#11
The Russia Journal
November 30-December 6, 2001
Gem of conspiracy from LUKoil’s Alekperov
An everyday tale of alleged fraud, conspiracy and unjust enrichment
By JOHN HELMER
In the town where I was born, it could be said of a man that he was so crooked, he couldn't lie straight in bed.
In a recent issue of a Moscow magazine, Russian businessman Alisher Usmanov demonstrated the many places in his apartment where he lies down, but not how. The answer to that question is given in a lengthy court filing that was lodged in a Denver, Colorado, court this week.
Usmanov is named as one of three principal defendants in a claim for $4.8 billion in damages by the Archangel Diamond Corporation (ADC). LUKoil, which is run by Usmanov's friend and business partner, Vagit Alekperov, is another of the targets, along with Arkhangelskgeoldobycha (AGD), a Russian mining company controlled by Usmanov, LUKoil and VA Investment, a firm whose initials stand for Vagit and Alisher.
Colorado lawsuit
The lawsuit, initiated by U.S. attorney Bruce Marks, is the first ever attempted in the United States by one of dozens of Western mining companies that have been targeted by Russian raiders, stripped of the assets they have paid for, and driven out of the country. It is also the first serious legal challenge to the tactics that have enriched LUKoil and a great many other Russian resource companies.
Moscow investment houses have already begun warning LUKoil shareholders and investors interested in the company that the lawsuit may put off LUKoil's planned listing on the London Stock Exchange. That in turn is viewed by the investment community, here and abroad, as pushing downward on LUKoil's share price – and the value the government can expect to get for the planned sell-off of the state's 6 percent stake in the oil company.
This is also the first warning to those who control the Russian diamond sector of their vulnerability and financial liability in the United States – the market that sustains global diamond prices and drives the international diamond market.
The story really began a decade ago, when the Yeltsin government and its regional allies were intent on creating private fortunes out of the efforts of several generations of Soviet geology to identify and develop Russia's extraordinary diamond wealth. Leonid Gurevich, who headed parliament's watchdog for the diamond industry, tried but failed to halt the secret chartering of Almazy Rossii-Sakha, the diamond miner now known as Alrosa.
That deal gave effective control of Russia's diamond mines to a clique around the president of the Republic of Sakha, Mikhail Nikolayev. Only today is the federal government trying to right the wrongs committed by then President Boris Yeltsin and Nikolayev in grabbing the diamond assets for themselves. So far they aren't any more effective than Gurevich was.
A decade ago, Gurevich told me, Moscow thought it would be a good idea to attract foreign mining capital into the diamond sector, but not because there was a genuine interest in seeing foreign companies mine Russian diamonds. The idea of opening up the Arkhangelsk region to exploration was partly Gurevich's and partly that of Boris Yatskevich at the State Geology Committee, egged on by regional government representatives. And so tenders were held for exploration and mining rights in Arkhangelsk and the neighboring region of Karelia. Many foreign mining firms competed, along with Russian partners, and many were awarded licenses.
As Gurevich said at the time, the objective was to get them to spend money in regions that needed it and on geologists who were out of work. No one in Moscow believed they would strike diamonds, let alone develop profitable mines. And none of the major internationals who started work – De Beers, Ashton, BHP, Riotinto – nor the many juniors from Israel, South Africa and elsewhere found anything worth mining. They spent their money and went home.
Except for ADC, which in 1996 managed to do something that wasn't expected – it found a deposit whose diamonds have been analyzed to be worth about $5 billion and the quality of which is equal to or better than Alrosa's mines in Yakutia. Technically, ADC's discovery turned out to be easier, quicker and cheaper to develop than Alrosa's deposits.
This meant that, if the Russian government were serious about increasing production of diamonds and expanding Russia's share of the world market, it could leverage foreign mining capital to do so in regions outside Nikolayev's little empire.
What ADC didn't realize – what no one quite understood then or since – was that there was no state policy for the diamond sector. Instead, Alrosa sought to protect its monopoly, while Nikolayev milked the company for all he could. According to one financial consultant to Alrosa, up to 15 percent of the company's revenues were diverted each year.
Fraud allegations
The cow and her milkers have never been in any mood to share the pasture with others.
Yatskevich, who rose to become the minister in charge of mining licenses before he was dismissed this year, had no interest in protecting the rights of ADC as Alrosa's competitor. Valery Rudakov, head of the state diamond stockpile, liked to say he saw no reason for Russia to use foreign miners to develop its diamond mines, although he knew that Alrosa lacked the creditworthiness to raise substantial sums to finance its new mines or halt the decline of production at its older ones.
Valery Borisoglebsky, head of the diamond trading agency Almazjuvelirexport until last year, was not only uninterested in seeing ADC develop its mine. He helped finance the raid by Russians intent on stopping ADC and taking its mining license for themselves. Like Yatskevich, Borisoglebsky has been removed from office. But his agency's backing for the attack on ADC has never been faulted, or its effect reversed.
These were the conditions in which Usmanov and Alekperov felt safe to arrange their conspiracy to enrich themselves. Usmanov took over AGD and handed LUKoil the control it sought over AGD's lucrative oil licenses and prospects. In return, LUKoil assured Usmanov he would take the diamond property, once it had been lifted from ADC. While Russian government officials up to the prime minister's level repeatedly promised to rectify the situation and protect the foreign investor's rights, the talk never penetrated the smoke in the backrooms of Moscow and Arkhangelsk. There, Usmanov and Alekperov told their allies to be patient and wait for the foreigners to lose their money and abandon their claim.
What Alekperov didn't realize is that you should never be seen to be biting the hand that feeds you. LUKoil badly needs the foreign listing and injection of foreign equity and credit on which its faltering production plans depend. ADC has been able to attack LUKoil in the United States because Alekperov's partnership with Usmanov violates U.S. law.
According to the court papers, ADC accuses LUKoil, Alekperov, Usmanov, VA Investment, AGD and other Russian companies associated with them of operating "a scheme of fraud, breach of express and implied contract, civil conspiracy, intentional interference with contract, breach of fiduciary duty and unjust enrichment."
"As a result of the fraud and breach of contract," the court papers claim that ADC and its investors have lost the value of $30 million already spent on finding and proving the diamond find, as well as $400 million in profits they expect to earn from ADC's 40 percent stake in the joint mining venture, together with another $800 million in profits they believe can be generated from diamond deposits in the territory covered by the disputed license.
Usmanov is identified in the court papers as the mastermind of the scheme by which ADC's Russian partner, AGD, was first privatized, and then turned over to companies controlled by Usmanov himself and by LUKoil. Together, according to the court papers, they have refused to honor agreements to transfer the license for the diamond mine to the joint venture with ADC. Their objective, the suit alleges, is to drive ADC out of Russia and take over the diamond project for themselves.
As evidence of fraud, the court claim cites and describes 19 communications from the Russians between August 1997 and April 2000, as well as 76 telecopy transmissions.
Jurisdiction under the Colorado court is claimed because ADC's office is based there, and because LUKoil operates a gas station and other business in the state.
Swedish connection
ADC is also in court in Stockholm, Sweden, trying to enforce the arbitration provisions of its joint venture contract with AGD. In June of this year, a three-man arbitration tribunal in Stockholm reversed its earlier ruling and told ADC it did not have jurisdiction to consider the dispute. An appeal of that ruling is currently before the Swedish Supreme Court.
A few weeks ago, LUKoil filed suit in an Arkhangelsk regional court trying to cancel the international arbitration provisions in the joint venture contract.
Valery Dikevich, spokesman for Usmanov, told me he "cannot provide any official comments on behalf of Usmanov, because I haven't seen the lawsuit." He claims Usmanov is not directly involved because VA Invest has sold its stake in the diamond project to LUKoil.
Timur Ayatkulov, an attorney with Blischenko and Partners, the Moscow law firm representing the Russians in Stockholm, claims "there are no grounds for appealing to the U.S. court, and this is just a gesture of despair by ADC. They are trying to find scapegoats."
Dmitry Dolgov, a spokesman for LUKoil, said his company will not respond until it has seen the court documents. LUKoil, he said, has yet to decide on attorneys to represent it in the Colorado court. He added that Akin Gump has been representing LUKoil in the United States on other matters and is likely to represent it in the latest case. One of the founding partners of the law firm, Robert Strauss, was a U.S. ambassador to Russia in the 1990s.
He claims to be one of the defenders of foreign-investment rights in Russia.
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