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. Last Updated: 07/27/2016

Suit Filed To Undo Norilsk Auction

The Moscow city prosecutor's office filed suit Tuesday to contest the 1997 privatization of Norilsk Nickel, a $1.5 billion metals giant sold for a relatively small sum under the infamous loans-for-shares scheme.

The lawsuit aims "to return to the government the shares of Norilsk Nickel that had been illegally disposed of," said an official at the Moscow prosecutor's office, in remarks reported by Interfax.

Vladimir Potanin's Uneximbank paid $170 million for Norilsk after winning a privatization auction in August 1997, shortly after Potanin lost his job as first deputy prime minister and took the helm at Uneximbank. The Norilsk privatization was run by Mezhdunarodnaya Finansovaya Kompaniya, or MFK, an Uneximbank affiliate.

Officials at Norilsk Nickel and Interros, Potanin's holding company, were uncertain how to take the news.

"We do not know what the formal claim is," said Anatoly Komrakov, spokesman for Norilsk Nickel. "We thought that the report of the Audit Chamber crossed all the t's on the issue."

The Audit Chamber f a State Duma watchdog body empowered to investigate possible misuse of government assets or cash flows f said 10 days ago that its investigation into Norilsk Nickel had found no evidence of wrongdoing.

However, Audit Chamber chairman Sergei Stepashin said Tuesday his office had reviewed only the company's current activities.

By raising the specter that the often-criticized insider privatizations of the mid-1990s could be unraveled, the suit sent shockwaves through the nation's business and political elite f many of whom snapped up lucrative assets in similar deals to the Norilsk privatization.

"A new order is being created in the country, which in the eyes of the new leadership means that everything has to be under the control of the Kremlin," said Igor Malashenko, first deputy chairman of Media-MOST holding.

"If you, God forbid, took part in privatization, you could be thrown in prison tomorrow," said Malashenko, speaking at an investment conference organized by Renaissance Capital.

Media-MOST founder Vladimir Gusinsky was jailed for three days last week before being charged with embezzlement over the privatization of St. Petersburg television company Russkoye Video.

Liberal party the Union of Right Forces said it will call on the Duma to send an official inquiry to the prosecutor's office regarding the suit filed over Norilsk Nickel.

It was not yet clear Tuesday whether the suit is the start of a government campaign to review the results of privatization and thereby rein in the oligarchs.

Prime Minister Mikhail Kasyanov said he could not comment on the lawsuit and would have to review the case.

"The court could overrule previous decisions and this is worrying," Kasyanov said.

Former Prime Minister Yevgeny Primakov said nationalization could be considered if the company was run inefficiently. Primakov f who heads the Fatherland-All Russia faction in the State Duma f has met regularly in recent weeks with President Vladimir Putin and accompanied the president for part of his recent overseas trip.

Potanin was one of 17 oligarchs who banded together last week to publicly call for Gusinsky's release from the Butyrskaya prison where he was being held.

The relatively new Putin administration could be sending a signal to powerful business groups that they must negotiate a deal with the Kremlin rather than oppose its plans, said Stephen O'Sullivan, head of research with Moscow brokerage United Financial Group.

He added that it was premature to draw any conclusions before the lawsuit was over.

During his presidential campaign earlier this year, Putin pledged he would distance himself from the oligarchs.

However, tycoon Boris Berezovsky's success in winning key battles f such as his assumption of full control at ORT television at Tuesday's shareholders meeting f has led some commentators to conclude that the oligarchs were as invulnerable as ever.

With two major business empires now under attack, even Berezovsky has been sounding nervous.

He warned Tuesday at an investment conference that it is impossible for the Kremlin to build both a liberal economy and a totalitarian regime.

"These policies are contradictory and sooner or later they will destroy each other," he said.

The head of the federal government's Center for Economic Reform, Vladimir Mau, said that any revision of transactions involving Norilsk Nickel's shares could scare away foreign investors. Norilsk shares fell 6.7 percent to $8.44 after the news, helping to drive the Moscow Times Index of 50 leading shares down 3.67 percent to 144.10.

O'Sullivan at UFG said it was unclear how nervous investors should be.

"That Norilsk Nickel goes away from its owners might not necessarily be bad news for the company," he said. "But redistribution of assets would be bad for the market."

The legality of Norilsk Nickel's privatization sales had earlier been disputed in court when obscure companies Taiga and Energotransprom filed civil suits contesting the privatization. The Norilsk sale came soon after the hotly disputed Svyazinvest privatization auction, in which a Potanin-backed group that also included George Soros won 25 percent plus one share of the telecoms holding for $1.9 billion.

The civil challenge to the Norilsk sale fell apart and Potanin incorporated Norilsk Nickel into his industrial holding Interros, which now controls 58 percent of the company's shares.

Uneximbank's winning bid was less than half the $355 million offered at the privatization tender by another top Russian bank, Rossiisky Kredit.

At either price, the sale was a bargain. Norilsk Nickel is responsible for 90 percent of Russia's output of nickel and cadmium, a majority of its copper and all of its platinum. It is the world's second-largest producer of nickel and the largest producer of platinum-group metals.

Potanin was the prime architect of the loans-for-shares scheme, which involved the government offering shares in major state assets as collateral against loans from private banks. When the cash-poor federal government could not repay the loans, the banks got the shares.

The scheme was widely seen as a means of buying the support of powerful businessmen to aid in President Boris Yeltsin's 1996 re-election campaign.

The cream of the nation's industrial assets went for a fraction of their real value.

A 51 percent stake in Sibneft was snapped up by companies close to Boris Berezovsky for $100.3 million in late 1995. The company's market capitalization stood at $1.13 billion Wednesday.

Catherine Belton contributed to this