The oligarch, the ANC and the manganese deal

The oligarch, the ANC and the manganese deal
Vicki Robinson and Stefaans Brümmer | Johannesburg, South Africa
10 November 2006 06:00

"Renova masters Africa", a Moscow headline shouted in November 2004. It was journalistic hyperbole, perhaps, but the progress of Viktor Vekselberg, the man behind the Russian investment group, has been remarkable.

When Vekselberg visited South Africa in February 2004, he got to meet the president, among others. Eighteen months later he co-owned rights to strategic manganese reserves in the Kalahari.

This is the story of how the government, through the Department of Minerals and Energy (DME), awarded prospecting rights to a consortium set to benefit both Vekselberg, one of Russia's infamous oligarchs, and Chancellor House, the company we reveal to be an ANC business front.

The story is important because it suggests that the government was swayed by a mix of diplomatic expediency -- it was keen to improve economic relations with Russia in tandem with growing ties of friendship -- and the ruling party's funding needs.

Vekselberg is ranked as Russia's third-richest man by Forbes magazine, which estimates his personal wealth at $10-billion. But just how he acquired this fortune is contentious. (See "Who is Viktor Vekselberg?")

Cast of characters

Mark Buzuk: Vekselberg associate and a director of Renova Investments

Chancellor House (Chancellor): Group of companies owned by a trust intended to fund the ANC

Department of Minerals and Energy (DME): Allocates mineral rights

Dirleton Minerals and Energy (Dirleton): Applicant for manganese rights; intended partnership with Renova did not materialise; led by ANC stalwart Zwelakhe Sisulu

Roddie Fleming: Scottish banking heir, Vekselberg partner but fell out with him

Taole Mokoena: Chancellor House chair

Kalahari Resources (Kalahari): Applicant for manganese rights, apparently close to Motlanthe; intended partnership with Renova did not materialise

Kgalema Motlanthe: ANC secretary general, appears close to Kalahari Resources

Mendi Msimang: ANC treasurer general; Chancellor House answers to him

Mamatho Netsianda: Former deputy defence secretary, MD of Chancellor House

Sandile Nogxina: Director general of the Department of Minerals and Energy

Pitsa ya Setshaba (Pitsa): Late applicant for manganese rights, partners Renova and Chancellor House in United Manganese of Kalahari (UMK); led by Lazarus Mbethe and Robinson Ramaite, the former public service director general

Renova: Viktor Vekselberg's multibillion-dollar investment company headquartered in Russia

Renova Investments: Renova's local subsidiary

Siberian-Urals Aluminium Company (Sual): Russia's second-biggest aluminium company, owned by Renova

Sual International: intended partnership between Vekselberg, Fleming

Yuri Trutnev: Russian minister of natural resources

United Manganese of Kalahari (UMK): Joint venture of Renova, Chancellor House and Pitsa ya Setshaba, obtained manganese rights

Viktor Vekselberg: Russian oligarch, controls Renova and Sual

A strategic resource
The manganese assets that this story is about are located in the Kalahari Manganese Field of the Northern Cape. About 80% of the world's known, commercially exploitable reserves are found in this area. Vast as these reserves are, they remain largely untapped -- South Africa accounts for less than one-fifth of world production.

Two companies, Samancor Manganese and Assmang, have dominated extraction from the Kalahari Manganese Field and have been accused of hogging its untapped wealth. Along with Brazil's CVRD and France's Eramet, they dominate the world trade too.

Manganese is a strategic resource, essential in manufacturing steel. A new player with significant access to the Kalahari's reserves is in a strategic position, because of the sheer volume of manganese waiting to be mined, to make a major impact on the world market.

During the second half of the 1990s, government started laying the groundwork for mineral reform. This culminated in the enactment of the Mineral and Petroleum Resources Development Act of 2002.

The process of mineral sector reform coincided with government pressure to open the Kalahari Manganese Field to new entrants, and particularly BEE groups. This would give Vekselberg and Chancellor House their gap.

In the meantime, Vekselberg was preparing to expand his by then already extensive mining and metals business out of Russia.

At a January 2003 press conference in Moscow, Scottish banking heir Roddie Fleming announced that he was going into a joint venture with the Siberian-Urals Aluminium Company (Sual), Russia's second-largest aluminium company. Sual is majority owned by Renova, Vekselberg's multibillion-dollar investment and management group.

The plan at the time was to create a diversified Sual International, to which Fleming and some co-investors would have brought, inter alia, Mozambican tantalum rights and a ferronickel mine in Cuba. Sual International would have been more attractive to investors because of its geographical and asset spread, and was to have been listed on international markets the following year.

If the lure of the market was one reason for Vekselberg to get out of Russia, arguably another was the Kremlin's attempts to cut the oligarchs down to size.

In October 2003 Mikhail Khodorkovsky, the CEO of the oil group Yukos and one of the world's richest men, was arrested in Siberia. He was sentenced to nine years in prison for fraud and tax evasion. His fate shattered the oligarchs' political immunity and came as motivation for them to externalise their asset base.

Vekselberg eyes SA
It may be no accident that Vekselberg looked to South Africa. His new partner, Fleming, already had a foot in the door through his brother Adam, who had moved to South Africa in 1991 to represent family interests. Adam Fleming was well ensconced in local mining, having served as the chair of Harmony Gold between 1999 and 2003.

The Flemings also had a long-standing relationship with the ANC treasurer general, Mendi Msimang. They knew him from his exile days in London, said confidential source "X", who is acquainted with some of the players in this saga.

When Vekselberg visited South Africa in February 2004 looking for mineral sector opportunities, Roddie Fleming took him to meet President Thabo Mbeki, the then minerals and energy minister, Phumzile Mlambo-Ngcuka, "and the ANC".

Mlambo-Ngcuka and Minerals and Energy Director General Sandile Nogxina confirmed in a joint response that they had met Vekselberg in the context of "the promotion of increased investment in the minerals and energy sectors …

"At this meeting, Mr Vekselberg expressed his interest with regard to investing in the South African resource sector and therefore wanted to know the available opportunities and the procedures that prospective investors had to follow … Manganese rights applications, however, were not mentioned specifically as Mr Vekselberg showed interest in a wide range of commodities."

Whatever other commodities they may have been interested in, Vekselberg and Fleming wasted no time pursuing manganese.

On May 1 2004 the Mineral and Petroleum Resources Development Act of 2002 finally came into force. As of then the state owned all mineral rights. Existing rights-holders would have to convert their "old order" rights over time to "new order" rights; progressive empowerment targets would have to be met; and rights not used would be lost. The Kalahari Manganese Field was open to new applicants.

That same month Fleming and Mark Buzuk, an associate of Vekselberg, were in South Africa. If they were going to go for manganese rights in the Kalahari, they would need black economic empowerment (BEE) partners -- and where better to get "guidance" than from the same department that would adjudicate the applications?

Nogxina and senior official Debbie Ntombela arranged a "beauty parade" to introduce prospective BEE partners to Fleming and Buzuk. Nogxina confirmed the introductions, but insisted that the department showed no favouritism and was not involved any further. "The DME does not participate in the selection of the parties with whom a deal may or may not be struck."

Nogxina also said such introductions were consistent with the Act, which provided that "the minister may facilitate assistance to any historically disadvantaged person".

BEE rules
Much rode on Buzuk and Fleming's selection of BEE partners. The DME interpreted policy to mean that only 100% BEE companies could apply for prospecting rights in the Kalahari. Vekselberg's Renova would have to enter the deal as "financial and technical partner" to a BEE grouping.

The department's insistence on awarding the prospecting rights solely to the BEE component in any consortium-to-be meant that established companies -- in this case Renova -- may have been motivated to seek BEE partners "acceptable" to the authorities, since their success depended on the BEE partners' success.

Nogxina disagreed, saying: "Your argument of acceptable BEE does not hold water. Renova did not have to comply with BEE requirements, because it never applied for any rights." On his version, Renova did not enter the equation as the BEE applicants were free to choose any technical/financial partners once they were awarded prospecting rights.

This is contradicted by a key requirement of the Act -- that the department take technical and financial ability into account when adjudicating applications -- and by an article last year in the Russia Journal, quoting Nogxina as saying during the adjudication process that he had dispatched three DME experts to Russia "to assure themselves that Renova has the technical capacity".

In July 2004 Renova registered a subsidiary in South Africa, Renova Investments. It pursued negotiations to form a consortium with three of the companies that had been introduced to Fleming and Buzuk at the DME's beauty parade. They were the ANC's Chancellor House; Dirleton Minerals and Energy, whose principals included ANC stalwart Zwelakhe Sisulu; and Kalahari Resources, a company that appears to have enjoyed a close relationship with ANC secretary general Kgalema Motlanthe (see "Kgalema's Kalahari friends" on the right).

Treasurer touts Chancellor
Following the beauty parade, Buzuk had written to Sisulu's Dirleton, saying Renova regarded Dirleton as "one of the most perspective [sic] partners among a number of BEE groups with whom we are carrying [on] negotiations concerning the project". Buzuk pledged Renova's "technical, expert and financial support", backing an application by Dirleton for manganese rights.

While Chancellor had been represented at the beauty parade, the drive to include it in the consortium came from elsewhere. According to confidential source X, Fleming brought it to the deal as Msimang, the ANC treasurer general, had "recommended" it and because Fleming's brother, Adam, was close to Professor Taole Mokoena, the Chancellor House chair.

In October 2004 Renova Investments drafted an agreement for signature between it, Dirleton, Chancellor and Kalahari. The draft envisaged a joint venture with a share breakdown of 49% Renova and 51% the BEE partners. Renova, it said, would bear the initial funding and technical responsibilities. Implicit was that the BEE partners would contribute the manganese rights.

Renova's draft outlined the scope of the project: a $300-million to $400-million investment resulting in a project worth $1-billion, incorporating prospecting, mining and beneficiation.

But the October draft was never signed, as the prospective partners started bickering. The relationship between Vekselberg and Fleming soured as the basis for their relationship, the intended listing of Sual International, failed to materialise. As it was Fleming who had introduced Chancellor, the relationship between it and Renova deteriorated too.

And from ANC headquarters, it seems that Renova got mixed messages, with an alleged intervention to favour Kalahari at Chancellor's expense. (See "Kgalema's Kalahari friends" on the right.)

Relations between Renova and Dirleton also declined. Renova had wanted to guarantee itself 49% of the joint venture with 51% shared by the BEE partners, as envisaged in the October draft. Dirleton, however, held out against fixing a percentage. "We believe such a commitment and such a discussion would be premature until the manganese permit is awarded, and we can then assess what each party brings to the table," Dirleton wrote to Renova.

As the DME was to award the prospecting rights to the BEE partners, Dirleton seems to have been confident it could negotiate maximum advantage for itself. But Renova had an ace up its sleeve.

A parallel process
Although the formal adjudication process was still pending at DME, Renova appears to have made headway in a parallel political process. In Russia, Buzuk was quoted as saying that sometime during the summer (South African winter) of 2004 a "closed presentation" had been made to Mbeki and his government.

That September Lulu Xingwana, then deputy minister of minerals and energy, visited Moscow, where she reportedly met Renova officials and publicly endorsed their plans. Nogxina confirmed Xingwana's visit, but denied she had "endorsed any particular company".

In November 2004, the deal was sanctioned -- or in the DME's view "welcomed" -- at a political forum still well removed from the department and its pending formal adjudication. The occasion was the fourth session, held in Pretoria, of the bilateral commission between South Africa and Russia, called the Intergovernmental Committee on Trade and Economic Cooperation (Itec).

It was presided over by Foreign Affairs Minister Nkosazana Dlamini-Zuma and the Russian Natural Resources Minister, Yuri Trutnev. A business delegation accompanying Trutnev reportedly included Buzuk and Renova's Moscow office head. Vekselberg also visited South Africa around that time.

The minutes of the Itec session stated that the "parties welcomed and supported the intention of the Russian group of companies [Renova] to develop the project of prospecting, mining and processing of manganese ores in the Kalahari manganese basin".

According to Renova's website, "Russian and South African officials approved the project" at Itec. Nogxina, who participated in the Itec session, denied the Renova version was accurate, saying: "The welcoming of a project does not necessarily translate into approval thereof."

Whichever the correct version, Renova was emboldened. Five days later it wrote to Dirleton, giving notice that it wanted to terminate their relationship because the latter would not agree to Renova's demand for 49% of the joint venture. "We are compelled to clarify the situation and make our own decision as to whom with and how we will act."

That same day, November 24 2004, the DME registered a manganese prospecting application by Pitsa ya Setshaba Holdings, a company less than a month old. Dirleton, Chancellor, Kalahari and other BEE hopefuls had lodged their applications months earlier.

Pitsa ya Setshaba was soon to emerge as Renova's choice to replace Dirleton in the consortium. Its founding director was Lazarus Mbethe, formerly with Ditswammung, another BEE group vying for the manganese rights. Mbethe was joined on Pitsa's board by, among others, Robinson Ramaite, the former public service and administration director general, and Jackie Sedibe, the widow of late defence minister Joe Modise. Pitsa's ownership structure is opaque -- repeated attempts to discover its full shareholding have been thwarted.

On December 7 2004 Abdoulaev, the local Renova director, wrote to Dirleton formally terminating their relationship. He copied the DME's director general, Nogxina.

Chancellor ambivalent
Dirleton had overplayed its hand and was out, to be replaced by Pitsa ya Setshaba. For reasons not clear, Kalahari had also fallen by the wayside. Chancellor's position was ambivalent, tainted as it was by the fallout between Vekselberg and Fleming.

For a while Chancellor explored an alternative without Renova: on December 10 2004 it signed a memorandum of understanding with Dirleton and another prospecting hopeful, the Northern Cape Manganese Company, to pool whatever prospecting rights they could get independently of Renova.

The ink was barely dry on this memorandum, however, when Chancellor was back with Renova. This, on the versions of two sources, was after tough negotiating by Fleming, who felt that he had been key to the facilitation of the entire deal and would have neither himself nor Chancellor excluded.

In late January-early February last year, Chancellor House's MD, former deputy defence secretary Mamatho Netsianda, reportedly joined Pitsa's Mbethe as Renova's guest in Moscow. Renova introduced them to Trutnev's Natural Resources Ministry.

On February 16 last year, as the DME evaluation of the manganese applications drew to a close, Chancellor and Pitsa signed a memorandum of understanding, envisaging that they would pool all prospecting rights they got from the DME. The memorandum identified Renova Investments, the local Renova subsidiary, as their technical/financial partner, earmarking it 49% of the shares in the consortium to be formed.

Rights awarded
On March 30 last year Mlambo-Ngcuka, in her then capacity as minerals and energy minister, signed an approval granting prospecting rights jointly to Chancellor and Pitsa. This was consistent with the DME's policy to award the rights to the BEE component. The prospecting title deed, registered by the DME on May 17, however also recorded that Renova Investments was to receive a 49% stake.

The deed registered rights to eight farm portions, totalling some 15 200 hectares in the Kuruman district of the Kalahari, to an entity called United Manganese of Kalahari (UMK). This was the name for the joint venture formed by Chancellor and Pitsa, and in which Renova was to share.

Renova's 49% was transferred in September last year. But UMK's share register shows that contrary to what was envisaged in the memorandum of understanding and the prospecting title deed, the recipient was not Renova Investments, the South African subsidiary, but Renova Manganese Investments, a company incorporated in the Bahamas, a corporate tax haven.

This switch could deprive South Africa of tax income. The Bahamian ownership could also defeat transparency, as share registers there are not publicly available. According to a confidential source, however, the Bahamian company's shareholding was split between entities belonging to Vekselberg, Fleming and Buzuk. Fleming has since exited the Bahamian company and UMK altogether.

At the time that Renova Manganese Investments took up its 49%, says the source, Renova injected $10-million into UMK, which was then valued at about $20-million. Based on this figure, the ANC's Chancellor, with its half of the 51% BEE shareholding in UMK, was the owner of shares instantly worth about $5-million (then about R31,5-million). This will shoot sky-high if the project reaches a value, as predicted by Renova, of $1-billion.

Unfair advantage
There appears to be widespread unhappiness among the other BEE players who competed with Chancellor and Pitsa. They feel that UMK, the joint venture of these two companies, got more than it deserved.

One of the fundamental principles of the Mineral and Petroleum Resources Development Act is that rights are awarded on a first-come, first-served basis. But records of the applications and awards show that UMK got eight farm portions, more than anyone else did, even though on five of those portions neither Chancellor nor Pitsa had put in the first application.

Three of the farm portions, Botha, Smartt and Rissik, were the most heavily contested, which means that they were probably regarded as the most attractive. Pitsa, the new kid on the block, applied for them two months after any other serious contender, yet bagged them for UMK.

Nogxina commented that the DME was not aware of unhappiness: "All groups of applicants were granted different properties. Pitsa was formed as a result of a split that happened in Ditswammung. Some shareholders of Pitsa therefore formed part of the original application. As part and parcel of solving the problems of disagreements between the two parties we allowed Pitsa to lodge their own application on all the properties in respect of which Ditswammung had applied."

Nogxina's answer reveals an extraordinary accommodation of Pitsa. When some shareholders, including Mbethe, left Ditswammung to form Pitsa, the DME recognised the latter's belated application as dating from when Ditswammung had applied. In any case, it appears that Kalahari or Dirleton, and not Ditswammung, had lodged the first applications on Botha, Smartt and Rissik. There appears to be no justifiable basis for Pitsa to have obtained these prime farm portions for UMK.

If UMK -- in other words, Vekselberg's Renova and related interests, the ANC's Chancellor, and the opaque Pitsa -- were unfairly advantaged in the rights allocation process, what accounted for it?

Vekselberg's role
Vekselberg and his place in geopolitics may have had much to do with it. He has positioned himself to assist and exploit the burgeoning relationship between Russia and South Africa.

In November last year, Mbeki appointed Vekselberg to his International Investment Council, an honour described by one commentator as "a sign of a maturing relationship between the two countries".

In March this year Nogxina visited Moscow as part of the preparations for the G8 summit held there in July, which was attended by Mbeki as one of a handful of non-G8 head-of-state observers.

In August Nogxina was in Moscow again for a conference on Russo-African relations. The DME director general's pervasive involvement in the developing relationship underscored the importance of economic relations, and specifically minerals and energy, to wider diplomatic ties.

In September this year, Russian President Putin paid an official visit to South Africa -- with Vekselberg the most prominent member of the business delegation that accompanied him.

Putin's visit has been seen by commentators as sealing a relationship built on a shared interest in strategic resources and South Africa's need to ally with emerging -- or in Russia's case, re-emerging -- powers. Russia's membership of the G8 and the United Nations Security Council are specifically attractive to South Africa.

During the Russian president's visit, he and Mbeki attended a "round table" of business people from both countries. Vekselberg stole the show, signing memoranda relating to a promise by Renova to build a manganese smelter, as well as an agreement between the business chambers of the two countries. Vekselberg heads the foreign relations committee of the Union of Industrialists and Entrepreneurs, which represents big business in Russia.

In mid-September, back in Russia, Vekselberg met Putin again. There, according to a Moscow newspaper, Putin asked about Africa. Vekselberg replied: "South Africa in particular, as a state and as a field for sensible economic expansion, is a very important element of foreign policy, for the state as well as for business, I hope."

Vekselberg, it seems, had positioned himself to be "Mr South Africa" in Russia, and "Mr Russia" in South Africa, straddling both business and diplomacy. This backdrop could explain why authorities here may have been motivated to regard Renova's pursuit of mineral rights in the Kalahari favourably.

Chancellor's role
But if South Africa's desire to boost ties with Russia helped motivate the decision to grant choice prospecting rights to UMK, what value did Chancellor bring to the consortium?

The November 2004 Itec support for Renova came at a time when Chancellor's position in the consortium was ambivalent because of Vekselberg and Fleming's deteriorating relationship.

But the impact of the ANC company's presence should not be discounted. During the South African winter of 2004, Chancellor was still well entrenched in the consortium to be formed. At this time Renova needed all the help it could get, in what was clearly a political process, to gain a foothold in South Africa.

And by the time Mlambo-Ngcuka awarded UMK its prospecting rights last year, Chancellor was again firmly entrenched in the consortium. If Fleming and Chancellor had not played a significant role in the process leading to the award of the prospecting rights, would Renova have allowed them to share in the spoils -- as it did in the end?

Nogxina and Mlambo-Ngcuka denied in a shared answer that diplomatic expediency or Chancellor's ANC ties had played a role in UMK's success: "It is only those requirements that are specifically stated in the law that inform the decision to grant, or not, prospecting rights, and diplomatic considerations are not [among] such requirements… Membership of a particular party is also not a consideration that the law stipulates as far as taking a decision in this regard is concerned."

Renova, Chancellor House, the Chancellor House trustees, Msimang, Motlanthe, Fleming, Mbethe and the Presidency failed or declined to answer detailed questions.

These articles are based on research undertaken by M&G journalists in collaboration with the Institute for Security Studies (ISS) corruption and governance programme and as part of a joint project with Idasa (PIMS) on party funding