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India’s bid for Russian firm hits Sistema hurdle

The Sistema dispute could cost India a chance to bid for a stake in Russian govt owned Alrosa

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The Sistema dispute could cost India a chance to bid for a stake in Russian government owned Alrosa,the world’s second largest diamond producing company after DeBeers.

The Indian government has told Russia it is interested in bidding for Alrosa. The issue was flagged when Commerce Minister Anand Sharma met Andrey Belousov,the Russian minister for economic development,and Denis Manturov,the minister for industry & trade in St Petersburg last week. The investment will be the second largest by India after OVL’s investment in Sakhalin for $2.1 billion.

But the ministers,especially Manturov,reminded Sharma that resolving the Sistema stand-off was crucial for any move forward on trade and investment issues.

Alrosa plans to sell 20 per cent of its equity in 2012-13 which is estimated to be valued at about $ 1.5-2 billion.

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An Indian investment in Alrosa can change the global balance of power in the diamond trade dramatically. In 2011,Rio Tinto had explored the possibility of a partnership with the Russian company but it never came through.

According to an Indian Commerce and Industry Ministry official,the bid for Alrosa may be made through either MMTC or Hindustan Diamond Company Private Ltd. As a first step India will want to sign a long-term supply agreement for supply of rough diamonds from Alrosa. India has in recent years emerged as the leading diamond processing centre in the world and so a stake in Alrosa makes sense. “A strategic alliance between our companies will be mutually beneficial,” said the official.

Sharma was making the pitch for a strategic stake in Alrosa in the context of Russian President Vladimir Putin making his plans clear for large-scale disinvestment in state-owned companies at the St Petersburg international trade fair,last week.

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Given the size of the stakes involved,the Commerce Minister was pitching for the “support of Russian government in effective participation by Indian companies in Alrosa’s divestment to take the matter forward”,said a note prepared for the meeting. Russia is emerging as the world’s largest producer of rough diamonds,which their government has said could reach upto 40 per cent of the global production.

But Sistema (partially held by the Russian government),which is its largest investment in India to date,could spoil these calculations. At an open session at the fair,the company representative told Sharma and Indian government officials that possibilities of arbitration would drag the Russian government into the case which they would be very keen to avoid.

The company whose telecom license along with its joint venture partner Shyam Telecommunications has been revoked under the Supreme Court verdict in the 2G case this year was allowed to make its case at the session on Russia-India Business Dialogue (organised jointly with CII) forcefully. While all the other industrial leaders from two sides spoke before Sharma and his Russian counterpart Dmitry Rogozin,Deputy Prime Minister of Russia took the stage,the Sistema intervention was allowed thereafter showing the Russian keenness that it be heard separately.

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Andrey Terebenin,Vice President of Sistema,Corporate Communications described his company’s investment as “a symbol of new age investment by Russian companies in India” and said the onus was on the Indian government to ensure the case did not become a matter of arbitration.

Speaking to The Indian Express later in the evening,Sergey Cheremin,minister for external affairs,Moscow city government,(which is a significant voice at the Kremlin) supported the Sistema position. Justifying the way Sistema was allowed to present its case,he said every effort must be made to ensure Russia and India did not face off in an investment related case which he said would be a uniquely bad precedent.

First published on: 25-06-2012 at 02:11 IST
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