shareholder, that may present conflicts of interest, potentially resulting in the conclusion of transactions on less favorable terms than could be obtained in arm’s length transactions or transactions that may expose us to risks outside the ordinary course of business…Thus, our controlling shareholder can take actions that you may not view as beneficial, and as a result, the value of the shares and ADSs could be materially adversely affected.”

By keeping details of related-party, especially Zyuzin’s transactions with Mechel from public report, Mechel shareholders are obliged to take this risk – in the dark. Mechel’s bankers are also invited not to look too carefully. But they reckon they don’t have to, so long as the Kremlin guarantees to cover Zyuzin’s mistakes and pay Mechel’s obligations.

In order to ward off default notices from its lenders, Mechel agreed with VTB earlier this month on a 5-year Rb40 billion ($1.3 billion) credit, the terms of which allow for an initial 15-month grace period in which nothing has to be repaid. In other words, the state is giving Mechel the cash to pay the debts its commercial lenders insist on receiving this year, and postponing the time Zyuzin must repay the state in return.

This is difficult to explain to shareholders who watched as the price of their shares fell 6% this week, on release of Mechel’s Form 20F annual report to the US Securities and Exchange commission (SEC).

Since Mechel shares hit this year’s peak of $7.40 on January 7, they have fallen 49%. The market value lost has been $1.5 billion. At the moment, the New York stock market thinks Mechel is worth $1.57 billion. It’s obvious that with debts of almost six times that number, Mechel is worth much, much more to its banks than to its shareholders. But because most of the Mechel debt is held by state-controlled banks, and they control the repayment terms, the reality is that Mechel has been nationalized.

According to the latest Mechel financial report released this week, the five state banks hold about 53% of Mechel’s rouble debt equivalent to $5.4 billion; 50% of its dollar debt of $3.3 billion; and 17% of its Euro-denominated debt equivalent to $639 million. The proportion of Mechel debt held by the state-controlled banks is in fact higher, because the calculation should include the credits contributed by VTB subsidiaries in Austria, Germany and France which are participating lenders in the $2 billion syndicated loan of September 2010. Rouble bonds worth about $2.4 billion also benefit from state bank underwriting and repayment guarantees.

Varshavsky’s tale was told here. Whatever has persuaded state officials and state bankers that Zyuzin is more honest and competent than Varshavsky is, however, not an issue that is permitted to be examined in public, no matter how much in state money is committed to keep Zyuzin in full control of Mechel.

Zyuzin, with approval from the federal government in Moscow, regional governors, and state banks, has loaned large sums of money to Estar steelmills for raw materials like coal, iron-ore, ferroalloys and scrap, along with semi-finished steel, all produced by Mechel, the book cost of which has been exaggerated in tolling agreements. In practice, Zyuzin has been slowly taking over the Varshavsky assets by creating debt beyond the capacity of the mills to pay. As the small print of Mechel’s Form 20F, the SEC’s required annual report filing, explained for 2011: “According the loan agreement, in the event that the loan is not repaid at maturity (September 30, 2012), the Group is entitled to enforce the pledge over the pledged related metallurgical plants assets and thereby take control of these assets subject to approval from the Russian Federal Antimonopoly Service.”

In November 2011, when the receivables or debts owed by the Varshavsky mills to Zyuzin came to $1.06 billion, Mechel loaned $944.5 million, and then extended the maturity date for repayment (aka takeover) to June of 2013. Varshavsky’s assets have so far paid off $213.4 million, so the default amount is about $731.1 million.

Another example of the way Zyuzin adds assets to the nationalized Mechel, but keeps secret how the transactions are funded, and who pays, is the purchase last December of Vanino port, on the Sea of Japan. After years of controversy over the privatization of the state’s control stake in the port, and competition from oligarch groups including Vladimir Lisin’s United Cargo Logistics Holding and Oleg Deripaska’s EN+, Mechel emerged the victor.

Mechel’s report to the SEC this week says: “On December 7, 2012, the Group won an auction to acquire 74,195 common shares (73.33% of the total common shares or 55% of the total shares) of Vanino Sea Trade Port OAO (“Port Vanino”), the largest seaport in Khabarovsk Krai, located in the Tatar Strait in Russia, for 15.5 billion Russian rubles ($501,444 [000] as of the auction date).”

But Mechel, which didn’t have $501.4 million in cash and wasn’t allowed by its banks to borrow the money, managed to pay for the port acquisition by selling it to somebody else. Again, according to the Form 20F disclosure, “on January 9, 2013, the shares of Port Vanino were transferred and the Group made a cash payment of 15.5 billion Russian rubles. On the same date, 72,780 of the acquired shares were sold to several Russian and foreign investors (“Investors”).”

This took care of the state stake in the port. The minority shareholder in Vanino, Deripaska, was then bought out, according to the following scheme. “On January 28, 2013, the Group acquired additional 21,892 common shares (21.64% of the total common shares or 16.23% of the total shares) and 16,039 preferred shares (47.56% of the total preferred shares or 11.89% of the total shares) of Port Vanino from a minority shareholder. The aggregate consideration for the preferred shares was 275 million Russian rubles ($9,152[000]) and was fully paid. The maximum aggregate consideration for the common shares is 4.77 billion Russian rubles ($158,817[000]) which is to be paid by October 2013. The Group has an option to sell and to require one of the Investors to buy 22,707 common shares and 16,039 preferred shares for the maximum aggregate price of $174,611[000]. The option can be exercised by October 2013.”

End result, for the record: “The purchases resulted in 23,307 common shares and 16,039 preferred shares being held by the Group. These shares represent 29.2% of the total share capital of Port Vanino, or 23.04% of the total common shares, which enables the Group to have significant influence over the operations of the investee. This acquisition will be accounted for using the equity method of accounting and will be included within long-term investments in related parties as of January 28, 2013.”

End result, in practice: Mechel has operational control of Vanino, and formal control of 29% of its capital, 23% of its shares. But it hasn’t paid the $669.4 million price tag. Instead it paid a handful of cash, and arranged with “Russian and foreign investors” to pay the rest.

If it turns out that these investors are Zyuzin and his Cyprus companies, whose assets are Mechel’s, and they are in turn pledged to secure state loans, then the scheme is a subterfuge, and the port privatization was an elaborate fake. If it turns out that some of the foreign investors are South Korean or Japanese coal buyers and traders, whose interest in the port is in getting more coal cargoes at a discounted transportation tariff and perhaps at a discount to the coal price benchmark, then Mechel’s future revenues are being charged for the asset. Either way, Mechel is in effect borrowing to buy the asset with trade receivables from related parties.

Such a scheme looks like a loan covenant breaker for the banks, and a charge against future net income from which shareholders have been hoping to be paid dividends. In short, a secret worth Zyuzin’s while to keep to himself. Mechel’s disclosure to the SEC is this: “In addition to the information disclosed with respect to this acquisition, ASC 805 requires the Group to disclose the amounts to be recognized at the acquisition date for assets acquired and liabilities assumed. It is impracticable to disclose this information because the Group has not completed the purchase price allocation as of the date when the financial statements were available to be issued.”

When the deal for Vanino was first announced, Barry Ehrlich of Alfa Bank, a leading steel analyst in Moscow, acknowledged that having the port under control for its expanded coal exports was a good thing for Mechel, but the extra debt would be a bad thing. “Overall payment for Vanino may total RUB21.1bn (~$650m). As of the end of 2Q12, Mechel had $8.7bn of net debt on the balance sheet and net debt to EBITDA ratio of 4.4x. Leverage is a major concern for the company, and we believe the news is NEGATIVE for Mechel if the acquisition would result in cash outflow from the company and further inflate its stretched balance sheet.”

“The news suggests that Mechel already has certain arrangements to sell the 25% stake in Mechel Mining and that it may finance the Vanino acquisition from that cash flow. The news may also suggest that one of the conditions for the MM [Mechel Mining] stake acquisition was acquisition of the port in order to secure shipping capacity to facilitate Elga coal exports to Asian markets. The buyer of the mining stake may provide long-term financing for the Vanino acquisition.”

In retrospect, it can be seen that the Mechel Mining sale has yet to materialize – not to the Koreans, Japanese or Chinese. Another Russian state entity, Vnesheconombank (VEB), may turn out to substitute for the foreigners and by another loan to Mechel the government will nationalize the asset, rather than let it go.

So has Vanino port been sold to anyone in particular? Who are these Russian and foreign investors?

Privately, Mechel management has been explaining to its bankers the benefits of the Vanino deal, and the strategic relationship between expanding the flow of coal for export from the Sakha republic (Yakutia) mines, adding to the capacity of the state railroad to carry the coal to port, and enlarging Vanino itself for the extra trade. According to one bank analyst, “the management has been highlighting a number of tangible benefits for Mechel of ‘sort of’ owning Vanino, such as the volume guarantee (there is a high competition from coal exporters to access Far East ports); plus Vanino is the end destination of BAM [railroad], and in this capacity acts as a regulator of the cargo traffic, which makes the entire eastern bit of this railroad more flexible to Mechel’s traffic needs; plus Mechel will be saving on port loading charges. Even if Mechel may have agreed on some discount for its coal as part of the Vanino deal, this has to be considered in the context of the benefits they are gaining. Last, but not the least, by buying Vanino Mechel is also saving on its own capex which would go otherwise to expand the capacity of Posiet [port, already owned by Mechel]. Vanino Bay is still better than Posiet as it allows to load larger capacity ships. Expansion of Posiet would have been a must (until they had Vanino) in order to ship all the new coal coming from Elga mine. [Without the Vanino acquisition] to allow expansion of [coalmine] output and target export markets, $2 billion plus in investments in the Sakha mines would be a waste.”

This sounds reasonable. But has Zyuzin told the banks by whom exactly the deal is being paid for?

The five state bank lenders to Mechel – Sberbank, VTB, Gazprombank, Transcredit Bank, and Eurasia Development Bank – were asked the question. They refuse to answer. The following banks, listed in Mechel Form 20F filings as well as in announcements of Mechel loan syndicates, were also asked the question: Unicredit, Raffeisen, ING, BNP Paribas, HSBC, Nordea, Société Générale, Morgan Stanley, Credit Suisse, Royal Bank of Scotland and Natixis. Nordea was the only one to respond. It claims it is no longer in a Mechel loan syndicate.

Analysts at the banks acknowledge there is a blanket of secrecy around Zyuzin’s dealings, which isn’t worth their jobs to probe. According to one, “in the market there are quite different rumours of who the buyers are, starting from a number of Russian names, from [Gennady] Timchenko [for Gunvor’s expanding coal operations] and ending with some Asian companies. And it is possible more than one person, but several. And it is said that it can be Zyuzin himself. But there is no consensus. Mechel itself keeps it in great secrecy; there is apparently no leak.”

Another bank source claims the banks have not been let in on the secret. “In one of the presentations which they [Mechel] showed to banks from whom they take credits, there is no such information. That is, it was written that they are buying a port in the consortium, that they do not require any funding, it does not affect either the covenants — nothing else. But just who exactly [is paying] was not written in the presentation. It may be that [Mechel] opened it to the banks in a private conversation. But it was not in an open presentation for the bankers-lenders. Even there they have not disclosed it.”

A Russian expert on ports says, also off the record: “My sources say that Zyuzin took his money out of the thrift box. That is, it is not the money of Mechel, it is money of Zyuzin’s by almost 100%.”

A well-informed Moscow bank source says he is confident the deal was done by “related party receivables.” He concedes too that there is genuine fear among bank analysts and newspaper reporters to open up what this means. He suspects that Mechel has written down receivables from related parties, meaning Zyuzin companies, and the corresponding amount has then been paid by the Zyuzin companies offshore to acquire the Vanino port shares.

In short, Mechel is lending (or giving) Zyuzin $669.4 million. “The [accounting report] dots”, claims this source, “connect to Vanino”.

Mechel wasn’t asked to disclose what it is keeping secret about the transaction. Instead, it was asked to explain the company’s reasons for not disclosing to the New York stock market and to shareholders the identities of the Vanino port investors, Russian and foreign; and to clarify Mechel’s purpose in the withholding and how it should be understood as compliance with normal corporate transparency standards.

The company promised to work on the request and reply. It hasn’t done so.

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Eurochem, a Russian fertilizer miner and manufacturer owned by Andrei Melnichenko, is suing the South African mine technology company Shaft Sinkers for $800 million on account of a mining technology which Eurochem says has failed in Volgograd. Shaft Sinkers says the technology works perfectly well, in Yorkshire for example. $800 million is the sum of Eurochem’s claims. Much less than that is at stake — according to Shaft Sinkers $15 million in unpaid invoices – but also much more, in Kazakhstan, where Eurochem’s plan for a large new phosphate mine is in trouble of another sort. About that Eurochem doesn’t want to talk at all.

In 2008 Eurochem made several announcements about its new potash mine, Gremyachinskoye mine in Volgograd. In the context of Melnichenko’s proposal to reduce his personal exposure in the company, and sell assets to Gazprom or shares to international investors, Eurochem reported growing reserves, speed in mining new output, and jumping sales revenues. Gremyachinskoye was to be commissioned in two stages, start shipping 2.3 million tonnes of potash per annum in 2012, and by 2015 double that volume.

EuroChem chief executive Dmitry Strezhnev said at the time that total investment for the project came to $2.2 billion; that included $100 million for the mine license; $50 million for preparatory works; $600 million for the processing plant; $300 million for infrastructure to support the mine; and more than $600 million for the two principal shaft builders, Thyssen Schachtbau (Germany) and Shaft Sinkers (South Africa).

“When we studied the profitability of this project,” Strezhnev said, “it was profitable even at a potash price of $500. We do not expect prices to go lower than $700-$800, so our investments carry almost no financial risks.” Nikolay Pilipenko, Eurochem’s financial director, added: “We were ready for an IPO already last year. The Eurobond [$300 million, issued March 2007] was a very good disclosure exercise that we’ve now passed. If [the IPO] will be decided by the management we can prepare very quickly.”

Potash hasn’t been the winning bet Melnichenko (92% of Eurochem’s shares) and Strezhnev (8%) were counting on. The commodity price peaked at $900 per tonne; collapsed to $300; and is currently at $391.50. During the five years in which Shaft Sinkers has been excavating at Gremyachinskoye potash has failed to reach Eurochem’s breakeven point.

In 2008, when Shaft Sinkers confirmed its $270 million contract, Rob Shroder, then chief executive of Shaft Sinkers, described the technology intended for Gremyachinskoye as only the second such application to a potash mine in the world; the other was at Boulby in the UK. “Älthough this is our first venture into Russia, we have sunk shafts throughout the world with the exception of North America. We specifically bring our grouting techniques, used successfully in the majority of these other projects, and are certain this will bring significant time and cost savings for this Project.”

According to Shroder, “Instead of freezing, where one drills holes 500 metres deep, freezes the ground to this depth, and then sinks the main shaft through frozen ground, we cover-drill up to 42 metres ahead of ourselves. If we intersect water or running sands, we pump cement or resin grouts into the material, until it solidifies. then we drill and blast through.” This is a Canadian description of the grouting technology for holding back water and preventing cave-in – common hazards in potash mining the world over.

Eurochem thought it was hedging against the potash price by investing in Shaft Sinkers grouting technology as a cheaper, faster way of getting saleable potash from underground and into the market – 25% cheaper, according to Alexander Tugolukov, the technical director at Eurochem. The German and South African contractors had been chosen, he said in 2008, “with a kind of socialist emulation between them to determine who will do the job better, quicker and cheaper. These tactics may also be used on our Verkhnekamskoye deposit [potash, in the Urals] to cut the timing of mine development and construction from the conservative 7-8 years to about 5-6 years.”

Vladimir Torin, Eurochem’s spokesman, added: “We searched the global market for a company specializing in what we needed, and found Shaft Sinkers by ourselves. We then negotiated directly, sending Alexander Tugolukov, our technical director, to South Africa to study their previous and pending projects. They are the largest shaft constructors in the world, so the choice was obvious.”

For the next four years what seemed obvious was that everything was going swimmingly. The Eurochem contract – Shaft Sinkers’s biggest, representing about 30% of its order book – enabled Shaft Sinkers to move from private ownership shared between Shroder and black empowerment enterprise partners to an IPO on the London stock market in December 2010. By then the control shareholder was International Mineral Resources (IMR), an affiliate of ENRC, the Kazakh mining conglomerate, which had bought out most of the South Africans.

In June 2011 Eurochem reported that Shaft Sinkers’ work was going according to plan, and was “on track to allow potash production to start by late 2013. Shaft Sinkers acknowledged there was a problem well before Eurochem did, but the former was a public company operating under London market rules. On December 29, 2011, Shaft Sinkers said that “due to the continued slow progress resulting from extremely difficult ground conditions previously announced, it has entered into discussions with its client EuroChem with a view to amend or terminate the contract. Sinking works have now been suspended and the parties are in negotiation on the way forward.”

On June 1, 2012, Shaft Sinkers reported the problem had become bad news: “discussions are continuing with EuroChem on the settlement of outstanding amounts… The Group continues to pursue new projects and is awaiting client adjudication on several tenders and proposals in South Africa, The DRC, Russia, and Kazakhstan. Results from trading for the 2012 financial year are forecast to be in line with expectations and the Board remains confident of the Group’s prospects.” On August 30, 2012, it was clear the Russian mine project had stopped: “The full demobilisation of our EuroChem project is expected to be completed during the second half of 2012. Discussions continue with EuroChem to recover the amounts owing to the company.”

In fact, as much later announcements from Eurochem revealed, Eurochem told Shaft Sinkers it was terminating their contract at Gremyachinskoye on April 20, 2012. Why Eurochem pretended nothing was happening isn’t clear.

Here is Eurochem’s first- quarter IFRS financial report, issued on May 22, 2012, one month after the contract ended: “We continued making good progress on our two potash developments in the first quarter of the year. In southern Russia, shaft sinking operations at VolgaKaliy’s skip shaft #1 hit the 500 meter mark late in the first quarter. As at 18 May, the shaft had reached its approximate midway point of 550 meters. The future mine’s cage shaft continued being readied for freezing with sinking operations set to resume within the next twelve months.” Note that the skip shaft was the German project; the cage shaft was Shaft Sinkers’. Eurochem was intentionally misleading in this claim.

Eurochem’s first public disclosure of the dispute was this announcement of October 5, 2012. The wording is important because of the claim that the dispute was a contractual one based on the technical claim about the grouting technology: “Shaft Sinkers was chosen as the contractor to develop the cage shaft of the Gremyachinskoe deposit but subsequently proved unable to fulfill its contractual obligations. Shaft Sinkers’ grouting technology entirely failed, causing in excess of USD 161 million in direct costs and a delay to the project’s completion date which was subsequently revised to 2015.”

This announcement is also noteworthy because of Eurochem’s calculation of the liability. It took several more months before it was disclosed publicly that Eurochem was raising the amount of its claim to $800 million to include purported lost profits because of the production delay. This amount appears in a Shaftsinkers report on February 13, this year. Russian courts don’t accept this type of damage claim. Whether it will be allowed by the two arbitration tribunals in Zurich and Paris, to which Eurochem has applied, remains to be seen, not least of all because Eurochem claims lost profits when the price of potash is still below the cost of mining and selling it.

In Eurochem’s reporting of the dispute with Shaft Sinkers, the details are to be found in the auditor’s notes to the financial reports for 2012. In its audited accounts Eurochem also fails to provision for Shaft Sinkers’ counterclaim ($54 million in press reports, $15 million in Shaft Sinkers’ reports). According to Eurochem’s auditor, “Write-off of a portion of the assets at the Gremyachinskoe potash deposit. Following an earlier termination of the construction contract, in October 2012 the Group filed a claim against Shaft Sinkers (Pty) Ltd. (Shaft Sinkers), seeking US$ 800 million compensation for the direct costs and substantial lost profits arising from the delay in commencing potash production. This was a result of the inability of Shaft Sinkers to fulfill its contractual obligations and complete the construction of the Gremyachinskoe cage shaft, primarily due to problems with the grouting technology. In October 2012 Shaft Sinkers presented an interim claim letter to the Group claiming compensation of US$45 million in costs incurred by them up to and inclusive of 30 September 2012 in connection with the termination of the construction contract. Management believes that this claim is without merit. The above disputes are subject to arbitration as specified in the contract. An outstanding advance given to Shaft Sinkers of RR 495,387 thousand was written off during the nine months ended 30 September 2012 (nine months ended 30 September 2011: nil). Due to the failure of the grouting technology employed in the cage shaft construction, expenses previously capitalised, amounting to RR 3,116,000 thousand, were written-off during the nine months ended 30 September 2012 (nine months ended 30 September 2011: nil).

Following Eurochem’s submission of its claims to arbitration in October, Shaft Sinkers issued this notice to the London Stock Exchange: “On 5 October 2012 the Company responded to the announcement by EuroChem that it had filed a claim against Shaft Sinkers (Pty) Ltd in relation to its project with EuroChem which was terminated with effect from 20 April 2012. The Company has reviewed the arbitration claims, and after consultation with legal counsel, continues to believe that the claims are without merit, and will contest them robustly. A claim for a net amount of $15 million has been submitted to EuroChem for amounts still owing under the contract.”

A spokesman for Shaft Sinkers was asked this week to clarify what happened, and also why the dispute escalated from a problem of mine delay to an $800 million claim. He responded: “Shaft Sinkers has built many shafts worldwide and we were involved in the construction of the other deep potash mine in Boulby in the UK. Shaft Sinkers was called in after other companies failed and we successfully completed building the mine. We believe that the [Boulby] mine continues to operate normally.”

“The technology is not experimental, having been used successfully in many mines around the world and it did not fail in this case. However deep shafts are clearly complex engineering projects where delays can happen due to a wide range of factors. In the case of Eurochem, the ground conditions were difficult and Shaft Sinkers were in the process of refining the specific application necessary for the shaft when Eurochem suspended the project. Whilst the exact details of the contract are covered by commercial confidentiality and are subject to legal restrictions, I can say that as Shaft Sinkers has – so far – not failed in its mining efforts, provision for failure was from Shaft Sinkers’ point of view unnecessary.”

Is there another reason why Melnichenko has stopped one of the mine shafts, and ordered his lawyers to pursue Shaft Sinkers on the technical claim?

Since the potash price is well below where the miners would like it to be, mining less potash is one way of putting a bottom under the price. Eurochem’s Russian potash rival Uralkali implemented a production cut in 2012 of 8%. In the first quarter of this year, Uralkali said it is cutting by another 40%. The Russian cuts match those of Canada’s Potash Corporation, the largest producer in the worl, which has taken 1 million tonnes off the market since last year. For Eurochem to hurry a fresh 2.3 million tonnes from Gremyachinskoye on to the market would be folly, as the price it would fetch would probably be lossmaking. Mining the law courts may look a better bet to Melnichenko, especially if he must pay his lawyers less than the $15 million in overdue invoices from Shaft Sinkers for the work done but not paid for when the contract was halted.

Is there any other reason for the attack on Shaft Sinkers and its Kazakh control shareholder?

The answer to that one may lie in problems which Eurochem is having in Kazakhstan, but which the company is reluctant to acknowledge.

Asked what problems in Kazakhstan Melnichenko and Eurochem have across the border, Eurochem sources initially claimed there weren’t any. Kazakhstan holds substantial reserves of mineable fertilizers, particular phosphates. These are concentrated in the southern regions of the country, between the cities of Shymkent and Taraz.

At Taraz the leading miner is Kazphosphate, which is incorporated in the UK. That entity has had what is known in the market as a controversial history since it was first taken over by two controversial Israelis, Nahum Galmor and Arkady Gaydamak. After fighting between themselves the property passed into local control and into the hands of three Kazakhs — Nurlan Bizakov, Galimzhan and Maxutbek Yessenoz.

According to Eurochem’s financial report for 2012, issued on February 7, 2013, Melnichenko has two projects in Kazakhstan – one at Karatau, where Kazphosphate is already mining; and one at the Kok-Jon and Gimmelfarbskoe deposits, which have been partially explored but not yet mined. According to Eurochem’s papers, “to increase upstream integration, we plan to start phosphate rock mining in Kazakhstan’s Karatau Basin from 2013”; and “we are looking to increase our vertical integration by extracting phosphate rock from the Kok-Jon and Gimelfarbskoe deposits in Kazakhstan’s Zhambyl province”.

The releases from Eurochem include the announcement in February 2009 of Kazakh presidential approval for the Karatau project, with capital spending of $2.5 billion; production targets of 1 million tonnes of phosphates, 800,000 tonnes of nitrogenous fertilizers; a nitrogen, phosphate and potash combination (NPK) plant, and more, allby the year 2015. This was repeated for the benefit of Russian and Kazakh ministers in June 2009. Subsequent company publications claim that right now “we are developing the phosphate deposits and constructing a fertilizer plant in two locations, Zhanatas and Karatau.”

It would be madness for Melnichenko to be spending $2.5 billion on adding to phosphate supply when it is suffering from the same downturn in market demand and price as potash:

Melnichenko isn’t mad. But the Kazakhs are impatient. They think there is a four year-old promise to start the mine with targeted production tonnage and estimated revenue and cashflows. So how much has Eurochem actually spent at Karatau since 2009, and is there a problem between the company and the Kazakh mine licensing authorities?

A spokesman for Eurochem replies: “In terms of its activity in Kazakhstan, EuroChem is working through the various regulatory and legal requirements necessary to ensure that its operations conform with Kazakh legislation. Investment has been made into social projects there, with USD 5 million already committed. Further than that, I’m afraid we cannot comment.”

That doesn’t sound like the thunder of digging machines at Karatau. But promising to start excavation in 2009 and not starting, Eurochem has paid real money for additional phosphate reserves elsewhere. Eurochem’s financial report for last year notes payment of Rb1.1 billion ($35.8 million) for the mineral and mining rights at Kok-Jon and Gimmelfarbskoye. “During the year ended 31 December 2012 the Group signed a contract with the authorities of the Republic of Kazakhstan for the extraction of phosphate rock at the Kok-Jon and Gimmelfarbskoe deposits in Kazakhstan’s Zhambyl region. The Group plans to launch a mining and production project, which includes the development of phosphate rock deposits, the construction of integrated mining-and-processing facilities and a fertiliser production plant. Under the terms of valid licences for the exploration and development of mineral resource deposits, the Group is required to comply with a number of conditions, including preparation of design documentation, commencement of the construction of mining facilities and commencement of the extraction of mineral resources by certain dates. If the Group fails to materially comply with the terms of the licence agreements there are circumstances whereby the licences can be revoked. The management of the Group believes that the Group faces no material regulatory risks in relation to the validity and operation of any of its licences.”

There is domestic rivalry for Eurochem from several sources, according to those familiar with the matter, and this is too sensitive for Eurochem to acknowledge, particularly as it doesn’t have to do so for public shareholders. The phosphate prospects are also not so attractive that Kazphosphate was able to sell its shares in a London IPO it was contemplating in 2009. Nor was Melnichenko willing to buy a 50% stake in Kazphosphate the year before, at least not at the reported asking price of $400 million.

So can the Kazakh and Russian phosphate combines go it alone, each publicly promising billion-dollar investments in new mines? That depends on a great many things, not least the willingness of Kazakh government ministries and state-controlled suppliers of raw materials, gas and electricity to cooperate at a price that allows the mines to make their target rates of return. Right now, if you follow the phosphate price trajectory, the risks recommend doing nothing on the ground.

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Russia’s aluminium monopoly Rusal, with its hidden Kremlin shareholders, has slipped below the worthlessness level on the Hong Kong Exchange – that is, its market cap is now less than the value of the 28% shareholding it owns in Russia’s largest mining company, Norilsk Nickel. The aluminium assets no longer support the market valuation; the aluminium operations would be loss-making if not for payment of Norilsk Nickel dividends, which are in turn being inflated above the profit line by borrowing from Russia’s state banks.

Rusal’s share price collapsed through the four-dollar threshold today, as the release of results at Friday’s Annual General Meeting (AGM) of Rusal shareholders revealed that the company is planning to use its shrinking cash reserves to try to prop up its share price.

In a dramatic warning issued in Moscow at the same time, Otkritie Capital warned current shareholders to sell. Rusal, according to Otkritie, is now “too illiquid and expensive to short given the lack of real catalysts, but we would avoid the stock on valuation grounds.” A Citi source has reiterated the US bank’s forecast of HK$1.80 as Rusal’s target share price, adding that since Citi’s April 18 assessment of Rusal “nothing has changed”.

According to a release to the Hong Kong Exchange today, Rusal’s controlling shareholders ran into significant opposition when they proposed two resolutions allowing the board to direct, and the company to pay for new share issues and repurchase of existing ones. Twenty-five percent of Rusal’s shareholders votedagainst the new issue authority, and 24% against the buy-back.

Even more sustained opposition by Rusal shareholders was voted against continuation on the board of Hong Kong lawyer and politician, Elsie Leung Oi-sie whose independent performance has been criticized by the minorities. For that story, read here. A total of 33.9% of shareholder votes were cast against Leung. They include Mikhail Prokhorov’s Onexim holding (17.02%), as well as Victor Vekselberg and Len Blavatnik (15.8%); the latter are suing the company and its chief executive in London for violations of the shareholder charter and for cash-stripping from the company.

The vote against Leung was the largest opposition count so far in Rusal’s 3-year history as a publicly listed company. The vote tabulations also reveal that the Russian state banks, which control at least 10% of Rusal’s shares, voted to keep Chief Executive Oleg Deripaska’s control scheme in place and prevent further board challenges.

The AGM and new board are also reported by today’s company release to have appointed “Mr. Artem Volynets, a non-executive Director, …as a member of the Audit Committee of the Company with effect from 14 June 2013.” Last week Volynets announced he is leaving Deripaska, and opting not to renew his contract as chief executive of EN+, the holding through which Rusal is controlled.

Two schemes for the survival of United Company Rusal have now emerged in Moscow to compete head to head for President Vladimir Putin’s approval. Neither is assessed by Rusal’s bank creditors as potent enough to staunch forecasts of steadily eroding asset and share value, on which the company’s $10.4 billion in loans is secured.

In April Citibank, one of Rusal’s syndicate of international lenders, predicted a decline of Rusal’s market capitalization to the equivalent of $3.5 billion. That represents the loss of five-sixths of the market capitalization which Putin ordered the state banks to support at Rusal’s initial public offering in January of 2010.

In effect, the banks are saying Rusal is already worthless. According to Otkritie analyst Andy Jones, Rusal’s real market value is zero, because its $6.74 billion capitalization on the Hong Kong exchange is entirely accounted for by Rusal’s 27.8% stake in Norilsk Nickel; at today’s price that is worth $6.92 billion. If Rusal hits Citi’s price target, its market capitalization would be half the value of its Norilsk Nickel shareholding.

“RUSAL remains a high cost call on the aluminium price”, reports Jones of Otkritie, “due to high leverage and sub-10% EBITDA margins. When aluminium does see a sustainable recovery, RUSAL’s share price could make big gains, but we do not expect this in the near/medium term…Around 100% of RUSAL’s market cap is accounted for by its 27.8% stake in Norilsk at present, but there is no reason that this should act as a floor price for the stock given the $6.3bn stake is part collateral for some of the $11bn net debt. Net debt less the Norilsk stake value is currently $4.6bn and RUSAL generates close to zero EBITDA at spot aluminium prices, implying there is little equity value in the core aluminium business.” The full text of the Otkritie report can be read (with permission) here.

The Otkritie forecast is for sale revenues to remain below the 2011 level through 2015; for earnings to fall far short of the 2012 level; and for the bottom-line to remain loss-making this year. “RUSAL has cash costs of c. $1,970/t. In addition to cash costs, it needs to pay maintenance capex of c. $500-600mn pa, and interest payments of c. $650-700mn pa. This requires a price realization of $2,280-90/t which equates to an LME price of $2,020-30/t at current levels of premiums, c. $2,190/t under an average 2005-2009 c. $100/t premium. Given spot is now $1,850/t, the aluminium business does not generate enough cash flow to reduce leverage.”

Only by a steady increase in dividends from Norilsk Nickel can Rusal escape loss-making.

Chief executive Deripaska has stopped trying to talk down the supply and talk up the price of aluminium in his public relations campaigning. In the London Daily Telegraph, for instance, he didn’t mention aluminium at all, and promoted instead his car business. “For us, it’s important to have an industrial policy that will promote more components manufacture, more new material development and help us to receive better resources into the Russian market, not raw material resources but industrial resources that will help us to compete and reach our goals.”

One day later, Dmitry Razumov, a former Rusal board director and manager of Prokhorov’s stake in Rusal, described Rusal corporate strategy in an interview with Kommersant and Bloomberg as little more than debt service. “The [Rusal-owned 27.8% share] package of Norilsk Nickel [currently equivalent to $7.8 billion] is worth more than most of Rusal [currently $7.9 billion]. The settlement agreement, signed by the shareholders with Millhouse, is perhaps positive for Rusal, but it does not solve all the problems. Even if Norilsk Nickel will be able to pay these [$9 billion in total] dividends, for Rusal they will only serve the interest payments on the debt. Dividends will not solve the debt issue. And can Norilsk Nickel pay them in such volumes? That’s another issue. The conditions in the nickel market are also not very favourable. In fact, I do not see any other way than that Norilsk Nickel will strongly increase its debt burden. This will lead slowly but surely to [Norilsk Nickel] becoming the second Rusal case. From my point of view, this is a multiplication of problems.”

Razumov was making the first public attack by a Rusal shareholder on the scheme of last December in which Roman Abramovich was drafted to buy into Norilsk Nickel; keep the peace between control shareholder Vladimir Potanin and Deripaska; and ensure that dividends paid to Rusal by Norilsk Nickel would be large enough to prevent Rusal sinking into loan default. Before Razumov’s attack, the only significant stakeholder to criticize the deal was Alisher Usmanov, a minor Norilsk Nickel shareholder, who was unhappy that the terms were negotiated without his knowing or benefiting.

The involvement of Valentin Yumashev and other members of the family of ex-President Boris Yeltsin in that scheme, and its approval by Putin, have exposed the role of hidden shareholders of Rusal, whose power is spelled out in the corporate records of RTI, an entity registered in Jersey the day after Rusal itself. The RTI shareholders are the inner circle at Rusal: they control Deripaska, not the other way round.

Though he knows the names intimately, Razumov doesn’t identify this group. Instead, he is proposing an option for Rusal which would eliminate their control over cashflow, pay them out, and reorganize the Rusal shareholding with new management, new strategy, and minimal debt. In the context, Razumov’s attack – and thus of Onexim — on the scheme of arrangement between Rusal, Norilsk Nickel and Abramovich is an attempt to build Kremlin support for an alternative future for Rusal. This would start, Razumov has proposed, with a buy-up of the foreign bank debt of Rusal by a combination of Prokhorov, Vekselberg and his SUAL partners. “In the current structure of corporate governance of Rusal”, Razumov has said, “I do not see an effective way to deal with it. The Onexim package and even that share together with the package of Viktor Vekselberg, who basically shares our views, are not sufficient to effectively influence the process.”
In the same interview reported separately by Bloomberg, Razumov added: “We don’t want to be in a company [Rusal] whose only mission is to pay creditors, not shareholders.” The one thing that may help Rusal “to recover sooner rather than later is converting a part of its debt into equity.”

Just how big a part of Rusal’s debt this plan could take over isn’t clear from Rusal’s debt reports. Nor are Moscow analysts who follow the company sure of the precise figures. In Rusal’s IPO prospectus, issued on December 31, 2009, “international lenders” were identified as holding $7.4 billion; “Russian and Kazakh lenders”, $2.1 billion; the state bailout bank VEB, $4.5 billion; and Prokhorov’s Onexim holding, $895 million; for a total of $14.9 billion.

The latest Rusal financial report confirms that the VEB debt is now Sberbank debt at $4.58 billion. The “Russian and international lenders” appear to be owed $4.75 billion, but because this aggregate includes state-directed loans from VTB and Gazprombank, it is impossible to pin down what amount is owed to the non-state, non-Russian banks. According to the Rusal report, the gross amount of the loans as of December 31, 2012, was $10.4 billion. Natixis, the French bank, was reported as having been fully paid out, while liabilities to Onexim were reported as having been refinanced.

A rough estimate by Moscow experts is that about 33% to 40% of Rusal’s current loans are foreign-owned. So if the Razumov plan materializes, that’s his initial target – between $3.4 billion and $4.2 billion, equal to or greater than Citi’s target for Rusal’s market cap. The worse Rusal’s financial condition appears to grow, and the more negatively Otkritie and other banks assess the future prospects, the bigger the discount at which the foreign loans may be sold.

However, lowering the price at which the foreign banks might agree to dispose of their loans also depends on what signals the Kremlin sends through the state banks. In holding the majority of Rusal’s loans, they are in a position to guarantee the nominal value of this debt and prevent discounting. They can also persuade the foreign banks to resist the buyout offer, and effectively veto the buyout and debt-for-equity reorganization plan for Rusal.

Unless Razumov’s plan can convert enough debt to equity giving a sizeable majority of Rusal shares to Prokhorov and Vekselberg, and unless the new plan wins Kremlin approval, it’s a non-starter. According to one Moscow banking source, this is already obvious. “If they were serious about this, it would not be advertised. They would simply start negotiating to buy up debt. He’s sending out feelers. He probably wants to force something out of Deripaska.”

Bloomberg quotes from another source, a report from Alfa bank metals analyst Barry Ehrlich. “We find it difficult to imagine Onexim taking a large stake in low-yielding Rusal bank debt. However, the threat needs to be monitored. By threatening and then potentially moving ahead to acquire the bank debt, Onexim can strengthen its negotiating position by refusing to give Rusal a covenant extension at the end of 2013 when the current covenant holiday expires.” That looks like a threat to trigger insolvency.

According to another source, the threat of another Rusal default comparable to the one in October 2008 which triggered the first VEB bailout and then the state anchor for the Hong Kong IPO, is a wakeup call intended for Putin himself. What Razumov is advertising is a plan to dislodge the control shareholders before the arrangement between them, the Kremlin, and the state banks puts Rusal in a worse position than it was in 2008.

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Moe (Moses Horwitz) of Three Stooges fame stuck his fingers so often in Curly’s (Jerome Horwitz) eyes, it was Curly the audiences loved — until he died of too much drinking and eating. No chance that if Russia’s President Vladimir Putin keeps giving French President Francois Hollande the two-fingered, two-eyed poke, the audiences will fall for the latter, or that Hollande’s fate will be as ignominious as Curly’s. This time the audiences prefer the Moe character. But what exactly has Hollande done, and keeps doing, that he deserves Putin’s eyeball treatment?

The first of Putin’s pokes at Hollande was the award in January of this year of a Russian passport and an apartment on One Democracy Street, Saransk, for Gerard Depardieu. This was followed in February by Hollande’s first visit to Moscow when he and Putin pretended to be businesslike, and Hollande dropped his regime-change talk, at least his earlier support for the overthrow of Putin himself. It’s quite clear that Hollande has struck the Russians as a duplicitous hypocrite. But it’s just as clear that he is so feeble domestically that it’s the French who are giving him the double-eyed poke. His approval rating (Ifop measurement) was 26% in June; last week it was 27%. No French president has proved to be so deeply and widely unpopular so quickly.

According to the Valdai Club of anti-Putin academics and reporters, Putin’s Depardieu ploy lacked motive and resulted in a mistake. “I must say that Hollande took this badly,” claimed a French analyst, Arnaud Dubien, in an interview arranged by the Valdai Club just before Hollande’s arrival in Moscow. “I guess the Russian leaders did not fully grasp the situation. They did not mean to cause any harm and merely improvised, as often happens in Russia, especially during holidays. Nor did they fully understand in full how French society and the government would perceive this. So it’s hard to see how this move benefited anyone.” Although Valdai portentously titled the interview, “Is there a place for Russia in Francois Hollande’s foreign policy priorities?” it provided no answer at all.

Better to ask, Is there a place for Hollande in Putin’s priorities? now that the second eye-poke has been delivered by Putin in Hollande’s face. This time the French instrument is Dominique Strauss-Kahn.

Last week Rosneft arranged for Strauss-Kahn to take a seat on the board of its pocket bank, Russian Regional Development Bank (the Russian acronym is VBRR). The action was taken so quickly, there was barely time for the bank to put Strauss-Kahn’s name on the Russian version of the board. On the English –language version, the bank website continued today, more than a week later, to list the three Morgan Stanley bankers hired eight months ago by Rosneft’s chief executive, Igor Sechin. Their names are still on the English version of the board – Rair Simonian, Elena Titova, and Walid Chammah – Strauss-Kahn’s is not yet.

The resignations of the Morgan Stanley trio, made public in Moscow on July 12, were put down in the Russian business media to a switch of the bank’s client strategy from investment to consumer banking. In the process, or in parallel, Titova reportedly clashed with Sechin. What Strauss-Khan can contribute instead of the Morgan Stanley trio hasn’t been announced, and he didn’t have time to say himself before the Russian Direct Investment Fund (RDIF) issued an announcement that Strauss-Khan is to take a seat on its 9-man board. That this July 19 move had been cleared with Putin in advance is certain. Sergei Ivanov, Putin’s chief of staff, is the second- ranking member of RDIF’s board.

RDIF was asked to explain when the shareholders of the fund met to decide to enlarge the board by the additional seat; why Strauss-Kahn was appointed to the Supervisory Board rather than the International Advisory Board; and why there are now two Frenchmen on RDIF’s controlling committee. The other is Laurent Vigier, Director of European and International Affairs at the Caisse des Dépôts Group, a French state institution without private, individual or corporate shareholders. Vigier was a protégé and advisor of former president Nicolas Sarkozy. He has government experience, but no banking.

The RDIF spokesman Maria Medvedeva refused to reply.

According to the RDIF releases, Strauss-Kahn “is an expert on the global economy and politics.” Politics, that’s the key word. When Strauss-Kahn ran into his sexual trouble in New York in May 2011, Putin was the only head of government in the entire world to publicly suggest that he had been framed by the New York Police Department, and possibly by others too.

The following was staged by the then-prime minister as a press opportunity on May 27, 2011:

“Question: Candidates for the post of the IMF managing director are now being discussed. Whom would you support? And what is your attitude towards the scandal surrounding Dominique Strauss-Kahn? Was he framed for political reasons?

Vladimir Putin: I don’t know much about the possible political reasons and don’t even want to touch on this issue, but it really is hard to believe that everything is as it was initially presented. I just can’t believe that – it is beyond me to understand it.”

The dismissal of the criminal charges against Strauss-Kahn thirteen weeks after his arrest wasn’t an exoneration of Strauss-Kahn’s conduct. But it was a vindication of Putin’s position that there had been a political plot against him. But why, almost two years later, has Putin given his approval for his two subordinates, Sechin and Ivanov, to reward Strauss-Kahn financially and help resurrect his public reputation?

There is no obvious answer – unless Strauss-Kahn, like Depardieu, has been assigned the Stooge role – that’s Moe the Stooge – with the intention of striking Hollande personally. That Hollande must have done something to Putin behind the scenes, as yet undisclosed, to warrant two two-eyed pokes in six months is likely. But if Putin were to deal out two-eyed pokes to every duplicitous hypocrite he meets in the course of running the Russian government, he’d run out of arms, fingers, and wit.

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After months of delay, Victor Pinchuk’s Interpipe group revealed in its financial report for last year — issued at the start of August but given a release date of May 23 – how much financial trouble the Ukrainian pipe and steelmaker is now facing.

The impact of this on the international art market is about to be felt in art auctions scheduled for later this month and in October in London and New York. That’s because Pinchuk’s record-priced acquisitions of two artists, Englishman Damien Hirst and American Jeff Koons, have created an overhang of their works in the market place.

According to speculation by London and New York art dealing sources, these works may be forced into sale at a heftier discount than Hirst and Koons have already been taking.

Art market reports show that sales by Hirst have dropped from $45.8m in 2008 to $18.3m in 2012 – and that doesn’t count the volume of works failing to sell at all. Since then, according to the New York Times, Hirst works are fetching 60% less than was originally paid for them. To reduce the supply, Hirst’s production company Science Ltd. has issued a catalogue of itemizing one line of purportedly authentic works and inviting owners to apply to Hirst for an authenticity check.

Part of Hirst’s problem is that one of his production lines, the so-called spot series, has turned out at least one thousand, according to Hirst; more than 1,200 according to other sources.

Art market sources currently report that the Koons work, Hanging Heart, for which Pinchuk paid $23.6 million in November 2007 is now down to $11 million. In May of this year, an attempt to resell a 1980s work by Koons comprising four vacuum cleaners encased in acrylic failed to reach the $10 million reserve — and failed to sell at all.

When Pinchuk paid Koons more than anyone else had ever paid for a living artist’s piece of work, he was beating the record the Qatar ruling family had set in June of the same year when it paid £9.7 million ($19.2 million) for a Hirst work calledLullaby Spring.

As bluntly as a Hirst shark in formaldehyde, when Pinchuk is feeling financial stress, his premium-priced holding of Hirst art is in a pickle too. This is a conventional case of over-supply in relation to demand; since Pinchuk started buying Hirst, one-third of Hirst’s works at auction are reportedly failing to find a buyer. But the falling Hirst value also triggers Pinchuk’s obligation to stave off margin calls from the banks which may have financed the art buying in the first place.

An advisor to banks lending on art assets says that Deutsche Bank and Citi – banks with a known association with Pinchuk – “typically lend on a recourse basis, when the art would be part of an asset pool securing the loan. Their loan value would usually be 40% to 60%, depending on the individual [borrower]. There would definitely be collateral in addition to the art work itself.” Since Citi and other creditors in the syndicate lending to Pinchuk have imposed fresh borrowing, pledge and borrowing limits, a significant loss of value in Hirst or Koons may oblige Pinchuk to raise more cash.

“The only way to do that in the art market is financing by art capital groups,” says the advisor. That is also “for between 40% and 60%. But the interest can run up to 18% per annum.”

Where to find cash has been problematic for Pinchuk since his cash-cow, not the Hirst variety but Interpipe, defaulted on its debts in 2011 and was obliged by its banks to undergo restructuring. One of the conditions for that was to require Pinchuk to put cash into Interpipe. Another was to stop him taking cash out. Poor cow.

According to Pinchuk’s latest financial report, his group debt as of December 31, 2012, was $1.05 billion. Required for repayment this year is $312.3 million. The company revenues for 2012 came to $1.8 billion; there was a net loss of $71.7 million. As reported here, the collapse of demand for Pinchuk’s pipes in the Ukraine and abroad increased his dependency on Russia to take a growing share of his products. In 2012 the Russian share was 28% ($497 million). From July 1 of this year, the imposition of penalty import duties by Russian Customs will cut this amount substantially.

To stay solvent and meet the debts to a syndicate of international banks, Interpipe is paying Libor plus 4% on loans, and up to 13% on bonds. Here is the report as released on the company website. The report acknowledges that during 2011 Interpipe was in default to its banks. The report doesn’t identify the banks, but sources close to Interpipe identify them as including Citi, Barclays, Credit Agricole, ING, and two Italian money houses — Intesa and the Intesa-owned subsidiary CIB.

Pinchuk regularly entertains Hirst and their Italian friends at the Venice Biennale and off Capo Ferro in Sardinia, where his motor yacht, “Oneness”, drops anchor during the summer season. Right is artist Hirst at the current Pinchuk Venice show.

In addition to Intesa, Italy’s largest bank, the Italian government is also heavily exposed to Pinchuk’s debts, and to the sinking prospects described in the latest financial report as “market downturns and economic slowdowns elsewhere in the world”. SACE, the Italian export credit agency, financed the delivery and installation of steelmaking equipment by Danieli and other Italian suppliers at Interpipe’s new mill at Dnepropetrovsk. SACE was given $10 million for rolling over Interpipe’s debts; the government agency in Milan is currently owed between $136 million and $322 million. The exact debt owing isn’t clear, nor is the security SACE accepted for its exposure. Danieli says the cost of its investment in Interpipe’s mill was €260 million.

Intesa is not mentioned in the Interpipe reports; but it is one of the main members of the bank syndicate involved in the restructuring. Aggregate debt to the syndicate is currently at least $543.7 million. Because of the cross-default provisions covering Interpipe’s indebtedness, each of the syndicate banks is in theory required to recognize an event of default in its exposure, and provision for loss in its shareholder reports. But even before default is recognized by the banks, the impact of the Russian penalty duty action against Interpipe sales in Russia is a “material adverse effect” which Pinchuk is obliged to report to SACE, Intesa and the others. A margin call or debt restructuring, issued in relation to the financing of art acquisitions, would also be reportable if the security extends to assets linked to the Interpipe group and Pinchuk’s other assets.

The Interpipe financial report reveals that of the $110.7 million in cash which Interpipe claims to have held at the end of last year, $69.3 million was tied down as collateral to secure the loans. If the balance has been deposited in Pinchuk’s bank, Bank Credit Dnepr, it may also be securing that bank’s liquidity and cannot be withdrawn. The bank, also wholly owned by Pinchuk through a chain of offshore fronts and trusts, reported a negligible profit in 2011; it is more than a year late in publishing audited results for 2012.

The Interpipe report acknowledges also that most of Pinchuk’s steelmaking assets are pledged for loan repayment, plus a third of the $187 million in unsold pipe inventories, plus $430 million in receivables and “rights arising out of sales contracts”. Pinchuk himself has been required by the banks to add $65 million of personal cash in additional equity capital; $40 million in a personal letter of credit; and to accept a ban on receiving dividends from company operations.

If a court were to rule Interpipe is in debt to a supplier by more than $20 million, and fails to pay, the banks and Italy’s SACE would be required to declare a default, leaving Pinchuk exposed to “acceleration and enforcement by the lenders of the security provided.” Since much of Interpipe’s financial foundation depends on Pinchuk’s personal liquidity, and his personal bank appears to lack that too, the risk is growing that Pinchuk may have to cash in private assets to meet the banks’ claims on Interpipe.

Pinchuk’s spending on Hirst, Koons and others has generated an art market rating that’s currently spot 32 on ArtReview’s “100 most influential people in the art world”. Hirst is at spot 41, Koons at 58. The only Russian on the list, one spot in front of Koons, is Pussy Riot. If buying Hirst and Koons has moved Pinchuk up the ArtReview ladder, what will happen to all three if Pinchuk starts selling them?

Christie’s Department for Post-War and Contemporary Art has scheduled sales in London, New York and Amsterdam for September, October and November. The pipeline isn’t publicly reported in advance, but it is believed there is no major Hirst work on offer. So far this year, Hirst has been selling off works well below the $1 million mark; those which have sold have generally failed to reach the top of Christie’s target range. Sources say that there is growing difficulty in getting Hirst’s price, and finding any buyers at all for his big-ticket items.

Christie’s was recently able to sell a Hirst work called “My Way”, after Sotheby’s failed to find a buyer at £1.1 million. The markdown or discount was 21%. One of Hirst’s formaldehyde installations, a sheep, sold in New York in February of this year for £1.95 million, 22% below the top of the reserve range.

In a report published recently with Deloitte, Anders Petterson of Art Tactic, a London art market consultancy, reports that market confidence in Hirst and Koons has been falling even though Petterson’s measure of overall art market confidence has been growing — see page 69. According to Petterson, the measure of confidence is taken from a survey of about one hundred experts, dealers and artist’s agents.

Following the London contemporary art auctions of last month, Petterson hasreported “the market is showing resistance to work priced between £1 million to £3 million. A total of 11 works estimated above £1 million failed to sell, missing out on £20.85 million in potential sales (based on average estimate). Whilst several of the works estimated above £1 million failed to sell, a total of 37 works below £500,000 exceeded their average pre-sale estimate, which suggests that buyers are looking for value in lower price segments.”

Petterson was asked how much of the Hirst asset stock is in Pinchuk’s hands. He was also asked what he estimates the price trend has been for Hirst since 2007-2008. He responded that precise numbers are difficult to come by. “[Pinchuk] is among one of the most important collectors and supporters of Damien Hirst.” Hirst’s website claims that a Pinchuk show in 2009 was “one of Hirst’s largest shows to date”, but ownership of the works wasn’t disclosed.

Hirst’s management company is less enthusiastic than Hirst or Pinchuk in acknowledging their relationship. Hirst’s company, Science Ltd., was asked to identify the largest single owner of his works, other than Hirst or related parties; and what number of Hirst works have been acquired by or for Pinchuk. James Kelly, Hirst’s business manager, said that ownership information is “firstly extremely confidential, and secondly is not necessarily information that we hold. As the majority of Damien’s artworks are sold through his galleries, he often is not privy to the information as to where the artworks are eventually placed. It would therefore be inappropriate for this office to comment on any individual’s holdings of Damien’s artworks. Also please note that a significant number of artworks do trade on the secondary market, and therefore there may be many collectors that have large collections of Damien’s work that have only ever acquired them through the secondary market such as auctions etc.”

The Pinch art collection curators in Kiev want to advertise the collection, but are evasive on how many Hirsts or Koonses they have purchased, or still hold. Without giving particulars, a reporter for the New Yorker was told that Pinchuk “has a great collection of Koonses…[and] reportedly owns half of Hirst’s current [December 2009] show in London, at the Wallace Collection.” According to Wallace Collection release, the exhibition included 25 works.

A spokesman for the Pinchuk Art Centre said: “We are unable to comment on your request regarding works from the private collection of Victor Pinchuk. To date, in the PinchukArt Centre were held more than 50 individual and group exhibitions, which was attended by about two million people. And the policy of the art center provides a free (free of charge) entry to all visitors. In some exhibitions, namely the Requiem, Sexuality and Transcendence, and Collection Platform were shown Hirst and Koons works from the collection.”

Petterson says that since the global economic crisis of 2008, for Hirst and others there have been “too many works and an indigestion problem. The auction market became saturated in 2008 after Hirst’s close to $198 million sale at Sotheby’s. Since 2009, auction sales have been averaging around $20 million, but with stronger emphasis on the private sales market. The art market is increasingly putting value on works from Hirst’s early period (1990s), and collectors are becoming more discerning and selective about what they buy in this market.”

He added that it is “very rare” for major art transactions to be opened up, and details of the cash or financing to be released. If the value of art works decrease, and art collectors run into financial straits, it would take some time for these news and their implications to be digested by the art market.

Javier Lumbreras is chief executive of the Artemundi group, which describes itself as an investment advisor for art as an asset. The group also operates Artemundi Global Fund, “a Diversified Low-correlated Alternative Investment Vehicle suitable for Portfolio Optimization”. According to Lumbreras, his group has had a turnover of half a billion dollars; this isn’t the same as the value of funds currently under management. That number, according to the fund website, is somewhere between $150 million and $225 million “to facilitate the purchase of 150-200 works of art.”

Lumbreras warns that he is not a keen investor in the type of contemporary art which Pinchuk has been buying. The fund portfolio assigns just 3% of its aggregate investment to the Post-War and Contemporary category. “The share of Contemporary art is small because it is the most volatile of all art segments, although returns can be extraordinary we are far more prudent in this market.”

According to a source at Artemundi Group, the future trajectory for Hirst and Koons is likely to be downwards. “Their markets have experienced price bubbles in the last decade, mostly because of price speculation from their main gallerists and some collectors. Tools like price indexes and confidence indexes have confirmed the sudden increase and decrease their prices. In both cases, their prices increased at an extremely fast rate, inflating them to unsustainable levels. When the general market acknowledged this, their prices decreased and returned to their initial value. In Hirst’s case, when prices were at its maximum level around 2008, the market experienced an excess on the offer side, making prices collapse in a matter of one year. Koon’s price bubble was less pronounced.”

What does this mean for the banks lending for purchases of these artists? “Investment funds usually perform a thorough due diligence process before investing in an artwork,” the source explains. “Usually the artist’s future price trend is estimated in order to determine if the investment is worth making. If the due diligence process was carried out correctly, funds must have avoided artists like Hirst and Koons because of their market risk. As both artists are alive and working, it is not easy to predict an accurate price tendency because the offer is growing and changing constantly. In the case of owning an artwork from these artists it would seem better to hold it for appreciation until its market stabilizes.”

The possibility of bank margin calls can be triggered by sharp declines in value, if the initial financing agreements Pinchuk made when he bought Hirst and Koons included the lender’s fair market valuation. “The terms of collateralization and interest rates are usually set using the Fair Market Value [FMV] of the artworks,” according to Artemundi. “This is usually calculated by a third party and would appropriately change according to the artist’s market tendencies. If an artwork became part of a collateral agreement, usually the FMV of the piece was established within the initial agreement.”

In his latest New York media profile, Koons fails to mention Pinchuk’s name among his important collectors. The art market media also indicatethere have been problems documenting actual sales of Koons’s work, and the prices they fetch — or don’t fetch.

An art market specialist said that when there is publicity indicating financial trouble for well-known art collections or their owners, the rumour mill quickly starts to speculate on what impact this will have to trigger art disposals. Two recent examples, the source said, are the bankruptcy of Detroit city in the US, and insider trading charges for Steve Cohen’s SAC Capital. A London source claims: “I’m not sure if Pinchuk is big enough for his problems to rattle the Hirst market. If he had to sell, the sales would be private, and handled very discreetly.”

Another market source said: “If people need to sell [Hirst], we are not seeing them”.

Hirst and his managers are currently trying to boost demand and prices with a big exhibition scheduled to open shortly in Qatar. “If Pinchuk wants to unload Hirst, there may be buyers in Qatar,” an international dealer believes.

Two weeks ago, Pinchuk invited a reporter from the Wall Street Journal on board his yacht in the Mediterranean to tell her that his collection of Koons is “strong”. “I am a trained metallurgical engineer, specializing in pipe production,” Pinchuk confided . “So I told Jeff that I loved that he cracked this ‘Egg’ because it allowed me to see how thick it is. With pipes, it all comes down to diameter and wall thickness. For the first time with a sculpture, I got to feel both sides of one. You can’t do that with a Rodin.”

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As larger cargo volumes and more international vessels move through Arctic waters, or the Northern Sea Route as the passage is generally called in Russian (SMP is the cyrillic acronym, NSR in English), the Kremlin’s strategy is to fund the construction of the most powerful nuclear icebreakers in the world, and ensure they dominate future navigation and convoys. These vessels are very expensive to build and to operate, however. So costly that just a few days of extra time navigating the icepack could eliminate the cost advantage which the Northern Sea Route is currently advertising over the Suez Canal alternative.

Because of the lack of ports along the Arctic shores, and tight beam and draught limits for vessels to navigate the eastern Laptev and Sannikov narrows, ten new Russian navigational and emergency centres will be installed over the next decade to bring the new traffic under Russian supervision and regulation. But there are technical problems with the maintenance of hundreds of strontium-90 powered navigational beacons installed along the coast line. Customs, coast guard, and special forces units are also being reinforced and tested to give the Russian regulatory authorities teeth to react to what the Kremlin considers foreign territorial or commercial threats. Ironically, according to one Moscow source, the satellite imaging used by the Russians to identify and navigate around thick ice concentrations is Canadian, not Russian.

Decrees issued by former President Dmitry Medvedev and President Vladimir Putin have ordered state funding for three new nuclear-powered icebreakers, built according to new designs by the Iceberg Bureau of St. Petersburg. The first, already under way at Baltic Shipyard in St. Petersburg, will be ready by 2017; the second and third by 2020. The federal ministry of Finance is planning to spend Rb100 billion ($3.1 billion).

After the US and Germany tried, then abandoned their efforts to create comparable nuclear-powered icebreakers, Stanislaus Golovinsky says Russia now has an “absolute monopoly” on this segment of shipbuilding and operation; Golovinsky is Deputy Director General of Rosatomflot, the state agency in charge of the new icebreaker fleet. Japan operates the nuclear-powered Mutsu icebreaker, but it is no more than a research vessel. China tested the route with the Xue Long, a diesel-powered icebreaker, a year ago.

It wasn’t until 2008 that Rosatomflot was put in charge of the nuclear-power icebreakers, after more than a decade of semi-commercial icebreaking by the Murmansk Shipping Company.

The new Russian vessels will replace the five icebreakers currently available for the Northern Sea Route. Unlike diesel powered vessels, however, the nuclear ones aren’t limited in range or operation by the need to make port for refueling. According to a recent study by the Arctic Institute, an American-backed think-tank without Russian participation, “the ice-free period along the Arctic’s main shipping routes is expected to increase from around 30 days in 2010 to more than 120 days by the middle of the century.”

Not since Operation Wunderland of 1942, a German Navy operation to attack and sink Russian convoys moving east and westward through the Northern Sea Route, has there been so much planned vessel movement through the Arctic seas. The perception of potentially hostile or competitive foreign threats in the region spurred the Kremlin and the State Duma to enact new legislation last year, establishing the Northern Sea Route Administration, and following with new regulations and new charges covering foreign vessel navigation, vessel to shore communication, weather and hydrological services, icebreaker operations, rescue and spill response.

The Northern Sea Route Administration opened for business in Moscow in March of this year. Its new rules require vessels applying for permits to transit the route to accept Russian icebreaker assistance, which is determined by whether ice conditions at voyage time are judged to be heavy, medium or light.

Russian maritime statistics indicate that in 2012 46 vessels sailed through the Northern Sea Route. They carried about 2 million tonnes of cargo; this compares with 7 million tonnes in 1987, the peak volume during the Soviet period. There was almost nothing when Boris Yeltsin took over the presidency in the 1990s. Slightly more than half these vessels sailed eastwards compared to those moving in the opposite direction. Petroleum product cargoes still dominate, compared to bulk iron-ore, fish or ballast. For the first time last year cargoes of liquefied natural gas (LNG) from Norway were transported eastwards, while one Norwegian product tanker set the record at 66,462 tonnes of jet fuel on the route eastwards from South Korea to Finland. On the westwards route, the Dynagas gas carrier,Ob River, delivered a record 84,682 tonnes of LNG to Tobata, in Japan, in May 2012.

It is worth noting for comparison that in 2012 through the Suez Canal 17,225 vessels made the passage, carrying 928.5 million tonnes of cargo.

The first Chinese cargo vessel to transport containerized cargo westwards through the Northern Sea Route is currently under way; Cosco’s Yong Sheng is enroute from Dalian to Rotterdam between August 27 and September 11.

The latest data from the Northern Sea Route Administration indicate that as of August 23, this year, the number of vessels making the complete transit voyage was only 16, carrying 433,000 tonnes of cargo – significantly less than a year ago. Vessel applications for operating permits in the area currently number 547; permits granted, 467, indicating a refusal rate of 15%.

When Novatek’s LNG refinery starts operating on the Yamal peninsula in 2017, and LNG shipments commence eastwards and westwards from the new Kara Sea port of Sabetta, a new fleet of 16 LNG carriers will depend on the Russian icebreakers to move more than 16 million tonnes per annum of LNG; the tankers will each have a rated capacity of 150,000 tonnes.

Russian experts told Fairplay there may be as much as a billion tonnes of fuel to be lifted and shipped in the Arctic region – without Russian icebreakers, though, it is bound to stay where it is. The Russian government agency in charge of Arctic emergencies, including oil spills, is called Gosmorspassluzhba (“State Marine Emergency Service”). Deputy director Andrei Haustov told Fairplay the agency doesn’t monitor oil spill risks, but is called into action when they happen. Seismic risks, he added, also threaten to breach oil and gas pipelines which are being laid on the Arctic seabed. At a conference last month [August] he acknowledged that his agency needed to “strengthen preparedness to deal with oil spills both from the Ministry of Transport of Russia, as well as [from] oil companies engaged in exploration, extraction, processing, transportation and storage of oil, in terms of whether they have enough equipment for oil spill response.”

Vladimir Chuprov, head of the Russian Greenpeace energy programme, told Fairplay there is a conflict between the oil and gas companies and the Northern Sea Route Administration and Atomflot. The companies want to keep the price of the nuclear icebreakers down to a minimum, and pay only for the time the vessels are in use. By contrast, the route and fleet bureaucrats who are starved of state budget money want to lift the icebreaker, navigation, and security charges, adding possibly an all-year-round access fee for operators, as is the practice in Scandinavia.

“On the one hand, there are the oil and gas projects for which this costly state presence has been created,” Chuprov says. “And on the other, there are the commercial interests. They contradict each other, and for the time being the oil and gas interests are prevailing.”

In August, the Northern Sea Route Administration refused to issue a transit permit for the Greenpeace vessel, icebreaker Arctic Sunrise, on grounds that it lacked the required ice classification. According to Greenpeace, the regulations are being manipulated to prevent Greenpeace’s protest against Russian and other oil company exploration in Arctic waters. A Greenpeace statement claims: “None of the six oil exploration vessels operating for Rosneft and ExxonMobil in the area has an ice classification as high as the Arctic Sunrise. More than 400 vessels have been granted access to the Northern Sea Route this year, many of them with an inferior classification to that of the Arctic Sunrise, which is classed as an icebreaker.”

Greenpeace is considering charging the Russian regulators with violating “Russia’s obligation under Article 58 of the Law of the Sea Convention to allow foreign vessels freedom of navigation in its Exclusive Economic Zone, and its obligations under Articles 10 and 11 of the European Convention on Human Rights to refrain from unjustified interferences with freedom of expression and peaceful assembly.” The Russian Coast Guard has claimed the right to impose a 4-mile exclusion zone around a Rosneft oil exploration vessel to prevent an approach by the Arctic Sunrise.

“The environmental standards that exist today in Russia are catastrophically low,” Chuprov says for Greenpeace. “That is, they do not encourage companies to behave in what is called an ‘environmentally friendly’ fashion.”

Chuprov also warns that Russia is running a much bigger risk in the Arctic than there will be oil profits to justify the state outlays and subsidies. According to Greenpeace calculations, by the year 2025 the Russian government expects that the Arctic shelf projects now in planning will be able to produce 13.5 million tonnes of oil. But in terms of aggregate Russian oil production elsewhere on the continent, that would amount to just 3%. According to Chuprov, there is a serious risk that for all of the special subsidies and tax incentives to encourage Arctic shelf oil projects, the price of oil may not justify the state budget outlays and tax losses.

And if that’s the risk facing the oil and gas companies, all the other costs of the Northern Sea Route may turn out to be too high, too uncertain, too risky after all.

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How many angels can dance on the point of a pin was a trick question for medieval scholars: that’s because, theologically speaking, angels have no substance. So the correct answer is that an infinity of them can sit on the point. Alternatively, since Thomas Aquinas (d. March 7, 1274) claimed two angels cannot occupy the same space, the answer is only one angel.

Fill a modern room on the bank of Lake Valdai last week with a couple of hundred academicians and reporters, most of them from states bent on regime change in Russia, and the headline question they want to debate is: will President Vladimir Putin (standing figure centre) run for re-election in 2018?

According to the presidential spokesman Dmitry Peskov – his job is to say as little and as ambiguously as possible — the question is premature. “Despite the fact that Vladimir Putin’s presidential term has just started, this question was also inexplicably present among other ones. Answering this untimely and not topical question, the president said that he really did not rule this out. To a rhetorical question, an appropriate answer was given.”

In point (pin) of fact, Putin initiated the question himself. He asked former French Prime Minister Francois Fillon, who was at the same Valdai session with Putin, and also former European Commission President Romano Prodi, if Fillon would run for the presidency. Fillon said he would only say if Putin answered the question in relation to himself. “I do not rule out the possibility,” Putin responded. Later to a reporter’s question he added: “It’s only 2013 today, there are another five years ahead of us.”

Everyone, even the French present, appeared to miss one of the points Putin was making. He was attacking the incumbent President of France Francois Hollande publicly, and not for the first time. This time round it was Fillon’s turn, — earlier it was Gerard Depardieu’s and Dominique Strauss-Kahn’s — to play foil to a warning of how badly Russia’s relationship with France has been damaged by Hollande.

Fillon’s presidential campaign is no news in France. It started last month. By giving the French presidential campaign prominence in Novgorod on Thursday, Putin was once again inviting French voters to put an end to the incumbent; and, incidentally, to invite the right wing in France not to repeat its mistake with Nicolas Sarkozy.

But Putin’s reference to the five years left before he announces his presidential intention is another point the academic audience in front of him also missed. Five years is a long time in politics, Peskov wanted to emphasize. It’s also a short time, Putin was warning. That warning has been made crystal clear to Prime Minister Dmitry Medvedev (bubble top left) and his deputy Arkady Dvorkovich (top right), by another of Putin’s men. It’s a warning against trying to assemble the half-billion dollar campaign fund necessary to run; and against recruiting the oligarchs whom Medvedev and Dvorkovich count on to pressure (pay) Putin into retirement.

The angel of this negative annunciation is Igor Sechin (right), formerly first deputy prime minister, then chief executive of Rosneft, and potentially the prime ministerial replacement if Medvedev and Dvorkovich continue plotting the regime change which they failed to achieve between 2010 and 2012.

For years now Sechin has been attacking Gazprom’s power to serve Medvedev’s ambitions by curtailing the cashflow from its monopoly over Russian gas exports. He is now within weeks of his biggest success.

Until now, Gazprom’s monopoly has been fixed in the federal law 117-FZ of July 18, 2006. This brief statute sets out the “bases of state regulation of gas export proceeding from the need to protect the economic interests of the Russian Federation, execution of the international obligations for gas export, ensuring receipt of income for the federal budget, and maintenance of fuel and energy balance of the Russian Federation.” Without naming Gazprom, Article 3, Section 1 orders that “the exclusive right to gas export is provided to the organization – the owner of the uniform system of gas supply or its subsidiary in whose authorized capital the organization shares.”

The federal Energy Ministry has now finalized changes to this provision; they will allow exports by competing Russian gas producers, starting with Novatek, controlled by Sechin allies Gennady Timchenko and Leonid Mikhelson, as well as Sechin’s own Rosneft to obtain their own licences for shipment of liquefied natural gas (LNG). This is a precondition for Novatek to finance the multi-billion dollar expenditure required for its Yamal LNG project and the Sabetta port terminal on the Karsk Sea. The new measure is likely to clear the State Duma and Federation Council by the close of December. It will include a provision for extra government supervision to prevent the gas producers undercutting each other’s export prices.

Alexei Miller (right), the chief executive of Gazprom for the past twelve years, has survived by bowing under Sechin’s pressure. Ziyavudin Magomedov (bubble, bottom) has resisted — and is surviving less assuredly. His takeover of the two leading oil ports, Novorossiysk and Primorsk, three years ago has run into the concerted opposition from Sechin’s allies, Nikolai Tokarev at Transneft, Vladimir Yakunin at Russian Railways, and Timchenko at the rival Baltic port of Ust-Luga. Together, they are denying Magomedov his ambition to create the energy trading and transportation empire he has been aiming at.

Medvedev and Dvorkovich have been too weak to save him, or even to conserve his capital. The share price of the Novorossiysk Commercial Seaport Company is now trading at 40% less than Magomedov’s takeover price. Magomedov’s appeals to Gazprom to protect him from Sechin aren’t being endorsed by Miller.

Not even Magmomedov’s proposal to finance the Valdai Club and get a leg up among the Anglo-American members is likely to improve his prospects. Announcing Magomedov’s appointment to the Valdai board on September 9, the club chairman and academic, Sergei Karaganov, revealed how desperate the Club is for sponsors, and how out of date politically: “The Summa Group [Magomedov’s holding] is one of Russia’s most dynamically developing holdings with a truly global vision, which is extremely valuable in this rapidly changing world. The company has repeatedly initiated discussions at the international level on issues related to its business. I’m confident that Mr. Magomedov’s participation in the Club’s work will allows us to raise the discussion of these vital national issues to an entirely new level.” On its website homepage, the Club has posted a disclaimer of this sort of thing — “some material may be inappropriate for children under 12.”

The commercial details vary in each of these complex stories. The political meaning is constant, and simple. Suleiman Kerimov (bubble, left), the Senator from Dagestan, evidently failed to notice when he attempted his potash putsch.

In Dagestan, the interpretation is that misfortune has befallen the two native sons, Magomedov and Kerimov, because they have been on the wrong side of the conflict between the Kremlin and Magomedsalam Magomedov, the Dagestan President, until he was replaced in January by Ramazan Abdulatipov. “Dagestan was fed, but not taken care of,” Abdulatipov told Putin at a Kremlin interview in August, “and therefore a lot of bad cells have multiplied.” “The cases of Kerimov and [Ziyavudin] Magomedov are connected with the replacement of the Dagestan elite,” according to a source who believes both of them are among the “bad cells” Abdulatipov is now eliminating.

A source close to Sechin believes the stakes are more national than local. He is predicting that other oligarch-sized figures with businesses dependent on Medvedev and Dvorkovich must choose to withdraw and realign themselves, or else suffer the same fate. The fertilizer and coal businesses of Andrei Melnichenko – Eurochem and SUEK – are vulnerable, according to this calculation.

So too are Yandex, the search engine and internet portal, and Ilim Pulp. Since he became prime minister, Medvedev has allowed himself to meet one on one and in public with no major Russian business figures. The two exceptions are Andrei Volozh, the control shareholder of Yandex; and Zakhar Smushkin, the control shareholder of Ilim Pulp. For the political risks facing Yandex, read this.

A source familiar with Ilim’s business comments: “I don’t think they’re big enough to be of interest.”

NOTE: Ziyavudin Magomedov turns out to be the only member of the Valdai Club’s board of trustees who wishes to publicize the appointment. When Sergei Karaganov, the Club’s chairman, was asked to identify the other trustees, he refused, claiming the list is on the Valdai Club website. When informed the list cannot be found there, he hung up his telephone.

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If the common Russian opinion of who runs the country matches the evidence of who really runs Russia, that’s a reliable test of a democratic culture.

There’s a catch. If just one man and a handful of his trusties run the country, and no one else, not even the very rich or very honest, can improve on their reputation for trust, capability, or popularity, then this must be a democracy without competition. Compared to democracies like the United Kingdom, United States, Italy, or France, where those who run the country are untrusted, incapable, and unpopular, and where the power elite buys election results, respectability, lordships, freedom from taxation, and immunity from prosecution, Russia must be a model of something unusual in politics.

At the head of this model Russian opinion polls and their foreign counterparts come to the same conclusion: in the top-10 most powerful men in Russia, there’s just one individual – President Vladimir Putin.

By the normal measures of magnitude, Putin’s influence over events, power over people, and lack of obligations to others are so much greater than everyone else’s, so it is misleading to include other names in the top-ten. Forbes, which specializes in misleading and inaccurate lists of the rich and powerful, got this point right when it estimated the relative positions of the top Russians in the 71 most powerfulpeople in the world. Putin came in at No. 3; Prime Minister Dmitry Medvedev came next at No. 61. Placing Medvedev behind Terry Gou, who runs an electronics tool company in Taiwan, and ahead of Joaquin Gusman Loera, a Mexican drug lord, is pretty close to how Russians view Medvedev, notwithstanding his near-decade in near-top jobs.

Forbes makes its usual mistake of confusing money with power by judging that the third most powerful Russian is the owner of iron-ore mines, steelmills, a mobile telephone company, and an internet portal company, Alisher Usmanov. Forbes always makes the mistake of confusing money with power in Russia. Not since Mikhail Khodorkovsky woke up on the morning of October 25, 2003, the richest man in Russia, and went to sleep that evening in prison, has big Russian money turned into the kind of power its owners like to advertise, and count on Forbes doing so for them. Forbes also misses the obvious financial point – it doesn’t know the difference between gross asset value and net wealth, because it cannot gauge the debts and concealed obligations of the Russian rich.

So this year’s Forbes list of the current top-200 richest Russians isn’t about power because Usmanov is on top. For an estimate of how much smaller his net is compared to his gross, read this. There is also the problem in Usmanov’s case of how to measure the political power of an individual who arranges to whisper and kiss in public with the front-running presidential candidate in Uzbekistan but who has never been seen in public, on his own and closer than arm’s length, with President Putin. Gossip about how influential Usmanov’s wife, Irina Viner, may be behind the scenes doesn’t compensate for that.

Forbes’ richest Two Hundred also includes Andrei Melnichenko (Eurochem fertilizers, SUEK coal, and MDM Bank) at no. 6 and Mikhail Prokhorov (Onexim holding) at no. 10. The former is married to a Serbian lady; the latter is a bachelor. Both have invited American television networks into their privates, I mean private quarters, so that their good fortune can be verified. How come then that the most powerful man in Russia cannot be persuaded to meet them for a photo opportunity to verify their power?

Prokhorov was the target of a public dressing-down by Putin in March 2010. Putinrevealed at the time that he had had a tete-a-tete with Prokhorov: “He feels good in economic terms, as they say in certain circles, he made some dough. He has money. He goes to different offices, and he came to me recently. I have a very nice relationship with him. He seeks various use for these funds and resources. But it is necessary to meet the commitment assumed earlier!” Since then Prokhorov has reduced his vulnerability by turning most of his solid Russian assets into liquid cash. His power handicaps are that he’s much taller than the President and his attention span much shorter.

Of the Top-10 on the Rich List, Melnichenko is the only one not to be known to slip in and out of Putin’s office for meetings. That he’s been into Medvedev’s office doesn’t count.

On measures of private access to Putin, the following on the Top-Ten List qualify: Victor Vekselberg (oil, aluminium, electricity); Vladimir Lisin (steel, transportation); Vladimir Potanin (Norilsk Nickel); Mikhail Fridman (oil, banking); Leonid Mikhelson (Novatek, gas); Vagit Alekperov (LUKoil); and Gennady Timchenko (Gunvor oil and coal trading, Novatek gas, transportation).

Roman Abramovich (steel, coal, gold), who slipped four places off the Forbes Rich List this year to unlucky No. 13, has exercised more private access to Putin than others. But that’s because Putin enjoys Abramovich’s cheerful readiness to do exactly what he’s told, not because Abramovich has the power not to take orders. Putin has measured the leash on which to keep Abramovich more certainly than Abramovich’s first patron, ill-fated Boris Berezovsky.

Timchenko is a special case. He’s missing from US Foreign Policy magazine’s 23 Russians on the list of the 500 most influential people on the planet. That list discredits itself by including the retired Russian Central Bank head, Sergei Ignatiev; Ukrainian gangster Semion Mogilevich; and Foreign Minister Sergei Lavrov. Lavrov has never made it to deputy prime minister, and is outranked by several ministers whose names are missing from the list; their significance will appear in a moment. Scratch the academics and intelligence officers who supply Foreign Policy magazine with their power ratings: they look more credible when their classified cables are published by Wikileaks.

Scratch the Financial Times of London for much the same reason. Its list of “25 Russians to Watch”, published on December 16, 2011, included notables whom the passage of time has already disobliged anyone to watch – reality show personage Ksenia Sobchak; Dasha Zhukova, current wife of Abramovich; and Vladislav Surkov, the Kremlin courtier who was dismissed this past May for getting too big for his boots and putting his foot in his mouth; then rehired for a petite pair of slippers last week.

As an “insiders’ guide to the country’s movers and shakers”, the Financial Times list erred more on the side of shaking than moving. But it did get four names right – Timchenko’s, plus Arkady Rotenberg (steel pipes) and Yury Kovalchuk (banking); plus the current deputy prime minister in charge of the defence industrial complex, Dmitry Rogozin. Timchenko, Rotenberg and Kovalchuk don’t always agree with each other, or act in concert. But their power lies in their subordination to Putin, and to Putin’s most powerful subordinate, Igor Sechin.

To this group, Roman Shleinov, one of the country’s most effective investigative journalists, applies the cross-the-road test. This is a variant of the international question – why did the chicken cross the road?

After Putin, according to Shleinov, Sechin is the preeminent powerholder. Currently chief executive of Rosneft, and formerly First Deputy Prime Minister and first presidential assistant in charge of everything really valuable, Sechin takes advice from, and gives orders to a wide circle. But it has been on Timchenko, Rotenberg and Kovalchuk that Putin relies most consistently. This makes their fortune, and their influence, derivative but potent nonetheless. Warns Shleinov: “They are seen as people in front of whom it’s better not to cross the road.”

Should there be any doubt about who has crossed safely, and whose remains are on the pavement, watch carefully how Putin and Sechin wind up the affairs of Uralkali, state potash champion, and dispose of Suleiman Kerimov (latterly No. 20 on the Forbes Russian Rich List ). In that process, it might be judged that the bosses of the three state banks funding such operations – Sberbank’s German Gref; VTB’s Andrei Kostin and Yury Soloviev, and VEB’s Vladimir Dmitriev – are as big as their money bags. Not their money, not so big.

Occasionally one of the List Makers tries crossing the road and makes a mortal fool of himself. Time, the New York news magazine for example, presenting its 2013 list of “the most influential people in the world” included US Vice President Joe Biden and an Australian mining heiress named Gina Rinehart; omitted Putin altogether; and included Sechin as the only Russian. Time’s analysis of Sechin was written by someone called Vladimir Milov, who identified himself as “a political activist who opposes Putin.”

Are any of the Russian opposition figures as recognizable, let alone as influential for Russians as they appear to be in the news media of the west?

Milov, Time’s analyst of Russian power, turns out to be, according to the US Government organ, Radio Free Europe-Radio Liberty, “the Russian Opposition’s Fresh Face”, and also “tall, handsome, and well-spoken at age 39, Milov is the newest poster boy for Russia’s liberal opposition.” No Russian polling organization which has been measuring nationwide recognition of opposition names has so far included Milov. Since the names of Alexei Navalny, Vladimir Ryzhkov, Sergei Udaltsov, Ilya Ponomarev, Eugene Chirikov, and Olga Romanova are not recognized by 47% to 85% of Russians polled across the country, Milov’s non-recognition score looks to be 100% — at least outside the soundproof Radio Liberty studio in Vienna.

Western poster boys for the Russian opposition are better known for things they did in the past, like chess (Gary Gasparov), Boris Yeltsin favourite (Boris Nemtsov), and Yeltsin prime minister (Mikhail Kasyanov). Even an emerging politician like Navalny (right), with a popular platform against corruption and without a past, is regarded negatively in nationwide polls by about half the Russians who recognize his name.

Navalny’s problem is that the majority of Russians who agree with what he saysdon’t trust him with their votes. There is thus no measure of power on which the opposition figures can qualify. They are lightning rods — their potency vaporizes as swiftly as it materializes. As for Prokhorov as a political campaigner, he is better known for his money: he has so far proved that turning the latter into the former is unlikely in Russian terms, if not for Radio Free Europe.

That leaves the Russian government, officially appointed by and reporting to Medvedev, but subordinate to Putin. Outside the Moscow Beltway – meaning outside the publishing and broadcasting circle of pundits, hacks, and schmoozers – just three ministers have significant reputations. They are Sergei Shoigu, formerly in charge of natural emergencies and now in charge of man-made emergencies (defence); Rogozin, once the strategist of political nationalism and now in charge of the military procurement budget; and Lavrov, the foreign minister. Foreign ministries are cemeteries for the power hungry, and Lavrov has none of that. Shoigu and Rogozin have plenty of it, but until or unless Medvedev is packed off, they are not going upward, where the real power is.

The duo closest to Medvedev are deputy prime ministers Arkady Dvorkovich and Igor Shuvalov. Their personal charms are often remarked on by western businessmen who meet them. But in all-Russia polls, their name recognition falls below the 50% mark, and their performance somewhere between the Far East and the Sport and Tourism portfolios. By pollster VTsIOM’s annual power elite measurement, Dvorkovich and Shuvalov don’t rate. If they sat on benches in London’s Green Park, as former Moscow mayor Yury Luzhkov often does these days, not even the Russian passersby would stop to chat.

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Struggling with a rising debt burden of more than $8.2 billion, the Evraz group, owned by Roman Abramovich, Alexander Abramov and Alexander Frolov, has suspended production at its Claymont steelmill in Delaware. The production halt is indefinite. A company announcement from Moscow on Monday says that “due to subdued market demand and the high volume of imports, it will suspend operations at its steel mill in Claymont, Delaware. Over the next two months, about 375 employees will complete processing and shipping of existing products and prepare the mill for idling. EVRAZ will consider restarting the operations as soon as the market conditions improve. Evraz doesn’t expect any adverse financial effect on its operations in North America as a result of this action, and customers of the Claymont mill will be served by other EVRAZ facilities in Portland, Oregon, and Regina, Saskatchewan.”

Dated October 14, this was a big surprise. If what Evraz says now is believable, why did the company say publicly on August 29 that it was planning to increase production at Claymont Steel? Less than seven weeks ago, in the Evraz half-yearlyfinancial report this is what the company claimed: “The key focus of the flat product group, in the period, was enhancing capacity utilisation. To this end, EVRAZ North America is currently finalising works to increase the rolling speed at EVRAZ Claymont which should improve productivity and provide capacity for higher output levels when the order book is strong.” (page 17).

There can hardly be a point to accelerating the rolling speed of a production line that has been switched off. A local publication in Delaware, where the Evraz mill operates, quoted the state governor Jack Markell as saying he had learned of the closure “late last week”. A statement from Markell’s office claimed he was “disappointed that Evraz is idling the Claymont facility. The global steel industry remains very challenging and DEDO was told that the facility is losing money as it seeks to compete with unfairly traded imports.”

In March, the state government had arranged to film at the Claymont steelmill a speech by Collin O’Mara, Secretary for the Department of Natural Resources and Environmental Control, inaugurating a new air pollution control system at the mill.According to the official, “it was a multi-million dollar investment. It’s going to improve the quality of life for local residents, improve the quality of life for the workers, increase productivity and make this plant much more competitive for decades to come. It’s an example that we can have a strong manufacturing sector and at the same time have a very healthy economy.”

“Through these investments, Evraz is demonstrating that Delaware will have both a strong manufacturing sector and a healthy environment,” O’Mara said. “The dramatic improvement in air quality in Claymont that will be achieved through this state-of-the-art baghouse would not have been possible without the unwavering dedication and engagement of leaders from Evraz, state and local government, and local community residents.”

In January Markell told the state legislature that the Evraz plant at Claymont was an example of “the world we now live in… more global, more productive, more competitive. It is a new world of unprecedented opportunities to create new partnerships, to sell to new customers, to innovate and collaborate in ways previously unimaginable.”

There can hardly be a point to an air pollution system if nothing at all is coming out of the chimneys. And if Claymont Steel was as competitive as the governor believed in January, how credible is the reason he says he was given last Friday by Evraz executives – that the mill was being driven into closure by “unfairly traded imports”?

Just how unfair that trade in imported steel plate can’t have been guesswork or lobbying talk by the Evraz men. That’s because it was the target of an eight-month investigation by the US Government’s International Trade Administration (ITA). The government had been asked by domestic steelmaker Nucor to check whether Ukrainian exporters of plate — Metinvest Holding’s Azovstal Iron & Steel Works and Ilyich Iron and Steel Works – were sticking to the terms of an anti-dumping price agreement they had signed with ITA in 2008. Starting this past January, ITA investigators probed whether “each [Ukrainian] signatory producer/exporter individually agrees to make any necessary price revisions to eliminate completely any amount by which the normal value (NV) of the subject merchandise exceeds the U.S. price of its merchandise subject to the Agreement. See Agreement, 73 FR 57602, 57603.”

Here’s the August 1 report from ITA, concluding there was no unfair import trading. “Our review of the information submitted by the companies indicates that they have adhered to the terms of the Agreement and that the Agreement is functioning as intended.”

So how come Markell reversed himself this week in order to claim the reason for the Claymont closure “is a reflection of this industry right now. Some very cheap imports coming in from some other countries and just not enough demand, it’s a bad combination.”

The shutdown of the US Government, triggered by the US congress, has taken ITA’s website statistical service offline, and so import volumes for the type of product Claymont Steel makes and sells are temporarily unavailable.

Claymont makes steel plate and custom plate products for industrial customers. Total production volumes in H1 2013 and for the whole of 2012 were 171,500 tonnes and 348,000 tonnes, respectively. Comparing the two numbers suggests that the rate of production at Claymont until very recently hadn’t been changed from last year’s rate.

Even so, the Evraz group admits it is running at a loss at present; according to its first-half financial report, the net loss for the first six months of the year came to $122 million. Its gross debt amounted to $8.2 billion on June 30, up by almost 5% since December 31.

Evraz does not issue financial results for its North American division, but based on a goodwill valuation of $135 million in the annual report for 2012, Claymont Steel is worth significantly less to the group than its plants in Oregon, Colorado, OSM Tubular-Camrose, Calgary, or Regina-Steel and Regina-Tubular (Canada). According to Evraz’s financial report for the six months to June 30, sales revenues for North America came to $1.62 billion; that represents 22% of the group-wide total, and it was down 10.4% compared to the first half of 2012. Today, according to Evraz, “market conditions continue to be challenging and low market visibility makes it difficult to foresee when positive changes will occur.”

Can a claim as vague as that be the real reason for the plant closure, or for the dissembling of Evraz executives in their reports to the London Stock Exchange, and to the office of Governor Markell?

The governor’s spokesman Catherine Rossi carefully distinguishes between what the governor was told by Evraz and what the US government has found regarding steel plate imports. “Governor Markell was told by Evraz that the mill closure was due to competition from imports. He was relating Evraz’s comment to him, not specifically commenting on the USDOC/ITA, its investigation, or Ukrainian steel imports.”

Is it conceivable that the closure is a tactic for persuading the ITA to reintroduce anti-dumping penalties against imported Ukrainian plate, allowing Evraz to restart the Claymont production lines, and start charging higher prices?

Evraz was asked three questions: Why was the shutdown of Claymont decided so suddenly and despite announcements indicating there was no such intention a few weeks ago? Why tell shareholders Evraz is enhancing capacity utilization at Claymont and then shut the plant down? What were the revenue, operating profit, Ebitda, and net profit (loss) for Evraz’s North American division in H1 2013? There has been no reply. 

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Oligarchy versus democracy is a very old game, and so are the seven deadly sins. Why exactly men like Vladimir Potanin, Mikhail Prokhorov, Alisher Usmanov, Andrei Melnichenko et al. should calculate that advertising their standard of living should help them keep it is difficult to say. Maybe their pockets are under better control than their appetites. Maybe they believe that advertising profligacy will boost the accounting of their net worth and stave off margin calls.

That’s the point the ancient Athenians grasped with conviction. It’s the point of many of Plato’s and Socrates’s dialogues; of the comedies of Aristophanes; and of the records of the Athens law courts which have come down to us. To those Greeks, if a man displayed an excess of money, or what he did with it – by eating, drinking, betting, having sex, bejewelling his body, house, slaves, children, wives — he was by that very fact to be suspected of a crime against the democracy. The Athenian judgement was both retrospective and prospective: spending money intemperately was evidence that it had been too easily (dishonestly) earned. It was also evidence that state policy (investment, tax, war) would be corruptly influenced to serve such oligarchs’ material and personal interests, to the loss of everyone else.

No Russian disagrees with the Athenians — there are many precedents of men convicted of playing the oligarch from the time of Greek civilization, and from the time of the Russian civilization since 1991. Why then, cautious to an extreme as he usually is, did Potanin arrange recently with a New York city restaurateur by the name of Nello Balan to buy a white truffle weighing four pounds (1.8 kilogrammes)?

The size of the Tuber magnatum pico rather than its taste – the black (Tuber melanosporum) is famously tastier, if less odoriferous than the white, at least across the Piedmont border in France – has contributed to the price demanded of, and reportedly paid by Potanin of $95,000. But did he pay to eat it on the spot in Balan’s eat-house, shaved into omelettes for a dozen or so of Potanin’s feasting friends? Or did the control shareholder of Norilsk Nickel, Russia’s largest mining company, get the truffle bagged for takeaway, so that he could share it with a dozen or more of his business and political associates in Moscow?

At this point, before the Athenian curse and penalty on oligarchs should be brought down on the heads of those Russians who, according to ancient-type democrats, warrant mistrust and condemnation, Potanin’s defence is that there is no evidence he did to the truffle what the New York Post claims. According to Potanin’s spokesman, Zoya Mischenko, Norilsk Nickel doesn’t comment on rumours.

Then there is the reputation of Balan the seller. Food vendors in ancient Athens were notorious blabbermouths. In Balan’s case, London evidence suggests he does a great many things which are exaggerated for the press in order to advertise his line of trade. He reportedly overcharges, for one thing, to attract those who want to appear in public to be indifferent to price.

Balan has been leaking the eating bills of Russian oligarchs before. According to this version from the London Telegraph, Balan spilled the beans on a £29,000 lunch eaten by Roman Abramovich, except that Abramovich denies the bill was his. Note the familiarity of the anonymous Balan employee who calls Abramovich, not only a big spender, but Roman, his first name. If indeed a £4,468 gratuity greased the waiter’s palm, he seems to have mistaken it for intimacy with the rich man.

Balan is currently into advance advertising of a new eatery he’s opening in London. So, modus operandi, plus motive. When his barman and night manager refused to confirm the truffle deal, and referred to their boss, Balan responded by email; “I am at an event now. I will get back to you tomorrow. Very Truly Yours, NELLO.” Then despite the intimacy of his first name, he went silent. So Balan is no longer saying what the New York Post claims he did, and Potanin isn’t either.

Now the New York Post – prop. Rupert Murdoch — is famously unreliable when it comes to Russian oligarchs, or at least those targets of the oligarchs whom the Post can be induced to misreport. Oleg Deripaska, for example – his cuisinary taste has been reported by a fanzine writer in Canada as including self-grown apples. For Deripaska’s interest, the New York Post planted a story about Deripaska’s patron, then his enemy in court, Michael Cherney (Chernoy). That story, now almost two years old, intended perhaps to intimidate witnesesses in the court case, can be readhere.

Deripaska also has motive for attempting to blacken Potanin’s name and using the Post to send a message back to the Kremlin, where the fate of both of them will be decided in December. That’s when President Vladimir Putin will supervise how the secret group of control shareholders in Rusal, the redeemable-share holders, will be paid out. For that group, it may be trebles and tubers all round on December 6.

Mikhail Prokhorov, whose investment position in local basketball and real estate has made the New York media his patsy, also has modus operandi and motive for trying to hurt Potanin by hanging a $95,000 tuber round his neck in public. That might be revenge for Potanin’s role, if he played one, in blackening Prokhorov at Courchevel in January of 2007. That story, and the role played at the time by Nicolas Sarkozy – then in need of cash for his election campaign – can be read here. According to one of the nubile women who were nabbed, Prokhorov was as innocent as Courchevel’s driven snow. The women did nothing more, the eyewtitness claimed, than send Prokhorov to sleep by reading to him from Turgenev, whose novels he kept under his pillows.

Since the collapse of the Soviet regime, a Russian’s privacy has been the jealously guarded constitutional right of everyone. So whether he puts large tubers in his mouth, or his organs into other mouths, is not quite what the Athenians meant by calling him katapugon (κατάπυγον), meaning profligate, intemperate, debauched, degenerate. The US courts have ruled that the Russian oligarchs are public figures, allowing their privates to be speculated about in public print. The Russian view is that so long as they don’t advertise, the oligarchs have the same constitutional right to innocent privacy as everyone else, according to Article 23, section 1. It is worth re-reading what that says: “Everyone shall have the right to privacy, to personal and family secrets, and to protection of one’s honour and good name.”

Advertising is a different story, not because of the purported sinning in private, but because of what this signifies when it is made public.

Then there’s the matter of price. The record for a white Piedmont truffle is $330,000 for a specimen of 1.5 kgs, paid by the Macau casino boss, Stanley Ho, in December 2007. The Guinness Book of Records is a little out of date on this score, finding their big one in Croatia, and way below the Ho price. Ho and other self-advertisers like Damien Hirst and the Hambro family have also paid premiums of comparable amounts, albeit for charity plus publicity.

By that standard, at $52.78 per gram Potanin’s truffle – if indeed he bought it – is, er, a steal.

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Private letters from foreign governments to President Vladimir Putin usually go into the Secret box. Applications by foreign governments for large-value arms deals from the Russian state exporter, Rosoboronexport, usually go to the Security Council of the Russian Federation for review, and there they are kept in the Top Secret box. The Council, chaired by Putin, includes his chief of staff, Sergei Ivanov; the heads of the intelligence and security agencies; the Minister of Defense Sergei Shoigu, the Foreign Minister Sergei Lavrov, and others. Nikolai Patrushev has been the secretary of the Council since 2008; before that he headed the Federal Security Service. The Council has a website and office address, but no press spokesman, no email address, and no telephone number.

Exactly why such a silent, professionally cautious group should be so careless as to advertise publicly that they are negotiating a large arms sale to Libya to help the government in Tripoli put down the local opposition is inexplicable – unless they were testing the Libyans to prove they can deliver what the Kremlin wants from that benighted place. Did they fail to anticipate the outcome might be an armed attack on the Russian Embassy in Tripoli, and the forced evacuation of the embassy staff? Read on.

Dmitry Rogozin, the deputy prime minister in charge of Russia’s military industrial complex, set the fateful ball rolling eighteen months ago. In April of 2012, according to state news outlet RIA-Novosti, Rogozin said “the Libyan military leadership and the Iraqi government have shown serious interest [in Russian weaponry].” Libya, he said, had a “very specific interest…We are certain that the Libyan military leadership trusts this weaponry, which proved to be very reliable. That is why they are interested in restoring military-technical cooperation with Russia, and we welcome it.”

Rogozin added that one condition of a new arms deal with Tripoli was the revival of the contracts signed with the previous Libyan government of Muammar Qaddafi. The contracts of January 2010 included the delivery of combat aircraft, upgrades of Soviet-era tanks, various types of missiles for air and surface operations, and infantry vehicles. Those contracts came with a prior condition. In 2008 the Kremlin had agreed with Qaddafi to forgive $4.5 billion in Soviet-era debt owed for an earlier generation of arms deliveries. That was roughly half the value which Russian Finance Ministry officials had estimated to be Libya’s debt as of 1991. What has happened to the rest of the debt is also in the Top Secret box; the Finance Ministry won’t say.

The murder of Qaddafi and the regime change don’t qualify the successor government in Tripoli to revoke all debts and obligations, nor have Libyan officials dared to suggest this.

So the Russian arms exporters have pressed on with the deal Rogozin had announced publicly, letting cats out of the bag in their apparent enthusiasm. In May of this year, Sergei Chemezov, head of the Russian Technologies (Rostek) which includes Rosoboronexport, told RIA-Novosti that he had met a high-ranking Libyan official and received from him a request for a big arms deal.

Chemezov and the Libyan had been together at the ceremonial commissioning of a factory in Jordan, which is to assemble Russian-made grenade launchers. According to Chemezov’s calculated press leak, the Libyan representative had asked him “to hand a letter to our president, that they would like to buy something and will apparently send a delegation to discuss their request.” Chemezov wanted the world to know more — for example, that this wasn’t the first such approach. “They have already asked us, as far as possible, to revive contracts that were suspended,” he added, claiming the negotiations had yet to begin.

That was on May 31. Chemezov isn’t a member of the Security Council, but it’s certain Putin passed the Libyan letter to Patrushev and asked for a Council staff review, with recommendations of what to do about the Libyan request. Putin asked Patrushev to be sure to include in his memorandum whether the Libyan government was stable and trustworthy enough to honour their signatures if new contracts were agreed. In the Council’s Top-Secret box there were also Russian foreign intelligence reports of what the various Libyan militia groups were up to, including Chechen fighters who have drifted out of Russia to pick up Saudi salaries for making war elsewhere, and keeping in shooting form before the Saudis order them back into the Caucasus.

Twelve weeks elapsed, much of it spent in August holidays for the council members, their staffs, and the Foreign Intelligence Service (SVR). On September 10, Foreign Minister Lavrov met in Moscow with his Libyan counterpart, Mohammed Abdulaziz (also spelled Abdelaziz) and an accompanying delegation of gun-buyers. According to the Foreign Ministry’s transcript of Lavrov’s public remarks, “the Libyan Minister of Foreign Affairs and International Cooperation, Mohamed Abdulaziz, and I have had a very productive meeting. We expect the results of our negotiations and the stay of the Minister and his delegation in Russia to contribute to further advancement of Russian-Libyan relations, the creation of prerequisites for the extension of contacts in all areas…We focused our attention on the activation of trade and economic cooperation. Last year goods turnover indices between our countries were the best in the last 12 years, though they only reached 250 million US dollars. We share a determination to significantly build up these volumes. To that end, we agreed to renew the work of the Russian-Libyan intergovernmental commission for economic, science and technical cooperation as soon as possible, to stimulate the activity of the Russian-Libyan business council, as well as specific projects, which several Russian companies are ready to renew or restart in Libya.”

Then Lavrov let the Rogozin-Chemezov cat out of the bag again. “We outlined good prospects of further development of military and technical cooperation, including supplies of armaments and necessary equipment, as well as preparation of staff for the Libyan army and police. We also discussed potential projects, which will help our Libyan friends to strengthen cross-border security.” For cross-border security in Russian, read Chechens.

Lavrov wasn’t obliged to say so much, any more than the Security Council was forced to agree to letting Abdulaziz and his delegation come to Moscow in September. There are plenty of civil sector projects in Libya which Russia has an interest in reviving, so Lavrov could have restrained himself in his public remarks and avoided mentioning arms. So why did he go to the trouble of advertising for the third time that the Libyans want to buy Russian weapons? Lavrov isn’t a policy initiator; he’s good at taking instructions from all sorts of people. Was he, a member of the Security Council, reading from the Council script agreed beforehand with Putin, intentionally letting those the arms are intended to be used against – “cross-border security” – know what is coming for them?

Since when is telegraphing a punch a feature of Russian state security, foreign diplomacy, and modus operandi for the SVR? — Rogozin was asked to clarify his advertisement of arms sales to Libya, but he refuses to say. According to his spokesman, Nikita Anisimov, he can’t get hold of his boss and can’t say a word on anything until Rogozin returns from a business trip next week.

At Rosoboronexport Chemezov’s spokesman, Alexei Ventslovskiy, passed the buck, saying questions about Chemezov’s dealings with the Libyans should go to Rostek for answer. Yuliya Lebedinskaya, the Rostek spokesman, says that she received this correspondent’s letter as surely as Chemezov had received the Libyan letter to Putin. But Rostek is refusing to answer. “We are not going to answer of course, because this occasion was announced after a meeting with the Jordanian side at the end of May. So half a year has passed and [comment] on any details is inappropriate.” Ventslovskiy promises to telephone to confirm whether Chemezov feels up to saying more about Libyan arms sales than he did last May.

This is what you would expect when sensitive gun-running matters are on the table for discussion. But the silence of the Russian officials has another context. Not the public disclosures of guns for Libya which stretched back over eighteen months, but the attacks on the Russian Embassy in Tripoli which almost cost the lives of the Russian ambassador and his staff. These attacks started on October 2, just three weeks after Lavrov hosted Abdulaziz in Moscow.

For what happened – that’s to say, what Lavrov’s spokesman, Alexander Lukashevich, wants you to think happened — the Russian press reports claim the cause was a Russian lady running amok, killing her Libyan husband and wounding her mother-in-law on October 1, the day before the embassy was invaded by a gun-toting mob. In unusual detail it has been claimed that Yekaterina Ustyuzhaninova, a bench-press, weight-lifting champion from Novosibirsk, was the perpetrator; whether she was arrested and in the custody of the Libyan police at the time of the embassy attack; or whether she had taken refuge in the embassy, isn’t clear. Ustyuzhaninova is also reported as having taken part in protests against the Anglo-American campaign to overthrow Qaddafi in 2011. What that has to do with the circumstances of her alleged attack this month on her husband and mother-in-law, two years since Qaddafi was assassinated, is unknown. Why the mob would go to the embassy building instead of the police station to demonstrate what they thought of Ustyuzhaninova is also uncertain.

Lukashevich didn’t mince words; he also didn’t recommend any qualification in interpreting the events in Tripoli. The attackers, he said, were an “armed group of militants”. They were reacting to Ustyuzhaninova’s crimes, which were “the direct reason for these aggressive actions”.

Maybe this is what Rogozin, Chemezov and Lavrov are hoping is the truth of the matter. For if it turns out that the “armed group of militants” who shot up the embassy were in fact demonstrating their readiness to stop Russian arms dealings with the Libyan government, then how is it possible the three Russian leaders failed to anticipate the impact of their press leaks? Not likely — not possible — not so soon after another incident of calculated press leaking, also in relation to a sensitive Arab gun-running matter, and to the operation of Chechen fighters in Arab employment.

The earlier incident surfaced as the purported transcript of a meeting in Moscow at the end of July between Putin and the head of Saudi intelligence, Prince Bandar bin Sultan. The Kremlin communique of July 31 is as circumspect as you would expect when intelligence matters are on the table. Then on August 21, in Arabic translation of what had been published in Russian, followed by English, excerpts of what Bandar threatened, er, said to Putin, appeared.

Bandar claimed to be having second thoughts about the value of everything he and the Saudi kingdom have been doing in Libya and elsewhere. “The terrorist threat is growing in light of the phenomena spawned by the Arab Spring. We have lost some regimes. And what we got in return were terrorist experiences, as evidenced by the experience of the Muslim Brotherhood in Egypt and the extremist groups in Libya.” Then came Bandar’s threat: “I can give you a guarantee to protect the Winter Olympics in the city of Sochi on the Black Sea next year. The Chechen groups that threaten the security of the games are controlled by us, and they will not move in the Syrian territory’s direction without coordinating with us. These groups do not scare us. We use them in the face of the Syrian regime but they will have no role or influence in Syria’s political future.”

Putin reportedly responded: “We know that you have supported the Chechen terrorist groups for a decade. And that support, which you have frankly talked about just now, is completely incompatible with the common objectives of fighting global terrorism that you mentioned. We are interested in developing friendly relations according to clear and strong principles.”

Claiming he had discussed his script with the Obama Administration first, and that they approved, Bandar purportedly claimed: “you have to stop giving [the Syrian regime] political support, especially at the UN Security Council, as well as military and economic support. And we guarantee you that Russia’s interests in Syria and on the Mediterranean coast will not be affected one bit. In the future, Syria will be ruled by a moderate and democratic regime that will be directly sponsored by us and that will have an interest in understanding Russia’s interests and role in the region.” As his reward for Putin’s compliance, Bandar promised oil and gas business, “multi-billion-dollar investments in various fields in the Russian market”, and “arms deals with you in exchange for supporting these regimes, especially Egypt.”

The Russians know Bandar to be a scheming character, who has attempted many times before to expand his power over his royal relatives, compensating for his mother’s origin as a slave with intelligence staffs, military plots, and money to finance islamist armies and regime change. His personal corruption has also beenreported in the London press.

A Saudi source in a position to know recognizes the reported remarks from Bandar as typical of his self-promotion, which he is obliged to restrain at home. That the remarks were leaked by the Russian side will not have much impact on his reputation with the Saudi leadership, or with his American sponsors, the source believes. But it has ended Bandar’s belief in his own value as a channel of communication between Riyadh and Moscow.

What then of the leaks from the Abdulaziz talks? That the Libyan minister has beensinging much the same song to US and NATO officials is already obvious to the Kremlin. NATO has responded already by sending a unit for “security advice”. “The problem for us – and due to the length of these borders – is that we need two basic things,” Abdulaziz told a Saudi newspaper recently. “The first is the specialised training of Libyan elements in terms of defence, security, and policing and the other is the advanced technological equipment because the required training cannot be effective without this technology being available.”

Can the Libyan leaks from Rogozin, Chemezov, and most recently Lavrov, have been a test of Abdulaziz’s bona fides, or are they intended to undermine the already parlous position of the Libyan government?

“It is possible to consider anything at all,” responds Yevgeny Satanovsky, a Moscow academic expert on the Middle East. “It can be assumed to be a provocation aimed at making Russia dysfunctional in Libya and ceasing to be a competitor there. Maybe you can assume a conspiracy theory. But in reality everything has happened by chance. That’s because the country doesn’t exist, full of anarchy and outrage at every turn. And no one here will ever get to the truth, because the country really does not exist. To provoke a blow to the Russian Embassy can be done in any way — for any small amount of money anyone can manage this. Exactly who there is safe – it’s the Saudis and Qataris. Because they buy in all of these groups. As for the rest, it is simply not possible to obtain reliable information. Not from anyone.”

Boris Dolgov, Senior Research Fellow at the Institute of Oriental Studies, acknowledges there are “several versions of the reason for the attack on the Russian Embassy. There is a local version connected with the death of the Libyan officer allegedly at the hand of a Russian or Ukrainian citizen. There is a version associated with the vengeance of Islamists against Russia for supporting Bashar al-Assad in his struggle with radical Islamists. This is the main trend.”

As for Russian commercial interests in Libya, Gazpromneft says it wants to buy a position in the Project Elephant oilfield from the Italian operator ENI, but completion of that transaction depends on the Italians completing project arrangements with the Libyan government. Tatneft won’t say more than it has already conceded this yearon whether it will resume operations at the Ghadames oilfield it evacuated during the NATO intervention.

Leonid Frolov, a spokesman for Russian Railways (RZhD), says planning is under way to revive the construction of a new line between Sirte and Benghazi, which was halted in 2011. RZhD is “taking all possible steps to start negotiations with the Libyan side to discuss the prospects of resuming the further implementation of the project and agreeing to develop a joint plan of action in this direction.”

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In the world of mules there are no rules (so Ogden Nash wrote last century). In selling $50 billion worth of nuclear reactors, there are a few.

Sergei Kirienko, the prime minister in charge of the Russian government’s default on its treasury bonds and other financial destruction in 1998, is no donkey. But this week, as the head of the state nuclear power monopoly Rosatom, it’s far from clear what rules Kirienko, and his South African counterparts, had in mind when they initialled their agreement on cooperation this week in Johannesburg.

Russian and South African press reports, as well as officials of both countries, have described the document as an agreement between the two governments for “strategic partnership and cooperation in the field of nuclear energy and industry”, as Vedomosti called it.

The special nuclear energy correspondent for Itar-Tass, Elizaveta Tsaritsyna, quoted the South African energy minister, Ben Martins, as saying that “all legal procedures under Rosatom’s agreement with South Africa on cooperation in nuclear energy will be completed by February 15 next year. The agreement ‘is initaled at the technical level and it is now necessary to complete the legal process. We will do this by completing all the necessary approvals at the beginning of next year. We have set ourselves the goal of signing by February 15.’ The SA government ministries which should approve the wording of the inter-government treaty include Energy, Finance, and Industry.

A press release issued on Tuesday by Rosatom subsidiaries, the wittily named NUKEM Technologies and its parent NIAEP-ASE, makes the agreement look less than it is, calling it a “Memorandum of Understanding” with the Nuclear Energy Corporation of South Africa (NECSA) . “The companies”, claims NUKEM, not the governments, “have “agreed to develop strategic cooperation in engineering, design, procurement and construction of complex capital projects and facilities.”

In his remarks before the signing, Kirienko who had earlier hosted Minister Martins in Moscow and on a tour of reactors in Rostov, explained that Rosatom wants to build eight nuclear reactors of the VVER type for South Africa, with total capacity of 9.6 gigawatts. Kirienko has estimated the cost of a single reactor at $5 billion. Buying the full brace of eight would cost between $40 billion and $50 billion, Rosatom briefing papers claim. South African estimates are in the same range. Kirienko has offered Russian bank financing for the deal, and promised that at least a third of the contract price will be invested by Rosatom in local sub-contracting and job creation.

There is nothing exceptional in the Russian bidding for this, one of the largest nuclear reactor contracts in the offing in the world. Competing against Rosatom and lobbying their company interests are the US, France, China, Japan and South Korea, in partnership with local companies. The competition is particularly intense for the decision to build the first two reactors as that may lock in a national technology making inevitable later reactor purchases from the same source. So far nine different reactor technologies have been offer to the South Africans from several different countries. The lobbying against Russia has been ferocious, and during the term of former South African President Thabo Mbeki, there were bitter recriminations in Moscow at the South African tactics. For that story, read this.

Jacob Zuma, who succeeded to the presidency in Pretoria in September 2008, appears to be more obliging than Mbeki; but he has yet to deliver more than undertakings in principle and agreements on intention. In parallel, Zuma is reported to be behind another large Russian transaction, a $320 million sale and purchase of the Russian-owned South African steel company, Highveld Steel & Vanadium. That deal was announced by the Russian steel group Evraz in March. But the deal closure has been repeatedly postponed. The buyer, a nonentity, I mean entity, called Nemascore, created weeks before the purchase agreement, is connected to Zuma. So far it has been unable to secure South African government guarantees for the loan financing to pay Evraz.

In Moscow this week Evraz spokesmen refused to say what is the status of the sale to Nemascore. That story can be read in more detail here.

David Gleason, the leading investigative journalist in South Africa, has reported: “I remain convinced the purchase of Highveld is part of a much bigger arrangement which I am sure will extend to the BRICS’ Development Bank and through it to which specialist is selected to supply the next nuclear power station. The Russians, already building nuclear plants in Turkey, would love to give Areva and Westinghouse the finger in Africa, and South Africa’s a good place to start. There’s a you-scratch-my-back, I’ll-scratch-yours somewhere in this.”

Between 2006 and 2008, when Eskom, the SA power utility, confirmed it had sent requests for bid estimates to Westinghouse (US) and Areva (France), but not to Rosatom, the French attempted to bypass competitive tendering for the deal. Their tactic was to fix an inter-government agreement formalizing Areva as the preferred bidder. Then President Nicolas Sarkozy lobbied Mbeki for his agreement, but failed as Mbeki fell from power. Francois Hollande, Sarkozy’s successor, is still trying for the same preferment in Pretoria. He visited last month, and Zuma will be in Paris in December. So far the French have announced deals to supply thermal and solar energy plants and refit South Africa’s railways.

The Russian and South African governments have already signed more than one inter-government agreement for nuclear energy. There was one in November 2004 which, according to Rosatom, includes “design, construction, maintenance and modernization of nuclear power and research reactors; the use of nuclear energy for electricity, heating, desalination of salt water and Nuclear Research; exploration and development of uranium deposits; production of fuel for nuclear power and research reactors , including the development of the fuel and the design, construction , operation, technology and modernization of installations for the production of fuel.”

Enriched uranium to power the single commercial reactor South Africa already has at Koeberg has been supplied by Rosatom’s fuel subsidiary, Tenex, for many years. The reactor itself was built in the 1980s by Areva, still one of the competitors for the new reactor contract.

The Russian uranium enrichment arrangement for Koeberg was renewed in August 2010. Then in June 2012 a memorandum of understanding was signed between Rosatom and NECSA for “elaboration of joint business projects in areas such as production and marketing of isotope production , manufacture of nuclear fuel, as well as the production of energy equipment.” A month later Rosatom opened a representative and marketing office in Johannesburg.

At the end of March 2013 at the BRICS summit in Durban, and then again at a May meeting in Sochi, Zuma and President Vladimir Putin reiterated their interest in striking a deal on the nuclear reactors. The point was emphasized when their foreign ministers met in St. Petersburg in July.

In an advance leak of the inter-governmental agreement, Carol Paton of Business Day of Johannesburg reported a version of the pact was being circulated in September. “Its drafting follows a visit to Russia by Minister of International Relations and Co-operation Maite Nkoane-Mashabane last month…Department of Energy officials stressed that the draft seen by Business Day is not a final document.”

According to Paton, the Russia-South Africa paper aimed to put Rosatom in pole position to supply the nuclear reactors. “Adviser to the minister of energy Robert Nkuna said that documents of this sort go through many iterations before they are finalised. Several other agreements were also in the process of being negotiated including one with the French government, which is expected to be signed this week during the visit of French president Francois Hollande. The Russian agreement is a revision of an earlier agreement signed in 2004.”

“In many aspects the draft agreement is similar to other government-to-government agreements, which commit the parties to working together in the interest of promoting nuclear energy for peaceful purposes. It is however, more detailed than other such agreements and includes in its scope co-operation in the ‘design, construction, operation and decommissioning of nuclear plants’. At face value, it also appears to undermine other bilateral agreements in so far as it commits South Africa to secure agreement from Russia should it want to enter into any other agreements with third-country organisations. Among the obligations of the parties listed is ‘mutual consent’ over the involvement of a third country.”

Rosatom was asked to provide a copy of the agreement initialled this week in Johannesburg. It declined. Rosatom does say it has built nuclear reactors in several countries on the basis of inter-government treaty; these include Turkey, Bangladesh and Belarus.

According to the Paton report, the rivals and opponents of Rosatom are coming out of the woodwork. They charge the reactor deal should be based on a competitive bidding process, not on an inter-government pact. Paton quoted Eskom as claiming the government has yet to decide “how the procurement will be done and who will manage the process”.

In Moscow Rosatom was asked to clarify whether the agreement text contains a proviso allowing for the award of the reactor construction contracts without competitive tendering or bidding. Spokesman Andrei Ivanov replied: “there is still no agreement yet. It will be concluded by 15 February. It is impossible to comment on the details of what doesn’t exist yet. If you talk about the tender for the construction of nuclear power plants in South Africa, this is not a question for us, but for the government of South Africa. At the same time I draw your attention [to the fact] that nuclear power plants in world are built through two procedures: tenders and intergovernmental agreements. These are two different options. The choice is always by the party who is the customer.”

A bulletin issued by the South African Broadcasting Corporation on Monday was either confused on what is happening inside the government, or revealed that not even Energy Minister Martins is sure he knows. The SABC claims “the government is expected to open the bidding process for a tender to build a new nuclear power station by the middle of February next year. Russia’s state owned nuclear energy company, Rosatom, is currently in meetings with local nuclear industry players in Johannesburg to study cooperation possibilities. Energy Minister Ben Martins, who’s been on a study tour of Russia’s nuclear facilities, says this doesn’t mean Russia will get the contract.”

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Andrei Melnichenko has extra reason to be concerned about the sunlight — and we aren’t talking financial transparency. The owner of Eurochem, a large Russian producer of fertilizers, says he has evidence that sunlight on his surfaces reveals rash, blotches, separations, lines, starring and sagging. He says he’s paid to see his face reflected on the surfaces, but because the job has been botched, he can’t. The damage he is estimating at $100 million.

That’s not Melnichenko’s person we are talking about, but the surfaces of his boat, a motor yacht named A, after his wife Alexandra, and owned by the two of them through a succession of offshore companies, starting with Niedes Ltd. of British Virgin Islands, A Yacht Charter Co. of Isle of Man, and currently Bermuda Yachts Ltd of Bermuda.

Since July of 2010 Melnichenko’s New York lawyer, Patrick Salisbury, has been suing the international paints and coatings corporation, the Dutch-registered Akzo Nobel through three of its paint subsidiaries for covering the yacht with paint which failed to reflect and failed to stick. Akzo Nobel’s shares are listed over the counter in the US, and it has a current market capitalization of almost $18 billion. One of the subsidiaries does business in New Jersey, where it calls itself “one of the most reliable marine coatings suppliers in the world.”

The case docket, No. L002634-10, in the Superior Court of New Jersey commenced with Melnichenko’s claim dated July 8, 2010. By late last month, it was running to 116 filings. Altogether, the file holds 260,000 pages, including 300 exhibits, 27 witness depositions, and dozens of contracts. So far it has cost both sides several million dollars. It is the biggest product liability claim ever made by a Russian against an international supplier.

But just what sort of a claim is it when Mr and Mrs Melnichenko say they can’t see their faces in the sides of their boat? According to the defence lawyers, “Plaintiff’s sole complaint is that the Awlgrip paint did not result in a highly reflective enough finish on Yacht A. That is the only ‘harm’ alleged, and it is not ‘harm’ as defined by the NJPLA [New Jersey Product Liability Act]… Plaintiff alleges only that the paint applied to Yacht A was not as reflective as Plaintiff (and/or the Melnichenkos) subjectively believes it should have been. Under New Jersey law, that is not a product liability claim, and this is not a product liability case.”

A boat-painting expert has reportedly testified that there were no serious surface defects in the paint job causing the poor reflectivity which is the nub of the Melnichenkos’ complaint. Akzo Nobel argues that “as the only harm alleged is the subjective lack of reflectivity in the paint, Plaintiff essentially argues that paint damaged itself.”

More detail on the Awlgrip-brand paint, and on what Mr and Mrs Melnichenko have claimed about themselves in the court papers, were sealed this past July by the presiding judge, Kenneth Grispin, on the ground that they may contain trade and commercial secrets for the paint company, and privacy issues for the Melnichenkos.

Still, the case is lifting the lid, so to speak, on what happens when an oligarch’s toy doesn’t play as he expects. It’s not the first from Mr and Mrs Melnichenko. Their lawsuit over a sculpture which turned out to be too short for their backyard — by 100 centimetres — was pursued for €5 million, but settled after eight months without judgement and without damages. This time the proceedings are already at the three-year, three-month mark, and the claim, as itemized by the Melnichenkos’ lawyers, is for more than $100 million.

That sum, the complaint alleges, has been calculated from “ascertainable losses of at least $100 million plus attorney’s fees and costs… These ascertainable costs include those required to correct the paint and coatings defects and repaint the entire Vessel, which will take at least 18 months. Further, these costs include the loss of use of the yacht and cost of a replacement yacht during the repair period.”

The shipbuilder, Blohm & Voss, is being sued separately and elsewhere for €13 million.

The Akzo Nobel defence documents argue that painting a yacht is a “complex process and requires, among other things, the appropriate environment, necessary equipment, and highly skilled and experienced applicators”. But they categorically deny product defects, negligent painting, or fraudulent warranties. As for the biggest item in the Melnichenkos’ bill, the cost of a boat for them to sail about while Yacht A is laid up for repainting, a source close to the case calls the 18-month period “nonsense”. In the court papers it is argued “Plaintiff has suffered no compensable damages”.

According to International Paint LLC, the New Jersey company which is immediate target of the court action, the Melnichenko claim is misdirected. If the paint job turned out to be as non-reflective as the Melnichenkos are claiming, the alleged damages “if any, were not the result of any act or omission on the part of International Paint LLC, but exist by reason of operation of nature over which International Paint LLC had no control.” In short, Mother Nature is to blame. Or to be specific, Aeolus, God of the sea winds, Briareus, God of the sea storms, Oeolyca, in charge of sea waves, the Harpies (gusts and water spouts), not to mention Poseidon, God of all the sea.

According to a source close to the case, “independent inspection concluded there was nothing wrong with the paint job. They [Mr & Mrs Melnichenko] were happy with the job. They signed off their acceptance. A normal paint (ship) job would last four to five years. But that depends on the weather and sea.”

The court record reveals an uncharacteristic reluctance on the part of Melnichenko’s wife Alexandra to put her mouth where her husband’s er, lawsuit is. In September of this year, according to one of the filings by lawyers for the Akzo Nobel group, the court was told that Mrs Melnichenko had been notified that she should appear for a deposition in the spring of 2012. It then took the paint group almost a year to compel her to appear.

“Despite her clear importance to this case, Plaintiff refused to produce Mrs Melnichenko – forcing Defendants to move to compel her production for deposition”. The compel order was filed in August of 2012. Mrs Melnichenko finally gave her deposition to the defence lawyers on February 12, 2013. That document, plus Andrei Melnichenko’s earlier witness statement, are among the documents sealed by the court.

Akzo Nobel is also accusing the Melnichenkos’ lawyers of withholding another dozen witnesses whose testimony, the company says, is required for the court to adjudicate the claims, including Philippe Starck, the designer of the exterior shape and interior decoration of the boat.


According to the defence lawyers, the Melnichenko side “has not only refused to make these witnesses available but has also opposed Defendants’ efforts to depose them”.

Just one witness has been located so far in the US. He turns out to live, not in New Jersey but in the neighbouring state of Rhode Island. But there’s a problem: “Mr Carroll has never seen Yacht A; has no idea of what products were applied to Yacht A; knows nothing about the paint application to Yacht A; and knows nothing about tests or experiments performed on Yacht A, stating that ‘I know absolutely nothing about the paint job’.”

Before any of these claims can be adjudicated, the New Jersey courts must decide whether they should exercise jurisdiction to hear the case, as Salisbury, the Melnichenko lawyer, is insisting; or whether, according to the Akzo Nobel group, the courts of Germany or England are the proper forum – Germany, because that’s where the boat was built, and where it and a 10-tonne mock-up of Melnichenko’s boat were painted; England, because that’s where all but two of the components in the Awlgrip-branded paint used on the boat were fabricated, and where the paint experts are located.

In a judgement issued on October 22, Judge Grispin decided there is something to be said on both sides. He agreed that “either Germany or England is an adequate alternative forum to New Jersey”. On the other hand, he agreed the expense of moving the case into the German or English courts would be enormous, and that the Akzo Nobel lawyers “have not met the burden of overcoming the presumption against dismissal”. On that triple-negative, and in the absence of a compelling argument either way, Grispin ruled that his court should keep jurisdiction, and the case should proceed.

Akzo Nobel has yet to register whether it will appeal this ruling, or go to trial.

SEE ALSO: Russian Atomic Agency Closes In On The Biggest Reactor Deal In The World

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So far everything about the metamorphosis of Mikhail Khodorkovsky has gone like the cartoon – surprise launch into the air; flight without turbulence; soft landing among a flock of wellwishers; much cooing.

Just how well those wishers intend towards Khodorkovsky, and he towards them, is now to be tested. That’s a game even more Olympian than the one to be inaugurated in Sochi on February 7; or the one which those who hate President Vladimir Putin have yet to appreciate he’s playing.

First of all, there is the question which Khodorkovsky will soon be discussing with Leonid Nevzlin, his former partner and trustee, now resident of Israel; Bruce Misamore, the chief financial officer at Yukos, who lives in Texas; plus an army of lawyers, PR agents, financial advisors, and miscellaneous invoicers who have been on Khodorkovsky’s payroll all these years, and who are naturally keen to stay that way. The stakes run into several billions of dollars, according to Khodorkovsky’s count and as he will shortly instruct new accountants to verify. New lawyers will also be required to make sure the trustee agreements Khodorkovsky thinks he left behind won’t go the way Oleg Deripaska did to Mikhail Chernoy, or Roman Abramovich to Boris Berezovsky.

Misamore is claiming in the Financial Times that before Khodorkovsky recovers his balance-sheets, he ought to be up for as much litigation as Misamore would like him to pay for. One of Misamore’s money-spinners aims “to settle with the 55,000 or so shareholders of Yukos who have been waiting for 10 years for compensation and justice for the billions of dollars in assets that were stolen by the Russian Federation. Their claims are being played out in courtrooms from New York to Amsterdam, Strasbourg to London.” For the story of Misamore’s pursuit of more than a billion dollars’ worth of booty in Amsterdam, read this. What if Khodorkovsky insists he will not be paying for this any longer, as he has already said since his release?

Then there is the question which Khodorkovsky will want to consider – if not exactly discuss – with Alexei Navalny, Vladimir Ryzhkov, Boris Nemtsov, Gary Kasparov, Sergei Udaltsov, Ilya Ponomarev, Evgenia Chirikova, and Olga Romanova. These are the names who comprise the current Russian opposition; theirs are feathers easily ruffled. Within weeks the VTsIOM and Levada polling organizations will be able to measure just how little name recognition in Khodorkovsky’s case will produce in voter support; and how much divisiveness Khodorkovsky’s undiminished self-regard will sow among the domestic regime changers.

Across town in the Kremlin, among those in the Putin circle strategizing for a stable succession, the more trouble Khodorkovsky stirs among the opposition, the stronger the case will be for removing candidate successors as weak as Dmitry Medvedev, and for building up much stronger candidates. The first among those is Igor Sechin.

His remark on the release of Khodorkovskyon Friday morning, following Sechin’s session with Putin that afternoon, was: “I am ready to consider the question of employment of the former head of Yukos, Mikhail Khodorkovsky, [who was] pardoned today by the President. However, all places in the top management of the company are taken. We are ready to consider any offers, but we have precise standards: [his] qualification has to be confirmed. The structure of the company is known — the places of top managers are occupied now. But if there is any interesting offer, we will consider it.”

This wasn’t light irony, nor heavy vengeance. It was the declaration of one of the men running the country that unless Khodorkovsky accepts his subordination, he has no future in Russia. Sechin’s meaning stung Khodorkovsky swiftly into replying from Berlin. He said that before judging his qualifications Sechin should have to “work where I worked.” That’s a veiled threat that Sechin should try a spell in prison. Sechin has thus drawn Khodorkovsky out, exposing once more, as the Kremlin sees it, the over-weaning vanity which has made Khodorkovsky a predictable foil for Putin since 2003.

Finally, there is already among Germany’s self-appointed liberationists like academic Alexander Rahr, the problem of what they have gotten Chancellor Angela Merkel, her ministers, secret services, and business supporters into. Rahr, who is more believed outside Germany than inside, claims the scheme for Khodorkovsky’s application for release, and the terms agreed to by Putin, were the work of former foreign minister, Hans-Dietrich Genscher “with the Chancellor’s office, with Mrs. [Angela] Merkel, with minister of foreign affairs [Guido] Westerwelle, with the German embassy in Moscow” – and Rahr himself. “Without Genscher playing this role, Khodorkovsky might not have been released… He’s very close to Angela Merkel.”

If there has been a secret undertaking between Merkel and Putin, and if in retrospect that appears to neutralize Khodorkovsky’s future as an asset to Russia’s enemies, this is likely to cause recriminations among the German political elite. In time, Khodorkovsky is also likely to feel uncomfortable in Germany whose closeness to Russia the Germans will not encourage him to entertain. If Khodorkovsky opts next for New York or London, he will liquidate his significance more swiftly and surely than Berezovsky was able to do in his decade in exile.

An American welcome for Khodorkovsky would bury him as deeply as Vermont did for Alexander Solzhenitsyn. But would Prime Minister David Cameron, Mayor Boris Johnson, or the Labour Party be as hospitable to Khodorkovsky’s application for residence in London as they have been for the likes of Bank of Moscow fraudster, Andrei Borodin? The Kremlin’s calculation of British intentions is that agree or disagree, that’s a win-win for Putin.

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Not since the British started the Δεκεμβριανά in Greece in 1944, and not unless you count Na Trioblóidí in Northern Ireland until 1998, has the possibility of civil war in civilized Europe loomed so gravely. No wonder the mailbox is brimful of questions, for which there are no obvious answers.



1. Whatever happened to Mrs Freedom, Yulia Tymoshenko?

For months leading up to the November deadline for Ukraine to sign the partnership agreement offered by the European Union (EU), the Europeans seemed to be saying that release of former Prime Minister Yulia Tymoshenko from her 7-year jail sentence was the precondition for the deal. The Germans seemed to be demanding her release as late as November 18.

That very day the US Senate’s Foreign Relations Committee agreed on the text of Senate Resolution 165 which “(1) calls on the Government of Ukraine to release former Prime Minister Yulia Tymoshenko from imprisonment based on politicized and selective charges and in light of the April 2013 European Court of Human Rights verdict; (2)calls on the European Union members to include the release of Ms. Tymoshenko from imprisonment based on politicized and selective charges as a criterion for signing an association agreement with Ukraine at the upcoming Eastern Partnership Summit in Lithuania; (3)expresses its belief and hope that Ukraine’s future rests with stronger ties to Europe, the United States, and others in the community of democracies.”

In seventy-two more hours President Viktor Yanukovich and his parliamentary majority decided to reject the EU deal in favour of a Russian one; that was on November 21. That day too, the Verkhovna Rada voted down a bill allowing Tymoshenko’s release for medical treatment in Germany. A week later, Ukrainian demonstrators in Kiev were shouting for her release, combining that with shouts in favour of the EU agreement.

But the State Department was beginning to go cold on Tymoshenko’s fate. On December 2, the State Department spokesman put Tymoshenko in the past tense. “We have consistently spoken about this in the past and expressed our concern about her detention…So we’ve consistently expressed concern, encouraged them to take steps forward. Obviously, there hasn’t been progress on that on the ground.”

Even in the past tense, January 15 was the last time a US Government official mentioned Tymoshenko. As the Euromaidan demonstrations escalated against government targets in the capital and across the country, not only has the US been mum on Tymoshenko; it has been actively backing someone else to be the next president of Ukraine. Why?

The last independent Ukrainian poll of voter intentions was undertaken between December 23 and 27. With a sample of 2,079 and coverage of 24 regions of the country, the survey found support for the EU partnership was running at 43%; support for the Russian customs union, 30%; with 20% in favour of no change in either direction. The poll also found that 47% were positive towards the Moscow agreement; 27% negative. As for the Euromaidan protests, 50% said they were against; 45% in favour. As for their presidential vote if an election were called immediately, 25% picked Yanukovich; 8% Tymoshenko. Among the other contenders, Vitali Klitschko did better at 14%, while Arseny Yatseniuk did worse at 5%.

No independent Ukraine poll has been published since then. Much private polling has been done, though, especially by those financing the opposition. Douglas Schoen, a pollster currently employed by the anti-Russian Ukrainian oligarch Victor Pinchuk, is an expert at creating political front-runners out of no voter support at all. According to US investigations, Schoen has done this Venezuela and in the Czech Republic.

In the Ukraine, there has been a problem – and that’s Tymoshenko. Between the time she was expected to be released and the time the Obama Administration decided to drop her, it became clear that if the Euromaidan campaign for Europe and against Russia were to succeed, it had to oust Yanukovich. Managed more or less constitutionally, that meant pressuring him into calling a new election.

The trouble with this, according to the private polls, was that the most likely candidate to win instead would be Tymoshenko. So why wouldn’t Mrs Freedom be just the ticket for Washington? Answer: she was ready to do a deal with Moscow and was thus acceptable to the Kremlin. President Vladimir Putin said as much last week: “For us it isn’t important [who from the opposition wins]— we carried on a very constructive dialogue with the government of Ukraine when this government was headed by Madam Tymoshenko.”

Inflating Klitschko has therefore been the principal goal of the US political technologists. Taking the air, er gas, out of him is the obvious Russian counter.

2. Where can be done for Ukraine’s gas pains?

Everyone in the Ukraine is stealing Russian gas. On this point there is unanimity from Moscow to Brussels, from Dniepropetrovsk to Kiev and Lviv.

Yanukovich doesn’t pay Naftogaz, the state gas distributor, and when Klitscho and Yatseniuk turn on their cookers, what burns for them is free of charge. The Roshen Group, which generates Petro Poroshenko’s fortune, owes Naftogaz a sum of money Naftogaz says is too confidential to release, and Roshen refuses to admit at all.

After the Ukrainian courts have ruled a half-dozen times, Pinchuk’s Interpipe still will not pay a debt of almost $70 million. Whether Tymoshenko is in hospital or prison, the gas keeping her and her guards warm is not being paid for. And if the EU and the White House could find an alternative supplier of gas to Gazprom, that too would be stolen.

Starting with gas and including most other commodities, Ukraine has become a pyramid of debt for stolen goods. Lend or pay any amount of cash into the system, and it will disappear immediately, converted into real goods consumed with the intention not to pay for them, leaving nothing but growing debts behind.

When Yanukovich, Putin and their subordinates agreed in December on a Russian programme of rescue measures, $15 billion was promised to refinance Ukraine’s treasury and foreign debts, partly to repay $2.7 billion in debt already owing for deliveries of Gazprom gas last year; and partly to enable Gazprom to continue delivering gas this year at a higher volume than 2013, and at a newly negotiated 36% discount in price.

But it’s now clear the first instalment of $3 billion in Russian bailout financing has gone – Ukraine still isn’t repaying the old Gazprom debt, and Naftogaz cannot afford to pay for current deliveries. Where did the money go? Putin is asking publicly – there’s not a Russian, nor Ukrainian, who doubts the answer.

According to Russian calculations, during the month of January Gazprom delivered 2.5 billion cubic metres of new gas for an invoice value of $658 million. At the start of the new month, however, Naftogaz was owed $3.4 billion by the country’s municipal and regional administrations. How much more is owed to Naftogaz by the Ukraine’s commercial enterprises hasn’t been counted. If the defaulters were paying up, Naftogaz would be able to repay Gazprom as promised, and start meeting its new delivery invoices. But the defaulters won’t, so Naftogaz can’t.

In order for Naftogaz to continue supplying local consumers with gas at a tariff which has been fixed below its supply cost, the state budget must meet its promised subsidy for Naftogaz. But it too cannot pay. There is simply no free cash left in the Ukrainian government.

If the guardian of the Euro-American rescue for Ukraine is to be the International Monetary Fund (IMF), this is how the IMF board of directors reported the Ukrainian situation on December 13, just before the Russian bailout began. “The fiscal stance loosened in 2012–13, contributing to the buildup of vulnerabilities. Large pension and wage increases, generous energy subsidies, and soccer cup spending led to a widening of the combined deficit of the general government and the state-owned company Naftogaz to 5½ percent of GDP in 2012. In 2013, the combined government-Naftogaz deficit is projected to expand to 7¾ percent of GDP.”

The American and European directors on the IMF board didn’t sound then that they were in favour of keeping Ukrainians warm this winter, at least not on the terms Gazprom has been agreeing to. “An inefficient and opaque energy sector continues to weigh heavily on public finances and the economy. Overall energy subsidies in Ukraine reached about 7½ percent of GDP in 2012. The very low tariffs for residential gas and district heating cover only a fraction of economic costs and encourage one of the highest energy consumption levels in Europe. As a result, Naftogaz’s losses in 2013:H1 more than doubled and the company is late on payments for imported gas.”

“Opaque” in IMF-speak means theft in Russian; in English too.

As Secretary of State John Kerry was poking his finger on the weekend at the rank of Ukrainian candidates the secret-service pollsters are recommending, the EU’s foreign minister Lady Catherine Ashton claimed she’s putting together a new financial offer to top the Russian one. In November Ashton was careful to insist that this should take the form of “a new standby arrangement with the IMF”. This week Ashton’s scheme offered short-term money with long-term conditions. According to Ashton, the new numbers “won’t be small”. She also claimed that although the non-small down-payment won’t require IMF conditions, there will be no non-small money to follow unless IMF conditionality is exactly what the government in Kiev agrees to. That money, according to Ashton, is “contingent on the new Ukrainian government pursuing economic and political reforms.”

Between Ashton’s taster and the IMF’s medicine, US officials have announced: “Nobody [American] is going to give them money if they’re not doing the economic reform as well as the political reform, because then it is money down the rat hole…The point is to say to them we will be with you if you walk this tough economic path and we’re not going to let you fall into default as you do it.” According to this Wall Street Journal version, “U.S. officials believe it could be easier for a transitional government to raise natural gas prices in the spring as temperatures rise.”

Here’s the IMF again, revealing what Ukrainian reforms it has in mind: “High budget expenditure should be reduced by rationalizing public procurement, restraining the growth in public sector wages and employment, and limiting pension indexation to inflation. In addition, authorities should refrain from unaffordable tax cuts. Directors agreed that these measures would reduce the fiscal deficit to a sustainable level over the medium term while creating space for essential public investment.”

“Directors underscored the need for a comprehensive energy sector reform. They stressed that upfront, meaningful, and broad-based tariff increases are essential for reducing large quasi-fiscal losses, attracting new investments, and improving governance. Energy tariff increases should be accompanied by measures to protect the most vulnerable households. Directors welcomed the authorities’ plans to continue with energy-saving reforms, increase domestic gas production, and diversify energy imports, but stressed that these measures cannot substitute for the indispensable tariff adjustments.

So who wants to be president of the country with the IMF in charge of the alternative to the Russian agreement? Which of them wants to go first in explaining that freedom to be European will mean job losses, wage cuts, lower pensions, higher prices for everything, especially gas, and higher taxes.

No hands are up, not Klitschko’s, not Yatseniuk’s. There’s no cure for the gas pains, at least not until the warm weather arrives.

3. Why is the Austrian Government guarding the Azarov family silver?

At the Munich Security Conference on the weekend, Yatseniuk, whose standing in the prospective presidential polls isn’t matching Klitschko’s, announced his alternative to the Russian rescue programme – a Euro-American giveaway. “Ukraine desperately needs a Marshall plan and not martial law in order to stabilize the political and economic situation in the country”, he said, according to German radio.

Klitschko has so far avoided making statements about what bailout terms he would agree to, if he were to become president. In Munich he stuck monosyllabically to a presidential replacement script. “Mr. Yanukovich, Ukrainians ask you if this is the right path. It is the path for rights for our people? Let me say as a Ukrainian citizen, this is not an acceptable path for us. For two months, the people of Ukraine have showed their will for political change…The people have said enough. Enough corruption, enough living without laws, enough of this system. The people, with this system, they don’t see the future.”

In impromptu remarks that followed, Klitschko did say he favours the type of sanctions initially proposed in the US. According to Klitschko, these would include bans on issuing travel visas and freezes on credit card and bank account operations by Ukrainian government officials. Klitschko named noone.

Why was Klitschko so reticent?

If sanctions are to be exemplary, painful and a deterrent to violence, as their proponents apparently want, the most accessible target is ex-Prime Minister Mykola Azarov and his family, now living in Vienna. The family also includes only child, Oleksiy Azarov, a member of the Ukrainian parliament whose expensive tastes are well-known.

Ukrainian protesters in Austria have targeted the Azarov house. But for the time being, the Ukrainian opposition leadership, and the governments supporting them, are sparing the Austrian Government the trouble of opening an investigation of the larceny, embezzlement, and money laundering allegations which have been made against Azarov senior.

If the Austrians, like the rest of the EU, genuinely believe what they are accusing the Ukrainian government of, this refusal to act is a sign that sanctions talk is bluffing. Why shouldn’t President Yanukovich think so? When naivety meets cynicism there’s nothing to be said.

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There is a tide in the affairs of men, which taken at the flood, leads on to pork sausage. And we must take the current when it serves, or lose our profitability.

If Europeans do that, it’s classical from Shakespeare’s Julius Caesar. If Russians do it, it’s trade war. Oleg Tyagnibok, the Ukrainian oppositionist whom the US Government is promoting into power in Kiev, hasn’t been asked yet what he thinks of the Russian ban on European pork imports. But he’s bound to blame the “Moscow-Jewish mafia” because he’s blamed them before, though not exactly for trying to enforce the kosher code.

The pork business is a sensitive one – not so much because it’s large in aggregate Euro or dollar trade value, but because the Russian market is the second largest consumer of pork imports in the world (Japan comes first) and the largest consumer of European Union (EU) pork; because pork production keeps farm voters happy in corners of Europe where their votes count in close elections; because in Russia itself the price of pork sausage is as sharp a trigger for voter discontent as the price of bread; and finally, because there has been a steady concentration of Russian pig farming and pork production into a handful of corporations and the men who own them, the porkligarchs. For the story of how unhappy they were at the loss of profitability inflicted on them since 2012, when Russia joined the World Trade Organization (WTO), read this.

In the line-up of EU member-states with the biggest herds of pigs, Germany is the largest slaughterer, as well as the largest consumer and the largest exporter. Spain, France, Poland, and Denmark are also big producers and exporters, and thus vulnerable to the Russian market. To feed the Russian appetite for pork, the alternative producer-exporters are China, the United States, Canada, Brazil, and maybe Vietnam.

Since January 2013 US exports of pork to Russia have been banned for failure to eliminate residues of the growth chemical ractopamine.

TOP 10 PORK PRODUCING COUNTRIES IN THE WORLD

African Swine Fever (ASF) is a highly infectious, highly lethal disease which passes from wild to domestic pigs, and through the pig food chain. Its first detection in Russia was in 2007 (the disease originated from Georgia); since then the international Food and Agricultural Organization (FAO) has charted the history of its recurrence in this report. The charting was good through December 2012. The report predicted worsening outbreaks in western Russia during the seasonally warm months of backyard production, June through November. These materialized in mid-2013.

MAP OF ASF OUTBREAKS AMONG WILD BOAR, DOMESTIC PIGS, IN RUSSIAN REGIONS, 2007-2012

As the maps show, the incidence was particularly acute in the western regions of Belgorod and Tambov near the Ukrainian border. When the outbreaks occurred, the EU issued a blanket ban of pig and pork product movement into the EU from all of Russian territory, including Siberia – which is off the FAO charts because there was no ASF outbreak. The EU immediately offered €2.5 million to Estonia, Latvia, Lithuania and Poland for what was reported at the time as aid to prevent the Russian infection crossing the border, moving westwards. No action was taken by the EU towards Ukraine.

Wild boars can migrate over distances of 200 kilometres or more, and though the boar map shows they are relatively scarce in Russia, they grow increasingly more common in Belarus, the Baltic states, and central Europe. Whither the boar, thence ASF.

WILD BOAR CONCENTRATION IN EUROPE

Until last month, the Europeans believed themselves clear of the infection – except for Sardinia.

Then late in January ASF infection was discovered in Lithuania. The US Meat Export Federation describes what happened next: “Lithuanian officials recently confirmed the country’s first cases of African swine fever (ASF). These are the first ASF cases to be detected within the boundaries of the European Union, with the exception of the Italian island of Sardinia. The EU veterinary certificate states that the EU is free of ASF with the exception of Sardinia. With this no longer being the case, EU veterinary officials requested that Russia allow them to continue to sign export certificates if they guaranteed exclusion of products from the affected regions of Lithuania. Russia’s Veterinary and Phytosanitary Surveillance Service (VPSS) did not agree to this request, so exports were effectively suspended on Thursday when certificates could no longer be signed.”

On February 8, according to a notice issued by Rosselkhoznadzor (RSN), the Russian veterinary and phytosanitary agency, the EU certificate was no longer accurate, and all of the EU was at risk until a new certificate can be issued. “The disease outbreak in Lithuania,” announced RSN, “radically changed the epizootic status, not only of this state, but also the entire European Union, which according to the principles and objectives enshrined in the Lisbon Treaty, is a single economic, social, territorial, and therefore epidemiological and epizootic space… the status of the European Union on this disease has changed from safe to underperforming.”

RSN was critical of the European Commission for doing too little to stop the eastward spread of ASF, too much to protect the EU’s pig farmers and pork exporters. “The European Commission in a hasty manner, without adequate scientific justification and without inviting experts of the Customs Union [Russia, Belarus, Kazakhstan] , held its own ‘regionalization’, and proposed to limit the isolation [quarantine] only in Lithuania, located along the south-eastern border with Belarus at a depth of 20-30 km.”

RSN then introduced new import regulations, allowing pig-meat products heated to destroy ASF and pork covered by a new EU certificate. This was not a ban on EU imports, but it did set conditions for imports which the EU has until now refused to implement. The impact was momentous for the EU exporters. Belarus and Ukraine exports were unrestricted.

Tonio Borg, a Christian Democratic politician from Malta who became the Health Commissioner for the European Commission in 2012, attacked the RSN action. Borg first blamed Russia for infecting the boars who, he claimed, took their infection over the Lithuanian frontier. Borg, a lawyer by training, claimed “latest scientific evidence shows that these two Lithuanian cases of ASF are linked to the unsuccessful attempts to control the prolonged presence of ASF in the western regions of Russia and the recent introduction of the disease in Belarus. No information or evidence has been provided by the Russians about measures taken to contain any risk of further spread of the disease into the EU.”

In Borg’s political past at home on his Mediterranean island, he has attacked the EU for failing to do enough to help Malta cope with waves of illegal immigrants landing from Libya and other conflict zones in northeastern and northwestern Africa. The EU should accept a proportionate share of the immigrants, Borg claimed just before he took his Brussels appointment, and contribute more to naval patrols and other measures to turn back the flood.

But Africans landing in Malta are a different story from boars landing in the EU. According to Borg’s statement of February 7, “Russia has imposed unprecedented trade restrictions on the export of pigs and pig meat from all 28 EU Member States, even though the occurrence of the disease is restricted to only a limited area of Lithuania. These restrictions, apart from having a serious economic impact on European business operators, are also disproportionate and contrary to international trade principles. Imposed two weeks ago by Russia, this trade embargo continues to apply despite an as yet unsuccessful request to meet my Russian counterpart… I repeat that in view of the reassurances provided, the surveillance and control efforts made, and the outstanding health status of all non-affected EU regions, a blanket ban is completely disproportionate”.

RSN’s response was to remind Borg that it was maintaining the same “commitment to the principle of equivalence of the measures taken” as the EU had taken against Russian products during last year’s ASF outbreaks in western Russia. Borg had been the commissioner in charge then and since. In the interval RSN accuses the Europeans of failing to negotiate the new terms for the EU’s veterinary certificate and for the regionalization required on both sides of the border to curtail the infection risk.

For voter consumption, Poland’s prime minister Donald Tusk has publicly accused the Russian government of starting a new trade war over pork. This is despite Tusk’s earlier success in negotiating the lifting of the two-year Russian embargo on imports of Polish meat products from 2005 to 2007. Polish, Lithuanian and other eastern European politicians claim the RSN action on swine fever is retaliation for the EU’s support of the anti-Russian opposition in Ukraine. Other European supporters of the Ukrainian opposition also accuse Russia of waging trade war on imported chocolates, dairy products, and tulips.

Lithuania has applied for $6 million from EU headquarters to erect a new fence to stop Russian boars from crossing. Latvia and Poland are also expected to put in for fencing money.

Alexei Portansky, Professor of the Department of Trade Policy at the Higher School of Economics in Moscow, dismisses the allegation of disproportionality in RSN’s action against EU pork. “This is a matter for [phytosanitary] investigation. And until the parties have agreed on a mutual procedure for investigation, there is no investigation. Until there is, it is difficult to say who is right and who is wrong. This is a situation where one side thinks the other is wrong. That’s normal — that happens a lot in the WTO.”

Sergey Yushin, head of the executive committee of Russia’s National Meat Association, rejects the trade war claims. “I’ll start with the fact that there is no ban. Pay attention to this. There is no new harmonized veterinary certificate to reflect the prevailing reality on ASF in the European Union. In the current certificate it is written that in the EU for the last three years there was no ASF except for Sardinia. But, as we now understand, after the ASF discovery in Lithuania, this statement is untrue. Therefore, there is no ban on the part of Rosselkhoznadzor. It did not impose a ban. It’s just that the certificate which exists today, and is agreed between the EU and the [Russian] Customs Union does not correspond to reality. Therefore it is necessary to revise the certificate.”

“But to review [the obsolete certificate] is possible only on the basis of comprehensive data about what really is the situation in the EU at the moment. And the ball, it seems to us, is now in the EU’s court. It should provide comprehensive, detailed and full information, in particular, on the monitoring carried out for ASF in the wild or on farms or factories, in the different countries; and what tools of control there are over the [inter-regional] movement of animals.”

According to Yushin, the problem of infection in Lithuania isn’t as fresh as Commissioner Borg has been claiming. “The corpses were found already decomposed,” so the timing of the boars’ movements and the direction from which they have come are “a very technical issue.”

Borg’s claims that Russian measures have been disproportionate fly in the face of EU protectionism to keep out Brazilian pork, argues Yushin. The EU record shows that for years now the EU has refused to accept Brazilian proposals for regional containment of veterinary infections, on the basis of which the European Commission has imposed import bans. “Therefore, the [Russian and EU] measures are exactly symmetrical,” says Yushin. “The last case of ASF in Brazil was in 1981. [The European] ban on the import, in particular pork, from Brazil is still active, and for the whole country. So the ban is already in force for almost thirty years.” For independent evidence of Brazil’s efforts to contain and eradicate ASF, read this.

RSN spokesman Alexei Alekseyenko is emphatic that RSN’s measures “are absolutely proportional. The fact is that the EU introduced approximately the same measures when we had an ASF outbreak and when the scope of their measures hit the entire country, including areas where there was no ASF (Kamchatka, Sakhalin, etc.). From the Kaliningrad region, although there was no ASF, the EU allowed product supply only after serious heat treatment. We have set them the same conditions… With the EU, the case is complicated by the fact that they do not have tracking systems for products over the territory of the European Union. That is, what is produced there can be circulated freely throughout the territory. The ASF virus persists in meat over many months. From bitter experience we have encountered this in Russia when [infected] products were distributed illegally from areas of outbreaks, causing secondary outbreaks sometimes at very far distances.”

A North American meat trader at this week’s ProdExpo industry convention in Moscow concedes that the Russian are giving the EU tit-for-tat. “At the Food Expo it was noted that part of the current EU problem is the fact that the EU refused to recognize Russia’s program of regionalization [last year] So if a disease is discovered in one region of Russia, the entire nation is considered infected. Russia’s ban on the entire EU is a way of saying ‘two can play at that game.’”

European prices on the pig slaughter market have been falling for two weeks now as the volume of unsold meat is counted which must be disposed of on the European side of the Russian frontier.

On the Russian side, two of the largest domestic pork producers are Cherkizovo, which is listed on the Moscow and London stock exchanges and controlled by Igor Babaev (right); and Miratorg, which is privately owned by the Linnik brothers.

The share price of Cherkizovo started rising in December and peaked in early January, before the Lithuanians announced their infected boar corpses.

Market capitalization for Cherkizovo is currently $766 million. It has been higher – $1.2 billion in September 2010.

Alexander Kostikov, head of investor relations and communications at Cherkizovo, makes this forecast: “In the short term the ban on imports will cause some increase in prices. In the longer term, it can contribute to the revival of investment interest in Russia’s industrial pig production. After the price shock of the 2012-2013 years most of the big agricultural companies froze their investment in pig farms. Restrictions on imports may return interest in these investment projects.”

Dmitry Sergeyev, spokesman for Miratorg, says his company is “firmly convinced that biosecuriy issues must take first priority. In the Russian Federation the large-scale fight against the spread of African Swine Fever (ASF) has already caused, by estimates of Rosselkhoznadzor, direct and indirect damage to different sectors of the economy amounting to about 30 billion rubles [$860 million]. It is totally unacceptable to accept the risk of introduction of this dangerous disease on our territory from the European Union. The rejection of European imported pig products is a necessary and adequate measure until the situation is fully clarified.”

Yushin of the National Meat Association points out that the impact of the current measures will be offset for Russian consumers. “Europe is an important trading partner in the supply of pork, but not the only one. Its share increased markedly [in 2013], but before Europe’s share was not as significant. Take, for example, 2009. The EU accounted for 38%of deliveries; in 2010, 45%; in 2011, 51%. So the EU has been increasing [market share] gradually while others lost. In 2012 [the EU share was] 40%. And in 2013 it was 60%. But then again, who have lost large shares – Canada, which used to account for 25% of supply, and the US, which accounted for 12% in 2012. Now take 2013: the US imports were closed due to ractopamine; they managed to import just 1.2%. For the same reason, Canada fell from 25% to 12%. But at the moment, US and Canadian enterprises have provided enough information that they can produce meat without ractopamine. Accordingly, Brazil, Canada and the US could potentially increase their shipments to the Russian market.”

Domestic production will also grow, the association is calculating. “The EU should bear in mind that Russian production increased in 2013 by 340,000 tonnes deadweight. And the first forecasts for this year [indicate that] growth may reach an additional 150,000 tonnes. Accordingly, we do not expect any sudden negative changes. We have had about ten days since European delivery was not allowed on the Russian market, but the dynamics of prices at wholesale, and so far in retail too, are practically unaffected. So I think the possibility of supplies from other regions of the world and our own production will keep prices stable. In addition, it is necessary to note that the prices in the summer of 2012 and the summer of 2013 were approximately 20% higher than they are now in the wholesale market. Even if there is a price increase, it is unlikely to reach the historical peak of summer 2012.”

The North American trade source anticipates that European pork will be replaced in the Russian market by Canada, Brazil and “soon the USA — supposedly they are about to finalize their deal with RSN. I believe this ban will remain in place for a month or two. In the meantime Russian hog producers (and non-EU exporters) will reap the benefits of higher prices, providing a major incentive for at least those constituencies to support the status quo. Plus if enough time passes, Russia will re-allocate European quota to other countries, as they do with beef every year. This means that the Russian importers will not suffer and lose quota whatever happens. So don’t expect any universal outbursts of indignation; the Europeans are likely to be on their own this time.”

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Bill Clinton and Hillary Clinton, the former and wannabe presidents of the US, say they have accepted more than $13 million from Ukrainian pipemaker Victor Pinchuk since 2006. But Pinchuk's records show that he’s given the Clinton Foundation only $7.6 million.

It won’t help to employ accountants to ask where the missing $5.4 million was originally trousered, if not the Pinchuk Foundation, then which branch of Pinchuk’s business. That’s because the Clinton Foundation’s auditors – an Arkansas firm called BKD – have turned up this much money in revenues, and also in expenditures, which the Foundation’s annual report inexplicably fails to report and regularly understates. The Pinchuk Foundation also refuses to answer questions about discrepancies in its annual accounts, whose auditors are reported by Pinchuk’s organization to be Ernst & Young. Their signature is reproduced in the Pinchuk Foundation annual reports, although no copy of their financial reports and notes has been published.

The question of the missing money could be related to a criminal case in Moscow for Russian prosecutors. This is because they are investigating how and where Pinchuk trousered the sum of Rb6.5 billion ($186 million) from his Russian auto insurance company, Rossiya Insurance Open Shareholding Company. The insurer’s licence was cancelled last October 23 by the Russian Central Bank’s insurance inspectorate. At the time, the liabilities of Rossiya were reported to be Rb2.3 billion ($72 million). Over the previous twelve months, Rossiya had defaulted on Rb4.5 billion ($141 million) in claims.

In the Moscow Arbitrazh Court hearing on Rossiya last month, the bankruptcy trustee Yevgeny Zhelnin charged that Pinchuk had been using fraudulent reinsurance and other schemes to empty Rossiya’s treasury of its income from premiums, along with its reserves for payment of claims. The allegation against Rossiya and its proprietor is fraud on a grand scale. And that’s where the problem starts for Hillary Clinton (right), her husband, and daughter: Have they been on the receiving end of a money-laundering operation in which the proceeds from Rossiya became the income of Pinchuk’s foundation and were then spent on the Clinton Foundation?

Pinchuk first acquired a 25% blocking stake in Rossiya through his EastOne holding company in 2007. In 2009 he bought another 25% plus one share to become the controlling shareholder, and by the end of that year, he had taken 100% of Rossiya.

In a single-page summary of its annual balance sheets, purportedly endorsed by Ernst & Young, the Pinchuk Foundation reveals that the year 2007 was a bonanza year. The money box started with a cash balance of just $63,947. It then filled up with what Ernst & Young calls “contributions and charitable donations” totaling $15.7 million. The Foundation refuses to clarify the source of its donations.

The balance-sheet claims the foundation spent $1.1 million on Pinchuk’s lobbying group for Ukrainian membership of the European Union, called Yalta European Strategy. Another half a million dollars went to a Washington, DC, lobbyist called Anders Aslund at the Peterson Institute for International Economics, and another $250,000 to the Brookings Institution, also a Washington institution lobbying for Pinchuk’s causes in the Ukraine.

The Clintons claim to have collected $132.5 million in 2007, but they won’t say how much was from Pinchuk. Pinchuk won’t say if he gave them a penny that year. Pinchuk’s accountants don’t start revealing their spending on the Clintons until 2009, when the Pinchuk organization reports that $4 million was despatched and received. In the meantime, the motor and third-party liability insurance premiums rolled into Rossiya in Moscow – and the philanthropy was booming at the Pinchuk Foundation in Kiev. According to Ernst & Young, Pinchuk’s donations in 2008 jumped 68% to $26.3 million.

In 2009, as EastOne took over Rossiya entirely, the Russian economy was in trade-induced recession, car sales dropped, along with premium revenues at Rossiya. Pinchuk’s generosity dropped to $13.8 million, according to the foundation balance-sheet. Aslund’s stipend was cut by half to $100,000 for the year.

Annus horribilis it might have been for philanthropy, but Pinchuk’s foundation paid itself $1.5 million in “administrative expenses” in 2009 – up from $1.4 million in 2008, and four times the $307,265 which running the show cost in 2007. Bill Clinton was paid to speak in January 2009 at what Pinchuk called his Davos Philanthropic Roundtable.

In 2010, Pinchuk said he gave $1.1 million to the Clinton foundation; Clinton claims the amount was between $5 million and $10 million. In 2012, the Pinchuk Foundation says it gave $1 million; according to the Clinton Foundation that year the amount donated was between $5 and $10 million.

The Clinton Foundation’s problems of accounting for its money are legion. Although it has been taking in about a quarter of a billion dollars per annum, it overspent its income in 2007 by $11.1 million; in 2008 the overspend was $13.8 million. In 2013 BBB, the American philanthropy watchdog, warned public donors that the Clinton operation failed to meet the required standard for public accountability and independent supervision; make that avoidance of conflict of interest, since most of the foundation’s staff have also been involved in the presidential campaigning of Mrs Clinton.

The foundation claims to operate a New York City headquarters at 1271 Avenue of the Americas, according to the website; 55 West 125th Street, according to the telephone answering machine. Its press department is headed by Valerie Alexander, who ran the press operation for Mrs Clinton’s abortive presidential campaign in 2007; the organization identifies her deputy as Betsy Feuerstein. Neither answers the telephone; both refuse to answer email requests for clarification of the $13 million in receipts from Pinchuk. On February 12, a New York newspaper claimed the total was “roughly $13.1 million”, but failed to cite a source. The reporter, who did not check Pinchuk’s financial reports and court claim records, refused to answer questions. The newspaper reported a statement in support of Pinchuk by Aslund and the Peterson Institute without identification of more than a million dollars Pinchuk has paid the two of them.

A cryptic note in the Pinchuk Foundation report for 2010 concedes that from “2009; all funding [for Clinton] was transferred through the accounts of the Foundation.” Open this link and go to page 61. That implies there was an agreement between Pinchuk and the Clintons, their foundations, and their lawyers that whatever conduit he had been using to pay them should appear from then on to be a channel between the two charities.

But the Pinchuk report goes on: “Such additional funding is not transferred through the accounts of the Foundation, but is provided directly by the donors to the legal entities implementing the projects. Accordingly, such transfers are not included in the combined statement of cash receipts and disbursements.”

This note becomes evidence for answering the question of the missing $5.4 million. But that question leads to bigger ones – what has Pinchuk been concealing of the origin of cash he has been giving the Clintons; what Pinchuk entities have been direct donors to Clinton entities off the foundation balance-sheets; and what have the Clintons suspected, or known, which led them to the charitable fix between the two foundations.

There’s more – and it’s now up the Investigative Committee, the criminal prosecution branch of the Russian procuracy, to determine who is liable for the fraud, money laundering, and conspiracy in the case of Rossiya Insurance Company, and where the money went. That last question ought to be of interest to US prosecutors if they can get the Clintons to explain as much as they know – or ought to have known — about their receipts from Pinchuk.

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One day before the President of Ukraine and the constitutional order of the country were toppled, Georhii Rudko, the chairman of the Ukrainian State Commission for Natural Resources, gave a notable presentation on the future for the oil and gas resources of Ukraine.

According to his February 20 presentation, the western regions of Ukraine can contribute little to the future energy supply of the country and aren’t worth fresh investment. That, he said, is because the area is already “ the most long-exploited in Ukraine and the smallest by potential resources and reserves.” In the eastern regions, by contrast, Rudko said considerable reserves of oil and gas remain to be developed if there is fresh money. The area “is the largest in Ukraine by potential resources and reserves. It has 205 fields, 121 of them are being developed (gas – 64, gas condensate – 72, oil – 53). The degree of the initial potential resources realization – 57%.”

Both west and east have potential value for unconventional gas production; that’s shale or coal-bed methane gas released by hydraulic fracturing and other methods. The estimated resource was plotted by Rudko on the map like this:

But the time required for development, Rudko conceded, is long, the cost high, and the outcome much more uncertain than his recommendation. That is for oil and gas drillers and foreign investors to concentrate on what he calls the “Southern Oil and Gas Region”. On Rudko’s map, the region’s energy riches have already been plotted in the Sea of Azov and the Black Sea. They lie to the north of Kerch; west of Simferopol; and south of Sevastopol. In short, they lie on the seabed within 200 nautical miles of the Crimean shore line.

Until now, that is part of the exclusive economic zone of Ukraine, according to the international Law of the Sea. But if Crimea formally votes on March 16 to give up its autonomous republic status in Ukraine and join the Russian Federation, and if the Russian parliament and President Vladimir Putin formally accept, these resources are no longer Ukrainian. They become Russian.

The potential, Rudko said, is enormous. The Crimean offshore areas already identified, he said, represent “a third of the undiscovered natural gas resources [of Ukraine] and a fifth of the undiscovered oil resources…including: oil and condensate – 1148 million tons and gas – 3831 billion m3. The development degree of resource potential of the shelf – up to 5%. The most prospective for the search of significant deposits is the deep part of the Black Sea. Its potential recoverable resources reach more than 1000 million tons of coal equivalent (54% of the total Black Sea resources).”

On this map, prepared by Ukraine’s state gas company NaftoGaz, there are four deepwater license areas south and south of Crimea, which have already been delineated by Rudko’s natural resources commission. Since 2006 all four – Skifska, Foroska, Prykerchinska, and Tavriya (to use their Ukrainian names) — have been formally offered for bidding by interested investors and oil and gas explorers.

Despite earnest efforts by several governments in Kiev, including the recent Energy Minister, Eduard Stavitsky (December 2012-February 2014), there has been no bidding interest for Foroska or Tavriya.

On January 30 Stavitsky announced that the government would be trying again soon. “‘There will be contests on two areas of the Black Sea – Foros and Tavriya. We are in talks with major investors to develop the shallow shelf,’ he added.” Stavitsky has been ousted from his ministry and replaced by Yury Prodan who held the energy portfolio from 2007 to 2010. Stavitsky is not the sanctions listissued by the European Union on March 5.

The most important of the four Crimean offshore blocks is Skifska. When Stavitsky announced a tender for the Skifska field, it was reported to hold 200 to 250 billion cubic metres of gas reserves, with an annual production estimate of five billion cubic metres a year. The field starts about 50 kilometres southwest of Sevastopol, and runs up to the Romanian sea border. There it adjoins the Romanian Neptun Deep block, in which ExxonMobil has a 50% working interest. In early 2012, Exxon announced that at a well called Domino-1, about 170 kilometres from the Romanian coast, it had “encountered gas”, according to Exxon’s 2012 Financial and Operating Review, issuedat the start of 2013. “Appraisal activities are progressing with additional drilling anticipated to commence in 2013.”

According to ExxonMobil and Ukrainian government announcements, between June and August of 2012, bids for Skifska were collected and assessed. LUKoil of Russia competed against a consortium of ExxonMobil, Royal Dutch Shell, OMV Pet rom of Romania, and the Ukrainian state-owned entity, Nadra Ukrainy. The Russian bid was rejected, and ExxonMobil (with a 40% operating stake) was the winner.

The ExxonMobil reports have said no more than “we are working with our co-venturers and the Ukrainian government to finalize the Production Sharing Agreement. But almost two years later, no agreement has been signed. A source close to the company says the promised payment for Skifska, a signing bonus of $325 million, won’t be paid until there is a production sharing agreement. The reason that hasn’t been signed is that Exxon and the Ukrainian government have so far been unable to agree on production, investment, tax and royalty terms. The negotiations have continued over the past twelve months, but no money has been spent drilling at sea. The only data available to Exxon so far were provided by Stavitsky and Rudko during the bidding process.

Officially, according to an Exxon spokesman, “we remain interested in the block.”

Unofficially, Exxon has halted its negotiations with the Ukrainians “due to the political situation, but is pressing ahead with several Russian projects, including in Russian waters close to the Crimean Peninsula.” This was told to New York analysts last week, and reported in Dallas on March 5. According to the report, ExxonMobil senior vice president Andy Swiger conceded the company has bigger fish to fry in the Russian Arctic than off the Crimean shore. According to Swiger, the Crimean block “has active oil seeps and that drilling would begin in 2015.” According to ExxonMobil chairman and chief executive, Rex Tillerson: “In terms of our view of country risk, geopolitical risk, other than things like sanctions, we don’t see any new challenges out of the current situation [in Russia].”

The second of the Crimean offshore blocks to have been awarded for development is next to Skifska to the east and known as Prykerchinska (Prikerchinskaya in Russian). At the time the block was put up for bidding it was estimated to hold more than 1 billion barrels of oil equivalent. The Ukrainian government award was made in April 2006, when the president was Victor Yushchenko. The winner, a junior oil explorer from Texas named Gene Van Dyke, defeated ExxonMobil, Shell, a Turkish company, and another Texan junior, the Hunt Oil Company. Van Dyke’s geography places the Prykerchinska block “in the Kerch area”, on the northeast of the peninsula.

Vanco, Van Dyke’s company at the time, claimed that Prykerchenska was “the country’s first deepwater license opportunity… The event made Vanco the first company to be awarded a Production Sharing Agreement by Ukraine for its portion of the Black Sea.” Only the production sharing agreement, which was signed in October 2007, was reversed and then subject to an arbitration proceeding in Stockholm in 2010. According to Vanco’s version, it was not until after Victor Yanukovich became president in 2011 that the government in Kiev agreed to reinstate the Prykerchenska licence and production sharing agreement. The original terms of Van Dyke’s deal provided for Vanco to pay all field development costs and then receive 80% of all production income until costs will have been recovered. From then on the split in income would be 60% for Vanco, 40% for the Ukrainian government.

It isn’t known whether the terms settled with Yanukovich in 2012 were the same. Nor have Vanco and Van Dyke responded to requests for clarification of the project at the moment. Van Dyke says on his company website that in 2010 he sold “a controlling interest in Vanco Exploration to Lukoil, retaining a substantial interest. Van Dyke Energy Company maintains that interest through PanAtlantic Energy Group.” He then appears to have restricted his direct exploration ventures to “the North Sea with a focus onshore and offshore The Netherlands.”

LUKoil’s version of the Vanco takeover refers to drilling operations in West Africa, including Ghana and Cote d’Ivoire. Ukrainian press reports suggest that the price for Vanco’s reinstatement at Prykerchenska was the sale of a large stake in Vanco Ukraine to DTEK, the energy company owned by Ukrainian oligarch, Rinat Akhmetov. DTEK hasacknowledged that it and two associated companies, also Akhmetov properties, “act as financial partners of Vanco Prykerchenska Ltd. in the project, which is in line with DTEK’s long-term development strategy and important for Ukraine’s energy security”. Last July DTEK’s chief executive, Maxim Timchenko, acknowledged that “in addition to energy generating companies and mines, DTEK owns a shareholding in Vanco Ukraine.” He didn’t say who remained as shareholders of the project, and DTEK has so far reported no expenditure on the block.

The public record also reveals that Van Dyke’s partner in the original 2006 bidding for Prykerchenska, as well as source of capital for the project, was Nathaniel Rothschild. In Van Dyke’s version, this came about because “Vanco had a representative in Kiev who is a former executive of BP and who had contacts with the London branch of the Rothschild family — JNR Eastern Investments Limited — which came on board as a 50-50 partner with Vanco.”

Rothschild was asked to clarify whether he still holds his stake in Prykerchenska; whether he thinks his stake has been adversely impacted by the changes now under way in the Crimean republic, and what he has done about that. Rothschild’s spokesman said he no longer occupies the post, and referred to Rothschild’s investment management office in Jersey. There it was agreed that the questions would be relayed to Rothschild for his reply. He didn’t.

Lukoil’s operating and financial reports mention only refinery assets in Ukraine; there is no reference to exploration of Crimean waters, and no report of the losing bid for Skifska or the Vanco link to Prykerchenska. For the time being Lukoil sources are considering the question of whether they might still be interested in these blocks. They are not answering.

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