Russian oil giant seeks to dissolve agreement with Archangel

Denver — Things are going from bad to worse for Denver-based Archangel Diamond (AAD-V) as binding arbitration has failed to resolve a long-standing title dispute over the Verkhotina diamond license in northern Russia.

Russia’s largest oil company, LUKoil, which owns a 74.5% controlling interest in Archangel’s supposed joint-venture partner, Arkhangelskgeoldobycha (AGD), has filed a claim in Russian courts to have the joint-venture agreement voided.

In June, the International Arbitration Tribunal in Stockholm reversed an earlier decision and ruled that it had no jurisdiction in the dispute.

This latest development has caught Archangel off guard. The company hoped to return to the negotiation table to resolve the matter and even considered taking its case to the Russian and Canadian governments.

The basis for the claim is that LUKoil believes that its rights as a shareholder in AGD were infringed when AGD entered into the Verkhotina agreement.

The Russian courts are unlikely to give much weight to the facts that LUKoil acquired its interest in AGD in 1998, five years after the first joint-venture agreement was signed, and LUKoil representatives on AGD’s board of directors were present and signed the formal agreement in 1999.

Timothy Haddon, Archangel’s President, says he is incredulous. “The action clearly demonstrates to the world once again the lack of protection international investors have in regard to corporate governance, rule of law or the simple sense of fairness in doing business,” he says.

LUKoil’s involvement in the project was originally regarded as a calming influence. When it became involved, Archangel had just suspended its funding of the joint venture in protest over AGD’s failure to transfer the license to the joint-venture company, Almazny Bereg.

As one of Russia’s largest companies, LUKoil could have exerted pressure to see that the transfer was completed.

“What I find most disturbing is that LUKoil, which is seeking to become an international player and which is reportedly seeking to have its securities listed on international markets, should resort to using the Russian court to undermine an international arbitration in which a LUKoil member freely agreed,” Haddon says.

Archangel, which has spent more than $30 million on the project over the last eight years, has decided that it would not participate in the Russian court action. This virtually guarantees an outcome that does not favour the company.

The Verkhotina license covers 400 sq. km in northern Russia near the White Sea. It hosts the Grib kimberlite pipe, which was discovered in 1996 and hosts 67 million carats of recoverable diamonds (larger than 1 mm). This resource is within 98 million tonnes grading 69 carats per hundred tonnes.

The estimated value is US$79 per carat.