Publication: Eurasia Daily Monitor Volume: 3 Issue: 30

As the Russian government moved to take over the country’s diamond monopoly, Alrosa, the company simultaneously opted to diversify by acquiring majority stakes in several Siberian oil and gas assets. While Alrosa has been seen as a potential nucleus for a state-owned natural-resources giant, the Kremlin’s drive to take over the diamond firm appears to face some local opposition.

Alrosa, the world’s second-largest diamond producer, has acquired majority stakes in several Sakha Republic-based oil and gas assets, indicating long-term interest in the natural resources sector. On December 30, the company announced that its board, headed by Finance Minister Alexei Kudrin, had approved the acquisition of a 50.4% stake in Sakhaneftegaz, an oil and gas exploration unit held by the embattled Yukos oil firm until last fall.

Sakhaneftegaz is not a production firm, but a holding company that owns controlling stakes in oil and gas companies in Sakha (Yakutiya), including 92.6% in Yakutgazprom and 85.5% in Lenaneftegaz. Sakhatransneftegaz, which is wholly owned by the Sakha government, owns some 40% of Sakhaneftegaz and another 10% is held by minority shareholders.

Alrosa acquired the controlling stake in Sakhaneftegaz from firms close to Russia’s BIN Bank. Yukos had controlled Sakhaneftegaz via Cyprus-registered offshore firms, but it sold a 50.38% stake in Sakhaneftegaz to BIN Bank last fall. The transaction was finalized on February 6.

In January 2006, Alrosa acquired a 75% plus-one-share stake in the oil and gas exploration company Yakutskgeofizika. Sakhaneftegaz had owned a 68% stake in Yakutskgeofizika, while the Sakha government owned 32%. Alrosa said this investment allows for the diamond giant to expand its reach into “geological exploration.”

Interest in oil and gas exploration comes as an unusual trend for Almazy Rossii-Sakha, widely known under its Russian acronym, Alrosa, which mines 100% of Russia’s and about 20% of the world’s diamonds. In 2006, Alrosa expects $2.89 billion in sales and more than $500 million in net profit. In-house geological surveys predict that the company has sufficient diamond reserves to sustain current production levels for the next 50 years.

The maneuvering around Alrosa has been seen as part of the Kremlin’s drive to tighten control over the country’s key commodity sectors. The Russian government currently owns a 37% stake in Alrosa, the Yakutiya Property Ministry holds 32%, and eight districts in Yakutiya have 8%. According to official information, the company’s employees own 23%.

The federal authorities first raised the issue of Alrosa ownership back in 2001, when officials in Moscow indicated interest in upping its share in the diamond monopoly. Not surprisingly, Sakha authorities have been reluctant to allow Moscow’s control over Alrosa. Nonetheless, the reform of Alrosa ownership started in November 2005.

On February 3, 2006, Alrosa’s supervisory board formally approved raising Moscow’s stake in the company to 50% plus-one-share. Russia’s Finance Minister Kudrin announced that the move was a formality following discussions last November.

The government plans to raise its stake in Alrosa by an emission of news shares. If Sakha’s 40% stake is kept intact, the employees’ stake could be diluted by an estimated 2.5 times. However, other state-owned assets in Yakutiya may compensate for the dilution.

Official valuation of Alrosa is due before the middle of 2006. Economic Development and Trade Minister German Gref has tentatively valued Alrosa at some $6.4 billion or $30,000 per share, some five times higher than the current market price. A majority stake in Alrosa could cost the government up to $1 billion. Moscow may offer to buy out minority shareholders in Alrosa at some five times the current market price.

Speculation over a government-led plan to merge Alrosa with metals giant Norilsk Nikel resurfaced as the former head of Norilsk, Alexander Khloponin, indicated discussions on the deal. Shareholders of Alrosa and Norilsk Nikel are discussing a possible merger in which 25% of the new company would remain state-owned and the shareholders would own the other 75% (Interfax, January 14).

Norilsk is the world’s largest producer of nickel and platinum-group metals and Russia’s biggest gold producer. In 2004 its revenue was $7.03 billion, with a net profit of $1.83 billion. Norilsk Nikel is valued at some $16 billion.

However, during his annual Kremlin news conference on January 31, President Vladimir Putin suggested there were no plans for Alrosa to acquire Norilsk Nikel. “I do not know anything about Alrosa plans to acquire Norilsk Nikel,” Putin said. “It is the companies’ business.”

In the meantime, the Kremlin’s pursuit of Alrosa faces some local opposition. The assets, currently leased by Alrosa, belong to Sakha and account for about 60% of the state’s revenues. Alrosa now pays some 11 billion rubles (about $390 million) a year to Sakha and the republic is reluctant to loose its main cash cow. Yakutiya’s local parliament said they want guarantees that their share of Alrosa would not change and they want full compensation for the switch.

Moscow said it would compensate Yakutiya for revenue lost in the deal. On January 6, during his brief trip to Yakutsk, Putin pledged to pay compensation to Sakha. He also promised that a 40% stake in Alrosa would remain in Sakha ownership. Putin dismissed suggestions to transfer other Sakha assets, including the Yakutugol coal company and Sakhatelecom, to federal ownership. Nonetheless, later in January, the Sakha local assembly passed a resolution, demanding to sustain Sakha’s shares in Alrosa. On January 25, the deputies also urged Moscow to come up with formal guarantees of compensation for Alrosa (Kommersant, January 26).

Some Sakha activists launched a “Yakutiya-Alrosa” Popular Front to protest what they called attempts by the federal government to wrest the diamond giant from Sakha. Headed by Ivan Shamayev, they have picketed government buildings and collected signatures against central control over Alrosa.

As discussions continued, on February 2 Putin met Sakha head, and former Alrosa CEO, Vyacheslav Shtyrov at the Novo-Ogarevo residence outside Moscow to discuss Sakha development. Following the meeting, the Sakha regional government said in a statement that the discussion was “positive” (Regions, February 3). However, no details of negotiations on Alrosa were disclosed.