Russia's environment hawks swoop on Hambro

By bne IntelliNews November 30, 2006

Ben Aris in Berlin -

Russia's natural resources agency swooped on Peter Hambro's highly successful gold mines on Wednesday and is threatening 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 Federal Natural Resources Agency revoke five gold mining licenses of Peter Hambro Mining Plc (PHM), a UK-based company that produces gold in Russia's Far East.

The company's stock plunged 15% on the news, but Hambro was quick to reassure investors 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. PHM was in the early days funded in part with money from the development bank the EBRD, 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, and so far Hambro's 43 other licenses havem't been questioned, although Mitvol says he wants to examine all the company's paperwork.

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

A lone crusader or concerted attack?

This latest fracas is likely to leave a bad taste in the mouth of foreign investors, as Mitvol has been responsible for a series of progressively more sensational attacks on foreign investments. The big question is whether these highly publicised attacks are sanctioned by the Kremlin or are merely 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 Russia's far east in September - the only block that has no Russian partner.

The sabre 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 back in 2003.

Mitvol first came to the public's attention when his agency investigated the privatisation of the Sosnovka-1 dacha in July 2005. This was another scandal with political connotations, as the dacha belonged to ex-prime minister Mikhail Kasyanov, who is so far the only candidate to say publicly that he will run against President Vladimir Putin's chosen successor in the 2008 presidential election. Mitvol claimed the dacha had been illegally privatised and that Alfa Group owner Mikhail Fridman facilitated the transaction.

Mitvol has also been involved in the wrangle 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 – the world's biggest fresh water lake – 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 foul of Rosprirodnadzor. At the end of last year, Porsche had to suspend construction of a showroom in Moscow because of objections from Rosprirodnadzor. And earlier this year, Samsung was forced to stop building a flat LCD TV factory for similar reasons. 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 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 some Russian firms have found themselves in the crosshairs. Russia's biggest oil firm Lukoil 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 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 popularise the idea that assaults on companies using environmental laws as a weapon are a new phenomena 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 assault on Yukos and many companies in the sector received visits from its inspectors as part of the Kremlin's crackdown on the "tax optimisation schemes" that Yukos was eventually busted for.

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 here 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 TV factory; and none of Moscow's construction companies have been designated as a Nazi organisation. 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 everyone on their toes.

Send comments to Ben Aris

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