Amber shadow on Ural emeralds

09.03.2011 — Analysis

In March, the Russian Federal Agency on Mineral Resources is going to announce who will be entrusted with development of the Malyshevo emerald deposit (the Sverdlovsk Region). The tender participants are two companies - the Malyshevo Mining Company, LLC, and the Kaliningrad Amber Factory, a state-owned unitary enterprise, which recently went through the bankruptcy process. The regional and local authorities are lobbying the transfer of the one-of-a-kind mine to the "outsiders". They believe that the Kaliningrad company will be able to get production on the right track at the emerald deposit that has been idle since 1995. However, as the "RusBusinessNews" columnist has found it out, these hopes are ungrounded: the amber factory is technologically obsolete and will have to focus on upgrading of its production within the next few years.

The Malyshevo emerald deposit is considered the largest deposit in Europe (the ore on-balance reserves total 11.5 million tons); emeralds of the deposit are deemed to be the best in the world. That is why the privatization announced in 1993 triggered a true fight for the mine. The mining complex, which used to belong to the Ministry for Atomic Energy, was split into two parts: the beneficiation factory was left with the government, and the mine was reorganized into the Ural Emerald Mines, OJSC. The owners of the mine organized emerald production, but were not able to sell emeralds because the company did not have a special license. As a result, the joint-stock company became bankrupt and in 1995 the production of precious stones stopped.

In 1999 the right to use the deposit passed to Zelen Kamen, CJSC, a Russian-Irish joint venture, where Cabal development Ltd, a Virginian off-shore company, acted as a partner of the Ural Emerald Mines. In 2003, its affiliated company - Norfin LLC - purchased shares of the Ural Emerald Mines and became the sole owner of Zelen Kamen. In 2004, Cabal attracted the TZAR Emerald Corporation, a Canadian management company, as an investor, which is owned by private persons (47.5%), as well as by JP Morgan (12%), ODL Nominees (15%) and Firebird Group (10%), etc. The existence of numerous off-shore funds-shareholders associated with Zelen Kamen suggests that TZAR Emerald was not exactly a Canadian company.

In 2005, the Sverdlovsk regional government started criticizing the investor's doings: the officials asserted that Zelen Kamen embarked on mining operations at the old stock piles and beryl selling to foreign companies instead of operations at the mine. They were also displeased with the amount of investment: instead of 3.9 million US dollars, the management company invested only 621 thousand US dollars in 2004. In 2007 the officials warned that they were going to revoke the license from Zelen Kamen, and in early 2008 they put the warning into effect. Yaroslav Kichalo, head of the Solid Mineral Licensing Department at the Federal Agency on Mineral Resources, explained that the license was revoked as Zelen Kamen failed to fulfill the license conditions or, putting it in plain language, it was revoked because the owners had not been mining emeralds.

In the same 2008, the temporary license was issued to the Kaliningrad Amber Factory, a state-owned unitary enterprise. Its director Yuri Mukhin informed mass media that the mine he accepted was in a deplorable state: according to him, TZAR Emerald, actually, cast the Malyshevo mine and more than 500 employees adrift, causing doubts on the very existence of the unique deposit. The top manager stated that he had hired personnel and started restoration of operational capability of the mine, spending millions of rubles every month.

However, as it became clear after interviewing of experts, Yu. Mukhin, say the least, exaggerated his prominence in history. When answering the question whether TZAR Emerald was really through with the mine, Sergei Kornilkov, Director of the Mining Institute at the Ural Department of the Russian Academy of Sciences, stated that the government had taken the license away from one entity to give it to another one. Vasily Fofonov, a deputy of the Duma of the Malyshevo Urban District, told the "RusBusinessNews" observer that the Malyshevo community had pinned their hopes on the Canadian investor who was expected to restore the production of emeralds: the investor hired 200 people, restored the Yuzhnaya mine and was getting ready to start operation of the Central mine.

After being criticized by the regional authorities, TZAR Emerald increased its investment in the enterprise dramatically: according to the company management, in 2005 the investment amounted to 78 million rubles, in 2006 - 105 million rubles, out of which 53.7 million rubles was spent on the restoration of the mine. The residents of Malyshevo settlement believed in the future of the enterprise and took consumer loans in banks, which they soon were sorry about: the arrival of the Kaliningrad Amber Factory resulted in the downsizing of the personnel and electricity was disconnected.

V. Fofonov asserts that the Kaliningrad Amber Factory has not started any production, though making ample promises to proceed with it in two or three months. No one has been able to find any results of operations of this company so far, though Yu. Mukhin time and again said that more than 10 kilograms of emeralds had been mined.

Yaroslav Kichalo affirmed the "RusBusinessNews" that TZAR Emerald had been restoring the mine and repairing the equipment, and the Kaliningrad factory was only maintaining mining workings. In his turn, Nikolay Kokorin, Deputy Head of the Subsoil Use Department for the Ural Federal District, says that the Kaliningrad factory performed mining operations; however, he states that in 2010 the temporary license given to the factory was not renewed because the factory failed to submit reports about the production.

On condition of anonymity, employees of the Malyshevo mine state that the management of the amber factory may deliberately spread rumors about its contribution to secure its footing at the mine. Most probably, the government intends to privatize the Malyshevo mine; therefore, it withdrew the license from Zelen Kamen. Oleg Kabanov, head of Malyshevo settlement, thinks that mineral resources must belong to the government. He hopes that the Kaliningrad factory will be the winner in the tender and will start mining of precious stones. Valery Ustinov, Director of the Malyshevo standalone business entity of the Kaliningrad Amber Factory, does not doubt it: he says that the state-owned enterprise will definitely win because it is supported by the government of the Sverdlovsk Region.

In the meantime, experts do not expect any positive changes if the Kaliningrad Amber Factory wins: it has no money, no experience, no market prospects. The factory is struggling for survival: in the 1990s, similar to the Malyshevo mine, it was stone-ground by the privatization and ransacked. The reverse nationalization of the Kaliningrad Amber Factory was not able to stop its decline: in 2002 its debt amounted to 35 million rubles. Government programs aimed at financial stabilization of the factory were not implemented, and in 2003 the state-owned enterprise was declared insolvent. In 2007, the bankruptcy proceedings were suspended; however, in 2009 the Kaliningrad Amber Factory owed 6.6 million rubles to the personnel. In 2010, Yuri Mukhin announced at the hearings at the Kaliningrad Duma that if the amber factory is not supported with funds, it will be closed down. According to the top manager, 90% of the mining equipment is obsolete, as no one has made investment in the amber factory for the last 20 years. The factory intends to upgrade the production facilities, thus requiring 900 million rubles. Whether such money can be made available is another question: the Russian Ministry of Finance, the founder, allocated to the state-owned enterprise only 22 million rubles in crisis year 2009.

The Kaliningrad Amber Factory pins its future on amber processing. Experts are sure that it will take a long time to succeed in this field - though chances for success are rather vague. In one of his interviews, Dmitry Zakharien, a privat-docent of the University of Konstanz (Germany), pointed out that it would take years so that the amber factory could gain a foothold on the market. While the Kaliningrad Amber Factory was stagnating, Polish and Lithuanian manufacturers set up the production of jewelry and tapped into the consumer market.

There is another essential issue. Despite the nationalization of the Kaliningrad Amber Factory, amber is still being sold on a shadow market. On repeated occasions, Georgi Boos, the former governor of the Kaliningrad Region, pointed out that the sales of sun stone exceeded the output officially reported by the factory. The introduced monopoly for amber mining has changed nothing: a sizeable flow of amber is not recorded in official documents.

The similar situation is observed on the market for emeralds. The Malyshevo mine has been idle for 16 years, but law-enforcement authorities regularly report about detention of precious stones shipped from the Urals. The police think that emeralds are shipped not only from the stock piles, but also from the mine.

The nationalization of the mine is unlikely to change the situation: the government is not able to control emerald sales efficiently. Suffice it to say that in 1993, when the privatization of the Malyshevo mine just started, the Russian government decided to export 400 kilograms of emeralds. The emeralds were sold through a dummy company, thus, resulting in lost currency earnings. It is obvious that the transaction was performed for the benefit of certain officials rather than for the benefit of the country.

Experts are sure that the frequent replacement of owners of the Malyshevo emerald deposit serves interests of such officials. They are not interested in a zealous owner of the mine; therefore, no wonder if the government decides to give the mine to the penniless Kaliningrad Amber Factory. No one expects any emerald production - the main task is to ensure that water is regularly pumped out of the idle mines.

Vladimir Terletsky