Russia Profile: Watchdog’s Bark Worse than Its Bite

December 7, 2006
By Ben Aris
Editor, Business New Europe

Face-off Between Rosprirodnadzor and Foreign Investors Shines Spotlight on Environmental Crusader

www.businessneweurope.eu

Russia’s natural resources agency swooped in on Peter Hambro’s highly successful gold mines in the Russian Far East last week and threatened to remove the operating licenses for failing to meet environmental standards. Is the Kremlin out to get foreign investors, using the environmental laws as a weapon?

Hambro is the latest to feel the lash of the watchdog’s deputy director, Oleg Mitvol, who is gaining some notoriety as he takes on progressively bigger companies.

The Federal Service for Natural Resources Oversight, or Rosprirodnadzor, said it will request the revocation of five gold mining licenses of Peter Hambro Mining Plc (PHM), a UK-based company operating in Yamal-Nenets, Amur and Magadan.

The company’s stock plunged 15 percent with the news, but Hambro was quick to reassure investors that his firm had done nothing wrong, saying he welcomes any and all official inspections of the mines’ operations.

“The company did not receive any prior notification whatsoever on this matter and its representatives are in discussion with the ministry and the relevant authorities seeking clarification on these comments,” Hambro said in a statement:

Mitvol accuses PHM of not meeting its obligations for the development of deposits in the Yamal region and specifically named five chrome licenses in breach of the rules.

However, the storm created by the announcement seems overblown. In its early days, PHM was funded in part with money from the European Bank for Reconstruction and Development, which insists on the highest environmental standards. Also, three of the five licenses in question do not even belong to PHM but to the company Kongor-Chrome. Hambro’s 43 other licenses haven’t been questioned so far, although Mitvol says he wants to examine all the company’s paperwork.

The two PHM licenses that are in the spotlight relate to the Novogodneye Monto (Novo) and Toupugol-Khanmeishorskoye areas in the Yamal region, which contain chrome and palladium deposits that are together worth about $9 million compared with PHM’s current market capitalization of $1.6 billion, according to Aton Capital. The company’s main money-makers in the Amur Region – the Pokrovsky, Pioneer, and Malomir gold deposits – have not been affected. Yet.

Lone Crusade or Concerted Attack?

This latest fracas is likely to leave a bad taste in the mouth of foreign investors, since Mitvol has been responsible for a series of progressively more sensational attacks on foreign ventures. The big question is whether these highly publicized attacks are sanctioned by the Kremlin or merely represent the work of an over-ambitious bureaucrat trying to make a name for himself.

Certainly Mitvol must have had the Kremlin’s approval when he threatened to sue to remove Shell’s licenses for the Sakhalin-II oil deposit in September – the only development underway in the region that has no Russian partner.

The saber-rattling was widely seen as part of the Kremlin’s campaign to retake control over Russia’s natural resources, which started with the arrest of Yukos’ owner Mikhail Khodorkovsky in 2003.

Mitvol first came to the public’s attention when his agency investigated the privatization of the Sosnovka-1 dacha in July 2005. This was another scandal with obvious political connotations, since the dacha belonged to former Prime Minister Mikhail Kasyanov, who is so far the only liberal candidate to announce publicly his intentions to run against President Vladimir Putin’s chosen successor in the 2008 presidential election. Mitvol claimed the dacha had been illegally privatized with the help of Alfa Group owner Mikhail Fridman.

Mitvol has also been involved in the wrangling over a pipeline route from the eastern Siberian oilfields to the Pacific Coast. In this case there are real environmental concerns because the proposed route runs close to Lake Baikal in an earthquake-prone zone. Moreover, much of this territory is pristine wildness and home to rare species like the Amur leopard and the Siberian tiger, not to mention the delicate biosphere on the Pacific Coast where the pipe is due to end.

Sword of Damocles

An increasing number of foreign firms are falling afoul of Rosprirodnadzor. At the end of last year, Porsche had to suspend construction of a showroom in Moscow because of the agency’s objections and Samsung was forced to stop building a flat LCD TV factory for similar reasons earlier this year. IKEA was refused permission to build a store on land it owns in northeast Moscow in June after Mitvol said the land is part of a national park. And in August he said that any construction firms that block his inspections would be classified as “extremists,” which would allow him to confiscate their property using new anti-terror laws.

More recently even some Russian firms have found themselves in the crosshairs. Lukoil, Russia’s biggest oil firm, is almost sycophantic in its efforts to please the Kremlin, yet Mitvol questioned 19 of the company’s licenses in October. And on a recent company trip to aluminum giant RusAl’s new smelter on the Mongolian border, Mitvol had company executives falling over themselves to point out the cleanliness of the new facility.

The Sakhalin case has done more than anything to popularize the idea that assaults on companies using environmental laws as a weapon represent a new phenomenon in Russia, but the threat has been present since the Kremlin began its more aggressive industrial policy in 2004.

Rosprirodnadzor was involved in the original investigation of Yukos and many companies in the sector received visits from its inspectors as part of the Kremlin’s crackdown on the “tax optimization schemes” that eventually brought down Yukos.

Alfa Bank’s Chris Weafer wrote in a note called “Who let the dogs out?” in February 2004: “Since the arrest of Mikhail Khodorkovsky three months ago, President Vladimir Putin has taken several opportunities to reassure investors that there will be no witch hunt… However, agencies like the Audit Commission and the Natural Resources Ministry have continued their investigations, often with thinly veiled threats. It seems these threats are allowed, if not encouraged, as a way of sharpening the Sword of Damocles, ready to smite anyone not adhering to the new guidelines.”

It should be noted that despite Mitvol’s rhetoric, he has not yet followed through on any of his threats. The Sakhalin licenses are still in place; Samsung finished their factory; and none of Moscow’s construction companies has been designated as a Nazi organization. Even Yukos was bankrupted on financial, not environmental, grounds. Nevertheless, the Kremlin is probably happy to see someone wielding the Sword of Damocles to keep investors on their toes.

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