Russian oil giant seeks to dissolve Archangel deal

Denver — A newly filed lawsuit is threatening Archangel Diamond‘s (AAD-V) ongoing efforts to resolve a title dispute over the Verkhotina diamond licence in northern Russia. LUKoil, Russia’s largest oil company, recently filed a claim in Russian courts seeking to have Archangel’s joint-venture agreement with Arkhangelskgeoldobycha (AGD) ruled void and of no legal force.

LUKoil owns a 74.5% controlling interest in AGD, a geological company previously owned by the state. The oil company acquired its interest in 1998, five years after Archangel and AGD signed their first joint-venture agreement. Archangel says LUKoil was represented on AGD’s board when a formal agreement was signed in 1999, and that this agreement was unanimously approved by AGD’s board of directors. AGD agreed to transfer the Verkhotina licence to Almazny Bereg, a new, jointly owned Russian company, within 180 days.

Archangel’s woes began when AGD failed to transfer the Verkhotina licence to Almazny Bereg as agreed; a setback compounded by AGD’s alleged failure to honour other aspects of the agreement. The licence covers 400 sq. km in northern Russia near the White Sea and hosts the Grib kimberlite pipe. Discovered by the joint venture in 1996, the pipe hosts 67 million carats of recoverable diamonds (larger than 1 mm) within 98 million tonnes, grading 69 carats per hundred tonnes. The estimated value is US$79 per carat.

Archangel sought relief through a clause that provided for the arbitration of all disputes in Stockholm. Earlier this summer, however, the International Arbitration Tribunal in Stockholm ruled that Archangel had no jurisdiction in the dispute, reversing an earlier unanimous decision stating that it did. Archangel plans to appeal the latest decision to Swedish district court.

Having spent more than $30 million on the Verkhotina project over the past eight years, Archangel says it will not participate in the Russian court action, having seen “too often the fruitless attempts by Western investors defending actions by their Russian partners in local courts.”

Nor has the company seen much progress in its efforts to have AGD honour the terms of the joint-venture agreement. “The enforcement of a contract in Russia seems impossible,” says Archangel President Timothy Haddon. “The prospect of the Russian government attracting foreign investment in the natural resources sector appears to have been dealt a further blow by these developments, and to have less chance of success.”

LUKoil’s recent actions aren’t helping the matter either, Haddon adds. “The [Russian court] action clearly demonstrates, 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.”

Archangel had originally hoped that LUKoil’s involvement would be a calming influence, particularly after the company suspended funding Verkhotina in protest over AGD’s failure to transfer the licence to Almazny Bereg. Such hopes were dashed by the newly filed lawsuit.

Says Haddon: “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.”

Over the longer term, Archangel intends to continue efforts to resolve the dispute through negotiation. The company has the backing of its largest shareholder, Task Holdings, which is wholly owned by the Oppenheimer family of De Beers fame. Task owns about 40.9% of Archangel.

Because LUKoil has no diamond mining experience; it has been speculated that the oil company might be willing to sell all or part of its interest in AGD to a company, foreign or domestic, that has such expertise.