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Kremlin Oligarchs to Take Control in Norilsk Nickel

Russia auctioned its biggest mining company a decade ago when it was strapped for cash. It’s using the global credit crisis to regain control of OAO GMK Norilsk Nickel as economic turmoil forces U.S. and European governments to bail out their own corporations.

Without buying a single share, the government is to appoint its own man as Norilsk chairman this month, replacing the company’s largest owner, Vladimir Potanin. The move comes as the economic crisis saps oligarch funds and Kremlin bailouts help Prime Minister Vladimir Putin secure control of industries where Russia can compete globally, such as energy and arms. Norilsk is the Kremlin’s candidate in mining.

Potanin, 47, is handing over the keys after ending a feud with Oleg Deripaska, the billionaire owner of United Co. Rusal, that turned the world’s biggest nickel producer into a battleground of ambitions. The dispute “irritated” government officials, Potanin said Nov. 26 at a briefing with Deripaska, 40, in Moscow to mark the truce.

“The Kremlin wants to see global champions in the industries most important to the country and the feud lost track of that goal,” said Chris Weafer, chief strategist with Moscow- based investment bank UralSib Financial Corp.

Presiding over the only Russian metals maker among the top 200 companies in the MSCI Emerging Markets Index gives the Kremlin a close handle on the supplier of half the world’s palladium and a fifth of its nickel, key to the global auto and steel industries. It has also alienated investors.

Shares Fall

“From an investor standpoint, it’s basically a big mess,” said Kevin Dougherty, fund manager with Pharos Financial Group in Moscow, which doesn’t own Norilsk. A weak metals price outlook and the battle with Deripaska, coupled with “deteriorating corporate governance make investing in Norilsk like stepping into a casino.”

Norilsk shares are down 40 percent since Nov. 5, when the government approved a $4.5 billion loan to help refinance Rusal, Norilsk’s second-largest shareholder. The Micex Index, a measure of 30 large Russian companies, has dropped 17 percent.

The state took a 25 percent stake in Norilsk as collateral for that loan. When Norilsk shareholders meet Dec. 26 to elect a new board, the remaining intrigue is how many of the 13 seats the Kremlin will win. The bailout also means two government officials will join Norilsk as managers.

Putin, in a Dec. 4 address, said Russia’s role in Norilsk is about providing stability and isn’t much different from assistance other countries have provided to their troubled financial institutions. Without state aid Norilsk may be unable to support its production, company officials have said.

Yeltsin Era

“There’s no direct policy to de-privatize” Norilsk, said Dmitry Peskov, a spokesman for Putin, who opposed the state’s auctions of the country’s major industries and spent the last eight years reasserting government control. “How this situation will play out, only time will tell,” Peskov said.

Russia is “willing” to buy stakes in companies where owners request aid with the aim of later selling out on fair terms, Putin said on Dec. 4. “This is not a way to nationalize the economy,” he said.

The state sold Norilsk to Potanin’s bank in 1997. Putin’s predecessor as Russian president, Boris Yeltsin, auctioned stakes in the country’s biggest enterprises to help his cash-strapped administration. As then deputy prime minister, Potanin became a Norilsk board director in 1996 and helped organize the auctions.

Reasserting state control at Norilsk revives the potential for it to become a platform for mergers in Russia’s metals industry, with the aim of creating a rival to Melbourne-based BHP Billiton Ltd., the world’s largest miner. It would also assert state influence in an industry that lags behind only oil and gas in terms of export volumes and budget contributions.

Cuba, Venezuela

A state-run Norilsk may help Russia’s government expand ties with anti-U.S. states such as Venezuela and Cuba, which has one of the biggest nickel resources. Norilsk is ready to develop a nickel mine in Cuba should Russia lend the Caribbean island $1.5 billion for the project, Chief Executive Officer Vladimir Strzhalkovsky, a former officer in the KGB Soviet-era security agency, said Nov. 20.

Norilsk could operate the Cuban mine without taking an equity stake in the project, the CEO said. The company currently only manages mines it controls.

Stock Downgraded

“If Norilsk has aspirations of being in the same league as the likes of BHP Billiton, it should start behaving as such and show the necessary respect to capital markets,” UralSib metals analyst Michael Kavanagh said in a report today. UralSib cut the company’s 12-month price target to $58 from $285 per share on a lack of strategy, poor disclosure and weak metal demand. Norilsk traded in Moscow today at $64.

Uralkali, a potash miner controlled by billionaire Dmitry Rybolovlev, might also be folded into a state mining giant based on Norilsk after Putin’s deputy, Igor Sechin, reopened a probe into a 2006 flood at the company’s mine. Potanin said Aug. 8 that the arrival of Strzhalkovsky at Norilsk was likely to spur mergers with iron ore, potash, coal and copper assets.

Deripaska had opposed Norilsk combinations with companies other than Rusal. After Rusal acquired its Norilsk stake in April, the nickel company’s merger talks with billionaire Alisher Usmanov’s iron ore producer OAO Metalloinvest stopped.

‘Invisible Hand’

At the “truce” briefing with Potanin, Deripaska only shook his head when asked if he would block a Norilsk merger with Metalloinvest.

“The invisible hand of the state could have seriously contributed to such an idyllic agreement,” Mikhail Stiskin, an analyst at Troika Dialog, Russia’s oldest investment bank, said of the settlement between the billionaires. “The state is playing first violin” and will support Norilsk mergers, he said.

Russia’s upper hand, with $437 billion in international reserves built up during Putin’s presidency from high commodity prices, is reinforced by the global market turmoil. Deripaska, the country’s richest man according to Forbes magazine, ceded stakes in Canadian auto-parts maker Magna International Inc. and German builder Hochtief AG to banks in October after shares used as collateral to finance the acquisitions lost value.

When Rusal’s 25 percent stake in Norilsk, pledged against a $4.5 billion loan from foreign lenders, faced the same risk in October, Russia stepped in. Norilsk CEO Strzhalkovsky, 54, formerly the country’s tourism chief with no experience in the metals industry, said that he asked the state to buy Rusal’s shares. The Kremlin chose to refinance Rusal’s loan for one year and took Norilsk shares as collateral.

Loan Conditions

Among the loan conditions, the state has the right to at least one Norilsk board seat. One of two government nominees is Sergei Chemezov, who like Putin and Strzhalkovsky is a former KGB officer. Chemezov is now CEO of state holding company Russian Technologies Corp., which controls OAO VSMPO-Avisma, the world’s biggest producer of titanium, and has 49 percent of Erdenet, Mongolia’s largest copper miner.

Chemezov said Dec. 12 that he has already asked Potanin and Deripaska to consider a combination with the copper assets of Russian Technologies, which are jointly held with Metalloinvest. Meanwhile, Usmanov of Metalloinvest has acquired about 5 percent of Norilsk as a prelude to consolidation.

“Norilsk Nickel is creeping toward becoming a state-run entity, in practice if not formally so,” Stratfor, a U.S.-based risk advisory group, wrote clients last month.


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Market downgrades Evraz on cashflow concerns

Evraz shares fall 6.4 percent in London as it announces shareholders can receive part of div in new shares.

Shares in Evraz Group fell on Wednesday after the company said stockholders could receive part of their interim dividend in discounted shares to enable the Russian steel maker to preserve cash.

At 1453 GMT the London-listed GDRs were off 6.4 percent at $10.2 having earlier fallen as much as 18.9 percent as analysts voiced concerns about Evraz’s cash flow.

The new shares will be issued at $22.50 each, or $7.50 per GDR, about 31.2 percent below the closing prices on Dec. 16.

Michael Kavanagh, a metals and mining analyst with Uralsib, calculated that if all investors accept the shares the total number of GDRs could increase by 10 percent.

“On one hand, the part shares offer, saving $276 million in cash could imply that cash is in short supply and raise some concerns,” Kavanagh said.

“On the other, the fact that the company is paying a $750 million cash dividend in this environment is a very positive sign regarding the health of the balance sheet and cash position of the company.”

The original first half dividend, announced on Aug. 26, proposed a cash payout of $8.25 per share or $2.25 per GDR.

Under the new proposal, shareholders will still receive $6.00 per share or $2.00 per GDR in cash by Dec. 18 with the remaining $2.25 per share or $0.75 per global depository receipt (GDR) available in the new shares.

“The board believes that the proposal offers shareholders an attractive partial scrip dividend alternative,” Evraz said in a statement on Wednesday.

“Any resultant cash saving will further strengthen the company’s financial position in the current challenging economic and market environment.”

All shareholders of record as of Sept. 18 are eligible for the dividend. They will be asked to vote on the proposal at a Jan. 30, 2009 extraordinary general meeting (EGM).

The company did not say when shareholders will receive the remaining portion of the payout.

Evraz built up considerable debt in recent years through acquisitions in Africa, Europe and North America. Its $2.3 billion purchase of Canadian steel pipe maker IPSCO earlier this year has saddled the company with a sizeable short term debt load.

The group in November obtained $1.8 billion in credits from state-owned VEB to refinance debt.

VEB, or Vnesheconombank, has been entrusted by the Kremlin to distribute a $50 billion rescue package to help Russian companies refinance a total of $120 billion in Western loans by the end of 2009. (Reporting by Alfred Kueppers; Editing by David Cowell and Elaine Hardcastle)


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Russian nationalizations pick up steam amid economic crisis: for better for worse

Nickel and potash mining are the latest key industries targeted by the nationalization efforts of the Russian government. Moscow has recently nationalized some private holdings that have put extreme levels of concentrated wealth in the hands of the country’s new oligarchs.

In the immediate aftermath of the socialist Soviet Union’s overthrow in 1991, there was a frenzy of unbridled privatization of all the former Soviet republics’ tremendous natural wealth, especially in the Russian republic.

Under socialism, the huge oil, natural gas, mineral, forest and other natural resources had been owned and shared in common by the people. But in capitalist Russia, modern-day robber barons have amassed huge fortunes while poverty has risen to record levels.

Much of the motivation for state intervention is the collapsing economy that has severely affected Russian companies. More than $74 billion worth of foreign investments has left the country since August, and the Russian stock market has lost more than 60 percent of its value since May.

The international capitalist financial collapse and plummeting prices for oil and other raw materials exports have pushed Moscow to act more forcefully to recapture some of the wealth stolen by the oligarchs. The government and state cannot function without sufficient income and resources.

From 2003 to 2006, the government took action against Yukos Oil, Russia’s largest private oil company, and its principal billionaire owner, Mikhail Khodorkovsky, because of massive tax evasion and siphoning of profits. Rosneft, Russia’s state-owned oil company, took over the assets. Last month, the government intervened in the nickel industry. Russia is the world’s largest producer of this strategic metal.

The government’s possible future takeovers are an attempt to keep vital industries operating by reclaiming them from the obscenely wealthy billionaires who have stolen resources that were once used for the benefit of all. So far, Dmitri Rybolovlev, the mining oligarch who owns almost all of Russia’s potash industry, has not resisted steps by the Kremlin to sanction and perhaps reclaim the industry.

In an online forum accompanying the New York Times article of Nov. 11, many Russians supported the nationalization, recognizing that “Mineral resources are a national wealth, and as such should belong to the state,” and that “[o]ligarchy sprang up thanks to the ‘liberal’ reforms imposed on us by Washington.”

One participant observed: “The financial crisis is an excellent way to review the results of the criminal privatization. … I can only praise it. And these measures will be very popular among people.”


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Rouble devaluation pressures continue

Russia’s Central bank has once again widened Rouble trading band this week. It’s the fifth time in the past month that the bank has allowed the local currency to devaluate - but not the last, say experts. Some investment firms are expecting a one-time devaluation of about 20% in January, following the New Year holidays.

Russians have started buying jewelry and hoarding foreign currency as the Rouble continues to lose value, falling 16 % against the dollar since August.

The Central Bank continues to weaken its defense of the Rouble, while the government assures it won’t allow sharp devaluation. Prime Minister Putin is adamant there will be no sharp Rouble fluctuations.

“With low prices for oil and metals - our traditional export products - we may face a deficit in our trade balance. This in turn has an impact on our national currency. But we will do everything to prevent sharp Rouble fluctuations. We have all the necessary financial reserves.”

The average forecast for the Rouble - Dollar rate at the beginning of 2009 is around 30 Roubles per Dollar. But some experts see signs that a larger devaluation may be on the way.

Investment firm Troika Dialog thinks the New Year holidays are a perfect time for a sharp drop of up to 20 percent in the Rouble’s value as demand for the currency rises.Chris Weafer of Uralsib agrees but says the government hasn’t taken a final decision so far.

“Despite Prime Minister Putin’s comments and statements that there would be no sharp moves in the Rouble, the fact is that the price of oil continues to go lower. Its increasing the cost of defending the Rouble, ie the reserves are going down at quite a big pace, and so the pressure is building. Despite the Prime Minister’s assurances they maybe in a situation where they’ll have no choice but to allow the Rouble to devalue by a higher level.”

Meanwhile Russian companies that borrowed massively in U.S. Dollars last year, have already started to lose money due to exchange rate movements. X5 retail group posted third quarter losses of $15 million, while Russian mobile operators, MTS and Vimpelcon lost $200 and $300 million dollars respectively - much of that blamed on exchange rate costs.

Experts say only state-owned firms are relatively safe now. The government has postponed sharp devaluation to allow them to convert their dollar debts into Roubles. Now it seems that there is not much holding the government back from letting the Rouble fall.


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Russia still plans to join WTO

Despite the difficulties facing Russia’s economy amid the global credit crunch, the country has not abandoned its plans to join the World Trade Organization (WTO), the foreign minister said on Wednesday.

“Despite continuing doubts in some circles, joining the WTO without unnecessary delays is still a priority of Russian foreign policy. Of course, it may be true that during a crisis period it is better to be outside the WTO system, but we take a long-term view and are aware of our international responsibilities,” Sergei Lavrov told a meeting of European businessmen.

He said Russia views WTO membership as “a necessary condition for improving the commodity structure of our foreign trade and GDP, and therefore a means for Russia of taking its rightful place in the international labor setup, in the future economy.”

However, the minister stressed that Russia is not ready to join the WTO “regardless of the price” involved.

Moscow had expected to join the 153-member global trade body by the end of next year, but the accession process has dragged on due to a number of political and economic factors.

Russia is the only major world economy still outside the WTO. The agreement of all 153 WTO members is necessary for a state to join the global trade body. The majority of analysts believe that Russia will not join the WTO earlier than 2010.


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Russia Pharmaceuticals and Healthcare in Q4 2008

Despite a bruising a few months for the Russian economy as a whole, BMI broadly maintains an optimistic growth outlook for the Russian pharmaceutical market for the period 2008 to 2012. We have lowered our US dollar growth rate estimates based on updated exchange-rate forecasts. With the precipitous fall in oil and gas prices in recent months and foreign-investment outflows, both the ruble short- and longer-term position has weakened. Nonetheless, we see strong average annual US dollar growth of 10.6% for the period and 10.3% for the ruble. Market growth is forecast at 22.0% for 2008, in line with 2007 levels, with the market cooling from 2009.

We expect 2012 market value to reach US$23.6bn. It would be going too far to describe the pharmaceutical industry as immune to the current instability, in particular the lack of access to capital for expansion and worries about a weakening currency are substantial worries. Anecdotal evidence suggests that the damage to date from the broader crisis has been limited. Domestic producer Valenta (formerly Otechestvennye Lekarstva) has reportedly had problems refinancing existing debt. It has halted investment projects and has moved to sell its Krasfarma production subsidiary in Krasnodar Region.

Leading wholesaler Protek has announced and then shelved its latest initial public offering (IPO) plans in the face of tumbling stock markets. Unlike the banking or retail sectors, however, there have been no high-profile company defaults . yet. Arguably, the local sector is mired in a longer-term crisis.

Local research group Pharmexpert estimates that around 50% of the country.s 525 registered producers are unprofitable.

In July, Prime Minister Vladimir Putin described the sector as only capable of producing “last century’s drugs”. Hence the industry is closely watching the development of the Conception for the Development of the Russian Pharmaceutical Industry to 2020, a draft of which was submitted to the government in August 2008. Unsurprisingly the plan calls for the development of both modern generics and innovative drugs by the domestic industry in order to lead five-fold growth in the sector as whole by 2020. Like Brazil, Russia sees import substitution of vaccines “a traditional strength of the Soviet-era industry” and insulin as a vital first step. With the exception of a long-rumoured plant project by Nycomed, the bulk of new investments in recent months have come from domestic players, including new players intent on raising capital from domestic and foreign markets.

One example is Gerofarm, which is building a contract-research focused factory in Moscow Region using both Danish and UK expertise for a EUR15mn. Meanwhile, some attractive production assets are reportedly in play. A powerful shareholder in local market leader Pharmstandart is reportedly pursuing Verofarm, controlled by Pharmacy Chain 36.6 and a modern player in oncology generics.

The belated collapse of a 2007 deal by Gedeon Richter for Polpharma and its Russian subsidiary Akrikhin could see bids for the latter firm. The prices paid will be indicative, a study by PriceWaterhouseCoopers suggests that asset prices for mid-sized Russian companies may be off by between 10 and 20% from their peak.


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The Real Estate Crunch Comes to Russia

By Jason Bush

The global economic crisis has hit Russia with full force, and property prices, especially in Moscow, are tumbling.

Shares of Russian companies have lost nearly three-quarters of their value in six months. The price of government bonds is down by almost a quarter. The ruble is sliding, losing 20% of its value against the U.S. dollar since August. The price of oil, Russia’s chief export, has fallen by 70% since the summer. But for a long time, there was one asset in Russia—real estate—that somehow seemed capable of defying gravity.

Even as property market bubbles burst all over the world, the value of Russian real estate just seemed to go up and up. According to Moscow real estate agency IRN, residential property prices in Moscow did not peak until mid-October, rising by some 50% from a year earlier. With apartments in central Moscow selling for $6,000 per square meter ($557 a square foot), the city regularly tops lists of the world’s most expensive cities. Elsewhere in Russia, too, property values have climbed dramatically over recent years.

It couldn’t last, and it hasn’t. Now that the global economic crisis has hit Russia with full force, real estate prices are finally tumbling. And if recent trends are any guide, the mother of all crashes may be in the offing. “The property market in Russia is on the brink of collapse,” says Vasily Koltashov, head of economic research at the Institute for Globalization & Social Movements, a Moscow think tank. “Property prices are very severely inflated, and demand is obviously slumping.”

Down 10% in Two Months
According to the widely cited IRN Index, the value of residential property in Moscow fell by 2% in the first week of December alone. That compares with a decline of 2.3% for the whole of November, and just 0.9% in October. Oleg Repchenko, IRN’s head of research, says that real estate prices in Russia have fallen on average by around 10% in the last two months. He estimates they’ll fall by a further 30% before next summer.

Others go further. Peter Aven, president of Alfa Bank, one of Russia’s leading commercial banks, has predicted that Moscow property values will fall “several times over.” In an October conference presentation, Aven pointed out that the value of Moscow property prices is some five times the European average. When it comes to choice property in the center of Moscow, the cost for a 100 square meter apartment is 155 times the income of the typical Russian. That compares with a multiple of just 5.9 in Germany.

Little wonder that Moscow property prices are now sinking rapidly. Indeed, some analysts say that the real market situation is way worse than the headline figures suggest. According to Inkom-Nedvizhimost, a Moscow real estate consultancy, the city’s major development companies sold an average of five new apartments in the city in November. That compares with around 40 to 50 apartments per month in the summer, and 90 to 100 in the first half of the year. The collapse in demand means that many developers are already offering deep discounts on new apartments, typically ranging between 25% and 40%.

Nor is it just residential property, the most overheated segment of the Russian market, that is now crashing. Commercial property also has taken a dramatic hit. Irina Florova, an analyst at real estate consultancy CB Richard Ellis (CBG) in Moscow, says that average office rents have fallen by 20% since October and are expected to decline by 25% more by early next year. The take-up of new office space has fallen by 50% since a year ago, while the volume of vacant office space has doubled. “Now it’s a tenant’s market,” says Florova. “Landlords were used to increasing prices, and now they are faced with a completely different situation. For them it was a bad surprise, which happened in the space of two or three weeks.”

No Mortgage Overhang
The sudden slump is bad news not just for landlords, but also for the wider Russian economy. True, Russia can take some comfort from the fact that the mortgage market, a major component of the economic crisis in the West, is still in its infancy. The value of outstanding mortgage loans represents just 3% of Russia’s gross domestic product, compared with shares of between 40% and 60% more typical in the West.

Nevertheless, mortgage lending has grown rapidly over recent years, doubling each year between 2002 and 2007. A collapse in apartment prices will spell misery for the most economically active part of the Russian population, young professionals who have recently taken out loans. Even for the majority of Russians who don’t have mortgages, a dramatic fall in apartment prices is likely to have a major psychological impact, affecting their confidence and consumption.

For one thing, it will wipe out the largest share of many households’ wealth. Unlike Westerners, few Russians invest in shares, pension plans, or mutual funds. Only a third have bank accounts. In contrast, most Russian families own at least one apartment, with many also owning country dachas. And over recent years, they have seen the value of this property rise dramatically—leading many to assume that the property market was a one-way bet.

As recently as October, a poll by Russia’s National Financial Research Agency showed that 51% of Russians regarded real estate as the safest form of investment. The next most popular form of savings, an account at the state savings bank Sberbank (SBER.RTS), was trusted by just 23% of respondents. Only a tiny fraction of the population felt confident about other savings vehicles, such as mutual funds and pension plans.

Developers Facing Ruin
That’s why, with property values now heading the same way as the Russian stock market, Russians will be in for a huge shock. The dismay will be greatest for the growing number of Russians who have acquired real estate not just as a place to live, but as an investment. “The real estate market in Russia was driven by investments by private individuals,” says Natalia Orlova, chief economist at Alfa Bank, who estimates that around 20% to 25% of Russians’ annual savings were put into real estate.

Spare a thought, too, for Russia’s construction and development companies, many of which now face ruin. Over recent years they have collectively plowed tens of billions of dollars into new construction projects, typically financed with the help of short-term loans. But even before property prices began tumbling, the sector was in a crisis brought on by a complete halt in financing. In comments to the RIA-Novosti news agency in November, Vladimir Ponomarev, vice-president of the Association of Russian Builders, described the situation facing the industry as “practically a catastrophe.”

As a result of the financial crunch, investment in the construction sector has already ground to a virtual standstill, with knock-on effects for other sectors of the Russian economy. “Of course, changes on the real estate market can significantly affect the rate of investment in the economy,” says Evgeny Nadorshin, chief economist at Trust Bank in Moscow.

The real estate crunch also will affect the wider economy through its impact on the banking sector. When it comes to the banks’ balance sheets, the fledgling mortgage market represents just the tip of iceberg. Alfa Bank’s Orlova estimates that around 14% of corporate loans are to construction companies, while an additional 30% of loans use some form of real estate as collateral. That means that the volume of bad loans—already estimated at around 10% of banks’ portfolios—is now set to rise sharply.

The combination of all these factors means that the wider economic impact of slumping real estate prices should not be underestimated. Little wonder economic forecasts for Russia are growing gloomier by the day, with signs that economic growth has already ground to a halt. “This is not just about 2009, but also about 2010 and 2011,” says Orlova. “It’s quite possible that GDP growth will stay around zero for this period.”

Bush is BusinessWeek’s Moscow bureau chief .


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SEC Charges Moscow-Based Broker Dealer For Violating Registration Requirements

The Securities and Exchange Commission today charged a Moscow-based unregistered broker-dealer for registration and reporting violations, alleging that it solicited institutional investors in the U.S. to purchase and sell small cap stocks of Russian companies without registering as a broker-dealer with the SEC or meeting the requirements for an exemption.

“Today’s action demonstrates that the Commission will closely scrutinize the activities of foreign broker-dealers soliciting investors in our domestic markets,” said Scott Friestad, Deputy Director of the SEC’s Division of Enforcement. “The broker-dealer registration and reporting requirements ensure that foreign entities soliciting business in the United States provide the levels of disclosure and transparency required by U.S. law to protect American investors.”

In addition to instituting administrative proceedings against OOO CentreInvest Securities (CI-Moscow), the SEC charged its registered U.S. affiliate, CentreInvest, Inc. (CI-New York) and four individuals: CI-Moscow’s former executive director Dan Rapoport, CI-New York’s former managing director, FINOP and CFO Svyatoslav Yenin, CI-New York’s former head of sales Vladimir Chekholko, and CI-New York’s chief compliance officer William Herlyn.

“It is incumbent upon foreign broker-dealers and domestic broker-dealers working with them to familiarize themselves with, and take all necessary steps to comply with, the appropriate registration requirements required by U.S. law before soliciting business from American investors,” said James Clarkson, Acting Regional Director of the New York Regional Office. “Today’s action is a significant step in ensuring that these provisions are properly followed.”

In the administrative proceeding, the SEC’s Division of Enforcement alleges that from about 2003 through November 2007, CI-Moscow and Rapoport solicited investors in the U.S. both directly, and indirectly, through CI-New York, Yenin, Chekholko and Herlyn. CI-Moscow and Rapoport were not registered as a broker-dealer as required by law, nor did they meet the requirements for the exemption from registration for foreign broker-dealers.

The SEC’s Division of Enforcement also alleges that Yenin and Herlyn were responsible for the filing of amendments to CI-New York’s broker-dealer disclosure form that failed to disclose CI-Moscow and Rapoport’s control of CI-New York, or that the license of the CI-New York’s parent company had been revoked by the Cyprus SEC. The Division further alleges that CI-New York either failed to maintain business-related emails, or failed to produce them at the request of the Commission’s staff as required by law, and that Yenin was responsible for CI-New York’s failure to maintain these business-related e-mails.

The SEC’s Division of Enforcement is seeking cease-and-desist orders, orders directing respondents to provide accountings, pay disgorgement and financial penalties, and orders imposing any remedial action appropriate in the public interest, including, but not limited to, bars from association with any broker or dealer, or revocation of registration. A hearing will be held before an Administrative Law Judge to determine whether the allegations of the Enforcement Division in the SEC’s order are true, and if so, what relief is appropriate. The Commission ordered the Administrative Law Judge to issue a decision not later than 300 days from the date of service of the order.


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Russian Mining Sector in Q4 2008

The global credit crunch is having a significant impact on the Russian mining industry, particularly among the oligarchs who control many Russian miners. In late October 2008, Russia’s richest man, Oleg Deripaska, was the recipient of a US$4.5bn loan from state-owned Vnesheconombank, which enabled his company United Company RUSAL (UC RUSAL) to maintain its 25% stake in Norilsk Nickel. The money will be used to repay the syndicated loan from foreign lenders used by Deripaska to buy the Norilsk stake in April 2008, it was reported on Reuters.

The motivation behind the loan was arguably political, with Russia keen to maintain control of strategic mining assets. Deripaska has already lost control of other non-mining assets around the world as a result of the credit crunch and Russia would not have wanted to see the 25% stake in Norilsk fall into Western hands. Russia has already stated that is ready to lend up to US$50bn to any domestic company having trouble refinancing existing loans with the West.

Where this leaves the recent trend towards consolidation among Russian mining players remains unclear.

Earlier in 2008, there was a spate of M&A activity among Russian miners. This was tacitly encouraged by the Kremlin as it would strengthen the position of Russian companies on world markets. An asset swap deal in late May 2008 between Alisher Usmanov and Vladimir Potanin allowed Usmanov to acquire 10% of Russian palladium and nickel giant MMC Norilsk Nickel, while Vladimir Potanin gained a 25% stake plus one share of Russian iron ore and steel producer Metalloinvest. In April, Mikhail Prokhorov’s ONEXIM Group bought a 14% stake in aluminium local UC RUSAL, as part of a deal in which UC RUSAL, controlled by Oleg Deripaska, acquired 25% plus one share of Norilsk Nickel. A three-way merger of Norilsk Nickel, Metalloinvest and UC RUSAL had been seen as a possibility earlier in 2008, although short-term economic difficulties may now preclude this.

Looking at foreign players active in the Russian mining sector, Canadian miner High River Gold’s future was in severe jeopardy as this report went to press. The company has said that its Berezitovy Rudnik subsidiary does not currently have enough funding to make a scheduled US$15.2mn payment to Nomos Bank due on November 21.

In terms of both area as well as the sheer variety of endowments, Russia figures as a major mining nation of the world. It is home to an array of minerals and metals including nickel, platinum, bauxite, cobalt, coal and tin. Siberia hosts the bulk of Russia’s nickel, platinum and diamond deposits, and despite the harsh geography and weather conditions, it remains an attractive destination for mining players from around the world. Russia-based Norilsk Nickel, ALROSA, UC RUSAL and Polyus Gold are some of the major local mining players that have established a strong presence.

However, in order to leverage these opportunities fully, Russia needs to improve its stance on certain parameters. Topping the list are bureaucratic delays and instances of corruption that substantially escalate the costs of doing business. On the mining front, safety issues and environmental standards continue to challenge the industry, in spite of the government’s efforts to review mines for compliance with technological documentation, estimated project capacity and safety regulations.

The Russian state holds rights over all mineral endowments. Historically, mineral resources have been auctioned to mining companies for development. However, a new methodology is on the anvil, whereby the decision to grant licences will be based on the applicant’s processing capacity. As mentioned above, the government also plans to stiffen regulations concerning foreign participation in the mining industry.

Industry forecast owing to its large metal and mineral base, Russia can continue to derive benefits from the boom in the global metal prices. Diamond mining augers a healthy outlook for the Russian mining industry.

The domestic mining industry is forecast to register an average growth of 7.7% a year over 2008-2012, reaching a total value of US$216.1bn.


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Russian Economy is Shrinking Fast

Today, Russia’s State Statistics Service revealed the GDP growth figures for the third quarter. And – lo and behold – they are “surprisingly bad”, “below market expectations”, etc. (There are many reports in The Moscow Times, Bloomberg and Reuters).

You might think that by now economists would no longer be surprised by the stream of dire economic news. For anyone who has been closely following what has been happening in Russia’s economy over recent weeks, it’s increasingly obvious that it has essentially stepped off a cliff. As Danske Bank economist Lars T. Rasmussen writes in a research note: “The question is whether there will be any economic growth at all in Russia next year.”

“But surely 6.2% growth in the third quarter isn’t so bad?” I hear you say. Think again. That figure is the year-on-year change, not the quarterly change. In other words, it includes the rapid growth that took place in the first half of this year and the fourth quarter of 2007, when Russia’s GDP was still growing by 8%. The month-on-month trends show that output is already contracting. Russia’s GDP fell by 0.4% in October, according to government officials.

Now, the signs are that production in Russia is not simply stagnating: It is in fact plummeting like a stone. Industrial output, generally an early indicator of GDP trends, has been falling over recent months. And the output decline appears to have accelerated dramatically in November and December. According to the latest government figures, cited in the Moscow Times article, manufacturing production will have plummeted by an additional 10% by the end of the year.

The latest business surveys also confirm the dramatic speed and scale of the economic deterioration. These show that the situation facing Russia’s service industries (not recorded in the industrial output figures), is even more dire than in manufacturing.

The gloomy official figures only confirm what has been apparent from anecdotal evidence for weeks. In sector after sector, Russian companies are reporting sharply declining orders and massive lay-offs. Construction, banking, metallurgy and the automotive industry are all in deep and obvious crisis. Russian railways has reported a 20% decline in freight volumes, reflecting the nationwide slump in industrial production. As for the oil industry: that was reporting declining output and insufficient funds months ago, long before the financial crisis escalated and the oil price plunged.

The risk of a GDP contraction has already been highlighted by longtime Russia watcher Anders Aslund, perhaps the first economist to warn of the current Russian economic slump. In October Aslund suggested that Russia’s GDP could fall by 5% next year.

Now those views, which once appeared heretical and extreme, are becoming mainstream. Barclays Capital now predicts “acute declines in output in the first months of the year”.

Nouriel Roubini, a US economist who became famous for accurately predicting the global credit crunch, is also weighing in on Russia’s economy. He writes that the current global outlook “signals a sharp recession in advanced economies, and a very likely recession in Russia too”.

Meanwhile Bloomberg cites Alexander Lebedev, one of Russia’s top businessmen, saying that the economy would “definitely” go into recession next year, and that it is “quite possible” that it will contract by as much as 10%.

Even the dreaded “D” word is now beginning to be heard. In comments cited in The Moscow Times, leading Russian economist Evgeny Gavrilenkov warns that if the latest government figures are accurate, they mean that Russia is now heading into a “severe depression”.


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