Podgorica’s commercial court has launched proceedings for introducing bankruptcy at Montenegrin aluminium smelter KAP upon a request of the finance ministry, radio station AntenaM reported on June 14, quoting unofficial information.

The report gives no further details on the matter but reminds that earlier in the day finance minister Radoje Zugic told reporters in Budva that KAP’s insolvency is a realistic option. Zugic said that launching insolvency would mean automatic activation of the state guarantees issued on KAP’s bank loans but added the government is working on making all liabilities payable in installments. 

He also said that in case the government takes over the payment of KAP’s outstanding electricity bills – the move will result in a budget rebalance since it was not envisaged in this year’s fiscal plan.

According to unofficial information KAP has accumulated over EUR 70mn in unpaid electricity bills. The company plunged in even deeper troubles after the power suppliers in the country cancelled their contracts with it and since the start of 2013 it has been without an official supplier.

This created unbalances in the local power grid, since KAP continued to receive electricity, and grid operator CGES was forced to steal from the European transmission system in order to stabilise the network. The European transmission operators, however, discovered the missing quantities and asked CGES to immediately put its system under control and prevent the illegal supplies to KAP.

Montenegro was also asked to start returning the stolen quantities as of June 14. CGES and the government said KAP should pay for the electricity to be returned to Europe since it has consumed it. Yet, the Russian managers of the company refused to take any responsibility, saying they have neither a contract with CGES, not the infrastructure to steal power from the regional system.

CGES then stepped in, bought power from energy producer EPCG and started returning it to the European system on June 13 in order to prevent a cut-off of the whole national grid. CGES, however, said it is automatically disconnecting KAP at noon on Monday, June 17, if it does not sign an official power supply contract by June 14.

In this context, introducing a programmed liquidation at KAP is considered as one of the most uncomplicated options for the government to get rid of its partner in KAP’s ownership – Russia’s CEAC. Although this option is expected to activate a one-off payment of EUR 100mn for KAP’s credits, via it the government would avoid the payment of EUR 120mn sought by CEAC.

The main problem in case of liquidation will be maintaining production and providing KAP with liquid funds for financing monthly working capital needs and raw materials supply.