LUKoil Has Filed a Claim in Russian Courts - Seeking A Ruling That the Verkhotina Agreement Is Void
Timothy J. Haddon, CEO and President of Archangel Diamond Corporation (the "Corporation") announced that it has become aware that open joint stock company LUKoil, the largest oil company in Russia and one of the largest oil companies in the world, filed a claim before the Russian courts, seeking a ruling that the Verkhotina Agreement, which was signed on July 15, 1999 between LUKoil's subsidiary, Arkhangelskgeoldobycha ("AGD"), and the Corporation is void, meaning it is of no legal force or effect. The claim has been filed against the Corporation and Almazny Bereg ("AB") and also against LUKoil's 74.5% owned and controlled subsidiary AGD. The basis of the claim is that LUKoil's rights as a shareholder of AGD were infringed by reason of AGD entering into the Verkhotina Agreement.
In 1998, it became public knowledge that LUKoil had acquired a controlling interest in AGD. In 1999, with the assistance of the Russian Government, the Corporation and AGD, which was indirectly controlled by LUKoil, signed the Verkhotina Agreement under which AGD undertook to transfer the Verkhotina Licence to a new jointly owned Russian company within 180 days. The Verkhotina Agreement was unanimously approved by the Board of AGD at a meeting at which senior representatives of the LUKoil Group participated. AGD has failed to perform the Verkhotina Agreement or to transfer the Verkhotina Licence pursuant to such Agreement.
The Verkhotina Agreement contains an arbitration clause which provides for the arbitration of all disputes in Stockholm under UNCITRAL Rules. It is clear to the Corporation that the claim has been brought by LUKoil in the Russian courts because AGD is unwilling to challenge the validity of the Verkhotina Agreement before an independent arbitration tribunal in Stockholm.
The Verkhotina Agreement also contains undertakings by AGD not to transfer the Verkhotina Licence except to a jointly owned company (AB2), which would be a clone of AB. The Corporation believes that one of the reasons for AGD wishing to get out of the Verkhotina Agreement is to free itself from these restrictions. One of the reasons for the original dispute between AGD and the Corporation was the attempt by AGD to transfer its diamond interests to a third party in breach of the 1993 Diamond Venture Agreement, as amended.
Timothy J. Haddon, President and Chief Executive Officer of the Corporation said: "Once again, we are witnessing the calculated and deliberate attempt by Russian companies and their controlling shareholders to deny any responsibility whatsoever under an agreement that their Board members voted for and that was crafted by two well-respected international law firms over many months of negotiations. It is a tragedy for all parties, but especially for Russia where this 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. Archangel has now spent more than $30 million finding a significant asset and protecting its rights over the last 8 years. We have complied with all aspects of every agreement that we have entered into since 1993. We have tried to cause our joint venture partner AGD to comply with the terms of the Diamond Venture Agreement signed in 1993 and amended in 1994. We then reached agreement under the 1999 Verkhotina Agreement but once again AGD was unwilling to perform its obligations. For years, they have clearly been in breach of contract and yet all of our efforts to bring this situation to a satisfactory conclusion have resulted in absolutely no progress. The enforcement of a contract in Russia seems impossible.
"However, what I find most disturbing about this new development 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 the tactics of using the Russian court system in an attempt to undermine an international arbitration procedure which a member of the LUKoil group has freely agreed to at a time that it was controlled by LUKoil. If the LUKoil group, which is generally regarded as one of the most 'international' groups in Russia, is not prepared to honor arbitration agreements in its international contracts, 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."
The Corporation will not participate in or take part in LUKoil's action before the Russian court. The Corporation sees no justification for the LUKoil group seeking to avoid the consequences of the Verkhotina Agreement, particularly as the principal terms of such Agreement only came into force after copies of such Agreement had been circulated to Board members of AGD in order that they "could inform the shareholders, who they represented, about the terms and conditions of the Agreement" and after the Board of AGD had then at a Board meeting passed a unanimous resolution which approved the Verkhotina Agreement. In addition, the Corporation has seen too often the fruitless attempts by Western investors defending actions by their Russian partners in local courts.
The Corporation is monitoring the situation very carefully and continues to use maximum effort to bringing together all parties to find a solution to the License transfer dispute through negotiation, thus allowing investment in the project may resume.
Archangel Diamond Corporation is an international diamond exploration company that currently owns a 40% interest in Almazny Bereg ("AB"), a Russian international open joint stock company involved in the exploration of the 400 square kilometer Verkhotina Area in the Oblast of Arkhangel'sk in northwestern Russia. De Beers Consolidated Mines Ltd. stated in a technical assessment study based on all exploration work completed through November 3, 1999, that the Grib Pipe has an estimated resource of approximately 98 million tonnes of kimberlite to a depth of 500 meters, containing some 67 million carats of recoverable +1 mm diamonds at an average mining grade of 69 carats per hundred tonnes and an average life-of-mine revenue value of US$79 per carat. The Grib Pipe was discovered in the spring of 1996 as part of the joint exploration program of the Corporation and AGD.
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