The Russia Journal

MOSCOW — Vagit Alekperov is one of Russia's richest men. His fortune, calculated on the basis of the value of his shares in Lukoil, Russia's largest oil producer, is currently estimated at between $4.2 and $4.3 billion. But he is famously parsimonious with words, particularly on the subject of diamonds. It was therefore a surprise to officials of his own company, including his spokesmen, when Alekperov let slip last Thursday in St. Petersburg that he and his company are thinking of mining diamonds someone else discovered in the northwestern region of Arkhangelsk.

Referring to the Verkhotina diamond field, Alekperov was reported by the Interfax news agency as adding: "We are not talking to anybody about a joint venture [to develop the Verkhotina field]." Lukoil, he went on, was fulfilling "all the terms of licenseagreements associated with the asset and had won all court cases involving the field." Alekperov has never spoken about his personal interest in diamond-mining at Verkhotina before, and for good reason. His lawyers have advised him not to. For almost five years, Alekperov and his company have stood accused in a US court, along with Alekperov's partner, Alisher Usmanov, and companies the two of them control, of having taken the Verkhotina diamond field for themselves, unlawfully. The North American company which had first found and developed the diamond field, starting in 1996, Archangel Diamond Corporation (ADC), has formally charged the defendants in court documents with "a scheme of fraud, breach of express and implied contract, civil conspiracy, intentional interference with contract, breach of fiduciary duty, and unjust enrichment." Alekperov is identified in the documents as "Lukoil's president.who is considered to be one of Russia's most powerful economic oligarchs." He and Usmanov are identified as alleged conspirators in the scheme, whereby a company called VA Investment acquired control of ADC's Russian partner in the diamond-mining venture, Arkhangelskgeoldobycha (AGD).

They are then accused of conspiring together to prevent AGD executing its contractual obligations to ADC to form the planned joint venture to operate the diamond-mining licence at Verkhotina. According to the pleadings, "Archangel initially believed that Lukoil effectively controlled AGD through VA, particularly because the initials of Lukoil's general director, Vagit Alekperov, were 'VA'. It appears that VA was controlled by both Lukoil and Usmanov; thus the term 'VA' most likely referred to 'Vagit' Alekperov and 'A'lisher Usmanov." ADC's brief goes on to cite a reply from an ADC letter hand-delivered to Alekperov in March 1998 . The reply appeared to be Alekperov's commitment to honour the contractual undertakings between AGD and ADC, and thus open the way to the start of mining. "When entering new projects, where there is already an established circle of participants, the Company [Lukoil] adheres to the principles of continuity and execution of the previously concluded agreements and commitments and obligations." In fact, however, ADC alleged in its court claim, "Lukoil, AGD, and Usmanov were secretly preparing to breach the Agreement."At stake is a diamond deposit holding an estimated 98 million tons of kimberlite to a depth of 500 metres. They contain about 67 million recoverable carats at an average mining grade of 69 carats per 100 tons, with an original valuation of $79 per carat. At the diamond prices of five years ago, the mine output would be worth $5.3 billion. Today the value is closer to $7 billion. It is the largest diamond deposit ever found in Russia outside the fareastern Sakha region, where Alrosa, the state-controlled diamond miner, holds a virtual monopoly over mining, although that may be about to change. Verkhotina is the only prospective diamond mine found in Russia by a foreign miner.

With this much at stake, Alekperov and Usmanov attempted to substitute their own interests for ADC, judging the junior company and its Canadian government allies would be easy to push aside. ADC sued for recovery of US$30 million in exploration and development expenditures; $1.2 billion in lost profits from the blocked mine venture; and $3.6 billion in triple punitivce damages. The US state of Colorado was the chosen venue, because ADC has been headquartered in Denver; because Lukoil operates petrol stations in the state; and because state law recognizes racketeering conspiracies of the kind charged against Usmanov and his associates. A parallel arbitration proceeding was launched, and, like the US case, it is still proceeding in Stockholm, Sweden.

Alekperov's companies stalled their reply to the ADC charges, and their lawyers moved to throw the case out of the Colorado courts arguing the following defenses: "failure to state a claim upon which relief can be granted; insufficiency of process and service of process; lack of personal jurisdiction; res judicata; international comity; and the doctrine of forum non conveniens." Depositions that were scheduled for ADC's lawyers to interrogate Alekperov and Usmanov have not been held. Anticipating that Russian courts would be corruptly influenced, ADC has fought for several years to secure jurisdiction for a trial in the US court system, and to secure a Swedish high court ruling in favour of jurisdiction also.

Alekperov has never entered a personal plea to the charges against him. Instead, his lawyers have filed the statement that "Defendants generally deny the allegations in the Complaint and deny any liability to Plaintiff." When Alekperov claimed last week that Lukoil "had won all court cases involving the field", he was wrong; on appeal in the US and Sweden, higher courts have ruled to accept jurisdiction to try the charges. But in breaking his silence, Alekperov has begun to acknowledge that the liability of AGD to ADC is his personal, executive responsibility. Asked to confirm the Interfax report of what Alekperov had said, his spokesman Dmitri Dolgov checked, and said: "we are able only to confirm what was said at the briefing." Asked additionally whether Alekperov was referring to negotiations between his deputy Leonid Fedun and ADC representatives for an out of court settlement, to allow the joint venture between AGD and ADC to proceed, Dolgov said: "We are not able to comment on additional questions." Having confirmed that their CEO had not been misquoted, Lukoil officials were unwilling to say whether Alekperov had made a mistake, confusing Lukoil for AGD, since it is AGD, not the oil company, which is currently the licence-holder for Verkhotina. They were also unwilling to say that Alekperov had misspoken when referring to the joint venture that already exists between AGD and ADC to mine Verkhotina, and the fraudulent scheme Alekperov and Usmanov are accused of inventing to deprive ADC of its mining rights.

In a statement issued Tuesday, ADC said "it cannot comment upon Mr. Alekperov's statements regarding the intentions of Lukoil other than to say that the status of [ADC's] joint venture with AGD and its rights relating to the Verkhotnia licence remain before the courts. With respect to the licence itself, there is an ongoing obligation on AGD, as the licence holder, to keep the Verkhotina licence in good standing."

Usmanov -- whose current stakes in Russian steelmills and iron-ore mines are worth an estimated $2.6 billion, trailing Alekperov by almost $2 billion -- has repeatedly said over the years of litigation that he intended to develop the Verkhotina diamond mine himself, and defend it from foreigners, especially from De Beers, now the controlling shareholder of ADC. Asked to comment on Alekperov's remarks, Usmanov replied through his spokesman: "Usmanov has sold out and has nothing more to do with Arkhangelsk diamonds." Asked to clarify whether the terms of that deal included a cash payment by Lukoil, he added: "this is commercial information and of course the details of the deal will not be revealed to the press."

According to ADC, "management of the Corporation has no substantiated information regarding the status of Mr. Usmanov's relationship with AGD or any arrangement he may have with Lukoil or any of its principals, and, therefore, cannot confirm nor deny the media reports to this effect."

ADC cautioned that whatever deal Usmanov may have already struck with Alekperov, it is the latter who is now calling the shots. "The Corporation would, however, note that even if Mr. Usmanov no longer has any interest in AGD, this would appear to have had no discernible effect on AGD and Lukoil's position with respect to the ongoing dispute over the Verkhotina licence." ADC's statement also warns against betting on the cards Alekperov claims to be holding.