MOSCOW - Most of Russia's metals producers and exporters have accumulated multi-billion dollar cash surpluses during the current international boom in commodity prices. And if the handful of shareholders, who control this cash, want to avoid the embarrassing disclosures and potential liabilities that listing their shares on the US market may expose them to, they must find ways of preserving the offshore status of their wealth, beyond the reach of the Russian tax man.

This is the driving ambition of Norilsk Nickel shareholders; this is what brought them to paying $1.16 billion on March 29 for a 20% stake in Gold Fields, which Anglo American had been unable to sell for several years. Noone who knows Russian investors has believed for a second that the Gold Fields purchase was intended to be a passive portfolio investment, least of all Leonid Rozhetskin, the Norilsk Nickel executive, who advised Potanin and Prokhorov on making the deal. But did Rozhetskin over-reach himself, making an expensive mistake?

Vladimir Potanin and Mikhail Prokhorov control roughly 70% of Norilsk Nickel, Russia's richest mining company, through a Moscow holding Interros, which Potanin runs; and through other companies. Prokhorov is the chief executive of Norilsk Nickel. Its 2003 financial statements indicate that the company's biggest seller was 308,000 metric tons of nickel for $2.8 billion. In addition, 467,000 mt of copper fetched $828 million; 776,000 ounces of platinum, $537 million; 3.2 million oz of palladium, $640 million; and 966,000 oz of gold, $367 million. This year's results are indicating less sales of each metal, except gold, but substantially more revenue from higher metal prices. The projected revenue total for 2004 should be up 8% at $5.6 billion.

According to a recent, still classified Tax Ministry report to the Prime Ministry, in 2003 Norilsk Nickel paid federal tax at a rate of 19% on revenues of $5.2 billion. After internal management changes and clean-up measures were introduced, the tax payment rate appears to be improving. Norilsk Nickel's reported tax rate is better than most other Russian metals exporters. But it still trails behind such Russian oil companies as LUKoil, which paid 24%, and Yukos 38%.

Yukos is being dismantled, and its assets sold off to clear its court-ordered tax debts. Its principal shareholders are either in jail, facing trial on fraud and other charges; or outside Russia, on the run from similar indictments. The trigger for Yukos's troubles was not tax minimization, nor rigged privatization, but the attempt by the shareholders to cash out of the company by selling a large stake to an American oil company. They refused to listen to Kremlin opposition to this deal.

Potanin and Prokhorov have been more discreet, but they too have been attempting to cash out. However, instead of inviting foreigners to buy their Russian assets indirectly, through open share listings, strategic placements, and Eurobonds, they have pursued a strategy of buying foreign assets themselves, leveraging their Russian assets for the cash to pay for it.

When it first happened, Rozhetskin suggested that the Gold Fields 20% acquisition would be the precursor of a takeover bid for part or all of Gold Fields, and a reversal or swap of Norilsk Nickel shares into foreign-listed ones.

The terms of the six-month Citibank loan of $800 million to pay for this deal barred Norilsk Nickel from buying more Gold Fields shares. But once the loan was paid out at the end of September, that restriction was lifted.
One Moscow interpretation of the trouble between them is that, once Potanin and Prokhorov understood they were stuck with a portfolio investment they could neither expand into a control stake, nor get rid of, Prokhorov told Rozhetskin to pack his bags.

Rozhetskin had already thought of doing just that in December of 2003. But the lure of deal-making kept him on. Three months later, the Gold Fields acquisition, and the Citibank loan, were very lucrative for him. Although Rozhetskin is listed as deputy chairman of the Norilsk Nickel management board, and he heads the financial strategy division, he is not a regular employee. He is a consultant, whose compensation is deal and share-price based. From November of 2003, when the Norilsk Nickel share hit bottom of $50, Rozhetskin benefitted from its steady climb to its April 2004 peak of over $80. At the moment, following the fall in international nickel prices, Norilsk Nickel's share is down to $61, with a market cap of $13 billion.

Sources in Moscow say that last month Polyus, Norilsk Nickel's gold unit, indicated that it had no desire to build a larger stake in Gold Fields. It claimed that its priority target was Russian gold acquisitions, starting with the 32-million ounce Sukhoi Log deposit; and after that, perhaps, the acquisition of a North American gold company of top-20 in international size. This was viewed as the slow road to a foreign listing, but one that would be limited to Norilsk Nickel's gold assets, leaving the core nickel, copper and platinoid business where it is, firmly in Russia.

Russian mining sources do not believe that the "irrevocable undertaking" which Norilsk Nickel is reported by Harmony to have given, backing Harmony's move to take Gold Fields, proceeds from this Polyus strategy. They also do not believe that Potanin and Prokhorov are challenging the Kremlin by doing a secret deal with Harmony to merge Norilsk Nickel's entire assets into the expanded company, once the first-stage Gold Fields merger is achieved, and New Harmony created.

Finally, Russian gold sources do not believe that Norilsk Nickel's gold assets are valuable enough as yet -- not before the Sukhoi Log tender is awarded -- to comprise a bid that would be large enough to transform Potanin's and Prokhorov's current minority shareholding into a significantly better one.

Like it or not, Norilsk Nickel's deal with Harmony -- whatever it is -- gives President Vladimir Putin and his mining advisor, Vladimir Litvinenko, a direct opportunity to play a key role in what otherwise appears to be a South African decision. Litvinenko is believed to oppose cash-out deals, like the 20% purchase back in March. He has also said he favours the state's acquisition of a golden share in Norilsk Nickel -- without specifying how big that would be, or how it would be paid for. If Litvinenko recommends that the Kremlin tell Potanin to return to Russia the $1.16 billion he paid for Gold Fields in March, it is likely that Norilsk Nickel would already be looking for an exit from Gold Fields, while minimizing the collateral damage.

Even those who do not believe the Kremlin is doing the prompting at present, suspect that Potanin and Prokhorov do not intend to repeat their earlier mistake; and will not spend the cash required to make a second-stage takeover bid for New Harmony.

Accordingly, exit from Gold Fields, not expansion with New Harmony, is believed to be the real Russian objective at the moment. "It would be much easier [for Potanin and Prokhorov] to sell 10% in the world's no.1 goldminer," says a closely connected Russian source, "than to sell 20% of a smaller company that Anglo American couldn't get rid of."

And the price would be more favourable for Potanin and Prokhorov than if the the Gold Fields-IAMGold merger proceeds, and their stake in that creation stands at around 17%.

Officials in Moscow lobbed today's questions about the review of the original Gold Fields transaction back and forth. The Prime Ministry claimed the issue is for the Central Bank to decide, while a Bank spokesman refused to say whether the review is still under way, more than six months since it is believed to have started. Officially, the Kremlin would say nothing at all.