Russia 090310 Basic Political Developments Russia, Hungary pms to discuss energy coop'n, gas issues

RusAl Gets Reprieve With Debt Repayment Accord

http://www.themoscowtimes.com/article/600/42/375167.htm

10 March 2009

United Company RusAl, an aluminum producer controlled by billionaire Oleg Deripaska, agreed to stop debt repayments for two months as it tries to renegotiate $7.4 billion of borrowings from foreign banks.

The company has the option to extend the so-called standstill accord by an extra month, RusAl said in a statement Friday.

RusAl amassed $14 billion of debt as it expanded smelters in Siberia, acquired a mine and a smelter in Africa and agreed to help finance nuclear and hydropower plants in Russia. Aluminum dropped 60 percent in London since trading at a record $3,380 per ton in July after demand slumped amid a global recession.

"Any easing of debt payments will give RusAl a second wind," said Alexander Pukhayev, an analyst with VTB Capital. "Unless bankers want to manage aluminum-making, restructuring debt is the only way."

RusAl said the agreement covered more than 30 transactions involving more than 70 banks, including syndicated and bilateral loan agreements, bank guarantees and letters of credit. It did not name the banks involved. Credit Suisse Group, BNP Paribas, Merrill Lynch, ABN Amro Holding, Citigroup, Natixis, Commerzbank, ING Group and Calyon are among RusAl's creditors, according to Bloomberg data.

Russian banks and the majority of foreign lenders support the standstill, RusAl said. During the payment freeze, RusAl will reorganize debts "to the benefit of all stakeholders," it said.

The company owes $2.8 billion to Mikhail Prokhorov, whose Onexim Group sold RusAl a 25 percent stake in Norilsk Nickel last year. RusAl may convert some of that debt into shares, RusAl chairman Viktor Vekselberg said in January.

Russia's diamonds up for grabs

http://www.atimes.com/atimes/Central_Asia/KC10Ag01.html

By John Helmer

MOSCOW - Russian diamond mines have long been the object of a tug-of-war between federal government interests in Moscow and the far eastern region of Sakha (Yakutia). Now, though not for the first time, the Moscow candidate to run Alrosa, the state-owned diamond miner, is facing a challenge for his job from the president of the region.

Sergei Vybornov, chief executive officer of Alrosa for the past two years, is mobilizing federal government and industry support in Moscow to oppose a bid by Sakha president Vyacheslav Shtirov to replace him and take over the top post at Alrosa, Russia'schallenger to De Beers for global diamond-mining dominance.

Shtirov made his bid at a meeting with Prime Minister Vladimir Putin on February 25. A spokesman for Putin told Asia Times Online that Shtirov was alone with the prime minister at the meeting. The spokesman declined to say what the two men had discussed on the subject of the Russian diamond industry and the future of Alrosa.

The stakes for Vybornov, or Shtirov, are nothing less than the Oppenheimer succession. The Oppenheimer family, for more than a century the controlling shareholder of the De Beers group, is losing control of the mining company's financial solvency and of its diamond output. Last month, De Beers was obliged to acknowledge that it had sought US$800 million in emergency, no-charge loans to pay its bills from two other shareholders - the Anglo American Corporation, the South African and South American miner; and from Botswana, the small southern African state which depends on diamond mining for its survival.

For the present, the Botswana mines, along with De Beers's South African mines, are closed. That is because De Beers cannot sell more than about $100 million of diamonds at its monthly sales (known as sights). The new figure is roughly one-seventh of last year's average monthly sales revenue. The newer De Beers mines in Canada have proved to be so far below profitability projections that De Beers has had to write $1 billion off their book value.

While De Beers continues to promote its brand-name gemstones as a durable store of value, the reality is that, for the time being at least, diamond value is anything but forever.

The diamond mines of Russia, however, continue to produce, and the state-owned mining company Alrosa is saying that no one is being laid off. Also, a scheme of state budget financing to sustain production has been devised, according to which the deep pocket of the Russian treasury will pay the state stockpile agency, called Gokhran, to buy the diamonds Alrosa is digging up but cannot sell on the open market.

Alrosa does not release production data in carats (the unit of mass for gemstones and pearls) for its mines, but it estimates that the total accounts for at least 20% of the global supply. None of its international rivals can match it for reserves, production capacity and the financial power to hold unsold diamonds in stock.

De Beers has acknowledged, according to recent remarks by spokesman Stephen Lussier, that "there's no point in digging a diamond out of the ground when you don't have a client ready to buy it". The company, which has been producing roughly 51 million carats annually, about 30% of the world's rough diamond supply, won't say by how much it is cutting back, or at what mine, except to admit the obvious - "the reduction in production will be significant".

BHP-Billiton (BHPB), which claims it produces about 3% of global diamond supply from the Ekati mine in Canada, has said its mine plan is unaffected and there are no shutdowns. However, in its report of February 9 on production in the six months to December 31, 2008, BHPB disclosed that it had mined just 1.4 million carats; that was drop of 27% from a year earlier. This looks like a market cutback by another name.

But BHPB spokesman Iltud Harri told Asia Times Online: "BHP Billiton hasn't announced any cutback in terms of our diamond production. However, actual production for the first half was 27% lower than the corresponding period last year due to lower grades following changed ore sources. In terms of the future, as Ekati - BHP Billiton's only producing asset - transitions from open-pit mining to underground mining, the mix of ore processed will change from time to time."

BHPB's sales policy in the present market, Harri said, is that "we sell at the market price and always sell what we can". He said data on the company's diamond inventory are "commercially confidential".

Rio Tinto, with an 18% share of the rough market from the Diavik (Canada), Argyle (Australia) and Murowa (Zimbabwe) mines, has told the market it is suspending diamond processing at Argyle for three months, and halting the move to underground production. Company spokesman Nick Cobban told Asia Times Online: "Rio Tinto has announced the slowing of capital projects at Argyle and Diavik in response to the global economic crisis. Production at Argyle will be reduced by a maintenance shutdown of the diamond processing plant for up to three months. The Argyle Underground Project has also been been slowed to encompass only critical development activities. At Diavik the commencement of the underground operation has been delayed until Q3, 2009.

"Rio Tinto's approach to sales is one of caution in light of market conditions and the need to be aware of the circumstances faced by our customers. Rio Tinto does not release details of inventory."

Vybornov began last year to take a leadership role among the international diamond producers; that was before the the global crisis began to strike at diamond demand, trade and credit. The outcome of the crisis, Vybornov believes, will not only push Alrosa into the commanding position as lead producer, with the largest inventory. It will also lift Alrosa's prominence as supplier to the fastest-growing markets for consuming diamonds - China, India and Southeast Asia.

Vybornov is only the second chief executive in Alrosa's 17-year history to come from a non-diamond, non-Sakha region background. He is also one of its youngest CEOs. Fluent in French, Vybornov has a career that includes diplomatic postings in Africa, a stint at Norilsk Nickel and broad experience in mining mergers and acquisitions.

The official text of Shtirov's meeting with Putin is in the form of a partial transcript, made available to Asia Times Online by the prime ministry's press office, in which Shtirov refers to the problems of his region, but mentions Alrosa only once, diamonds once.

The transcript of Shtirov's remarks refers in some detail to the region's oil, coal and gold-mining developments.

All Putin is recorded as saying is that while the market prices of oil, coal, metals and diamonds are declining, the price of gold is rising. He is reported to have repeated himself on this point, while Shtirov is reported as pointing out that gold production from the region, while a healthy 18 tonnes (579,000 ounces) last year, cannot be expected to increase without fresh and costly capital investment, which the Russian banks are reluctant to finance.

According to the transcript, Putin said: "We'll solve the problem with gold mining." Shtirov then says that he expects a solution for state-guaranteed advance funding of goldminers will be devised soon. The published transcript ends with Putin saying: "Good."

Sources familiar with what was discussed claim that Shtirov's bid to leave the presidency of Sakha and retake Alrosa was the point of the discussion with the prime minister. They interpret Putin's reported remark about goldmining as taken too crudely out of context to make sense and also to be irrelevant to the decision Shtirov was asking for.

In the past, Putin has met with the leadership of Alrosa, as well as with Shtirov, whenever diamond policy has been considered. When Putin has met with Shtirov alone, however, it has been to discuss the post of the Sakha presidency, and the leadership of Alrosa. Shtirov was Alrosa CEO for several years until, in 2001, Putin ordered him to take the regional presidency from its two-term incumbent, Mikhail Nikolaev.

Nikolaev, who had been Shtirov's godfather in the regional government and at Alrosa, was shunted into a sinecure in the federal senate while Shtirov was ordered to Yakutsk, the regional capital, with a mandate to clean up the regional administration and transfer control over Alrosa to the federal government. Critics say he did neither.

On December 28, 2004, Putin met him alone in Moscow and warned him against obstructing the federal takeover of Alrosa. At the time, the closed shareholding of the state company comprised equal 32% stakes for the governments in Moscow and in Yakutsk; additional stakes allocated to management and Sakha regional districts gave the locals de facto control. Since the mines were all in Sakha, the locals enjoyed operational control as well.

On January 6, 2006, Putin and Shtirov met again, this time in Yakutsk, and Putin repeated the warning. On October 31 that year, Shtirov was summoned to the Kremlin for another rebuke for continuing to hold out against completion of the 51% federal shareholding at Alrosa. During that year, Shtirov also threw his weight against the then-CEO of Alrosa, Alexander Nichiporuk, and played a supporting role in Vybornov's promotion to replace Nichiporuk in February 2007.

Subsequently, Putin rebuffed Shtirov's pleas to be released from the regional presidency, telling him that he should remain until the parliamentary and presidential election cycles were completed between December 2007 and March 2008. Since then, Shtirov has been begging to break out of the confines of his administrative post.

Shtirov's assistant, Yury Kravtsov, declined to answer questions from Asia Times Online relating to last week's meeting with Putin. He also refused to say if Shtirov had briefed Vybornov on what had been discussed. Vybornov's spokesman, Andrei Polyakov, said there would be no comment on Shtirov's meeting with Putin.

Sources in the Russian diamond industry say it has been no secret that Shtirov has been seeking to leave the Sakha post and take Alrosa from Vybornov. The battle that has ensued has also spilled into the press, with leaks aimed at undermining or compromising one or other of the principals. Sources close to Alrosa believe Shtirov's campaign will fail. Others believe Vybornov is likely to lose.

An investigation of Alrosa's financial performance by auditors at the Accounting Chamber, the federal government's audit agency, has been underway in parallel. Some claim it's part of the campaign to overpower Vybornov. On January 27, the chamber issued a statement disclosing that it had applied in the Mirny regional court (Sakha) for a ruling to sanction Alrosa's management for refusing to hand over documents which chamber auditors had requested. The court, the statement claims, has ruled in favor of the chamber. A source at the chamber said the audit was still underway, but he declined to identify the auditors responsible.

The one certainty, on which sources appear to agree, is a temporary one: Putin has not made up his mind on whether to keep Vybornov and Shtirov in their places, or what changes to make at Alrosa, if any. But with so much at stake in the diamond world, the temptation to do something must be overwhelming.

John Helmer has been a Moscow-based correspondent since 1989, specializing in the coverage of Russian business.

Hambro Sees Output Up
http://www.themoscowtimes.com/article/1009/42/375165.htm

Peter Hambro Mining, Russia's second-biggest gold producer, said output might increase to between 685,000 and 769,000 ounces by 2010, from 393,600 ounces last year.

Production may reach 855,000 to 1.02 million ounces by 2012, the firm said in a statement Friday.

The company expects to "benefit from increased production, which we expect to offset the negative impact of inflation and depleting grades," chairman Peter Hambro said in the statement.(Bloomberg)

KIT Finance Sues S7
http://www.themoscowtimes.com/article/1009/42/375165.htm

KIT Finance has sued S7 airlines in a Novosibirsk arbitration court for a negligible amount, Vedomosti cited a bank representative as saying on Friday.

The airline defaulted on a bond issue and did not make an offer for a 2.3 billion ruble ($64.5 million) bond buyback early February. Raiffeisenbank, which was appointed to help S7 restructure the bond issue, offered to pay back 20 percent of the debt immediately, 40 percent in summer of 2009 and 40 percent in summer of next year. The airline has amassed 10.66 billion rubles of debt, the newspaper reported.(MT)