Croatia presses on with corruption charges against head of Hungary's MOL

By bne IntelliNews June 11, 2014

Guy Norton in Zagreb -


The protracted tug-of-war between Croatia and Hungary over control of Croatian oil and gas firm INA took another twist June 10 with the news that the judicial authorities in Zagreb are determined to proceed with the politically controversial prosecution of the head of the Hungarian oil and gas firm of MOL on bribery charges. The decision will do little to help the two sides reach an agreement over the ownership of INA, which is harming its future just as vast oil and gas resources off the Adriatic coast open up.

According to a statement by the Zagreb County Court, Zsolt Hernadi, chief executive officer of MOL, which is the leading shareholder in INA, will be tried in absentia over accusations that he paid former Croatian premier Ivo Sanader a €10m bribe in 2009 to secure management control over the flagship Croatian firm.

The corruption allegations against Hernadi were first made by the Croatian anti-graft agency Uskok back in December 2012, but progress over bringing the leading Hungarian businessman to book was held up by Croatia’s accession to the EU, which the former Yugoslav state joined on July 1 last year. Having secured its long-cherished dream of joining the EU in 2013, Croatia has since been more assertive in its pursuit of Hernadi, who the Hungarian government has steadfastly refused to be allowed to be extradited to Croatia, citing national security concerns. Last October Croatia raised a European arrest warrant against Hernadi, but the Budapest Metropolitan Court refused to execute it on the grounds that Hungarian prosecutors had investigated the graft allegations against Hernadi and reportedly found no evidence of criminal wrongdoing.

Despite that legal rebuff, the judicial authorities in Zagreb have now definitively decided to press on with Hernadi’s prosecution, which has soured hitherto friendly relations between Croatia and Hungary.

Bad company

In the wake of last October’s court decision in Budapest, Hungarian Prime Minister Viktor Orban accused Croatia of applying “non-economic” methods to intimidate MOL, in which the Hungarian government is the biggest shareholder with a 25% stake. For its part Croatia, which holds a roughly 45% stake in INA (MOL owns 49.1%), rejected Orban’s accusation of political bias behind the corruption charge against Hernadi, with Croatian PM Zoran Milanovic claiming that the charges had been brought by Croatia’s independent judiciary and said that as such the Croatian government “cannot negotiate over” Hernadi’s arrest.

Croatia has already sentenced the ex-PM Sanader to 10 years in prison on the basis of the charge that he received a €10m kickback from Hernadi in return for agreeing to amend the shareholder agreement between MOL and the Croatian state that granted the Hungarian firm enhanced management rights over INA, despite it not owning a majority in the firm.

Sanader began his appeal against his conviction in Croatia’s Supreme Court on March 31, the same day that Uskok announced it would push ahead with its indictment against Hernadi despite his being unavailable for questioning by Croatian prosecutors. Meanwhile, Hernadi in May successfully defended himself in the Hungarian courts against a private prosecution brought by a former colleague Ilona Banhegyi alleging fraud and embezzlement on the basis that Hernadi had harmed MOL shareholders by not keeping them fully appraised about the corruption investigations against him in Croatia.

The fight comes at a bad time for INA, which is at the forefront of Croatia's efforts to develop huge, newly discovered oil and gas resources off the Adriatic coast, licenses for which the state launched tenders in April. These new discoveries are regarded by the EU as crucial to help wean the continent off Russian gas – a process given further urgency by the current crisis in Ukraine.

With so much at stake, inevitably the fight between the two sides over ownership of INA has been bitter. Fractious talks between MOL and the Croatian government over INA's future have dragged on for years without any resolution, with both sides accusing the other of negotiating in bad faith. MOL wants to keep hold of INA given its potential as a cash cow when the new resources are exploited; Croatia wants to regain control of INA though its current economic difficulties mean it can't afford a straight purchase of the MOL stake.

In mid-May, for example, the head of the Croatian negotiating team, Economy Minister Ivan Vrdoljak told local media in Croatia that MOL had "ruined" INA since it took over running the firm in 2009, causing it to lose “several billion dollars” according to the findings of a consultants report the Croatian government had commissioned.

MOL vehemently rejected the charges of mismanagement, questioning the independence and credibility of the state-sanctioned study, and alleging for its part that badly thought-out Croatian government regulations had led to recent losses at INA. The June 10 decision to continue legal action against Hernadi is therefore likely to add further to the barely concealed ill will between the two warring parties. 

Uncertainty over the fate of MOL's holding in INA has weighed on MOL's share price since late 2012 when allegations of financial shenanigans were first levelled against Hernadi. At the close on June 10 on the Budapest Stock Exchange the company’s shares were quoted at HUF13,100, down sharply on the HUF17,750 level they were traded at before the corruption allegations against Hernadi first surfaced in December 2012.

The battle for control of INA between MOL and the Croatian government has also take its toll on INA's valuation, with the company’s stock June 10 quoted at HRK3,580 on the Zagreb Stock Exchange, versus HRK4,000 in December 2012. 

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