Overpriced Russian coal imports push Romania’s CE Hunedoara towards bankruptcy

Overpriced Russian coal imports push Romania’s CE Hunedoara towards bankruptcy
By Iulian Ernst in Bucharest April 4, 2016

Romanian mining and energy group CE Hunedoara, which is in insolvency proceedings, faces liquidation because of its imports of overpriced, low-quality Russian coal, a Rise Project investigation revealed on April 1. An attempt to investigate the transactions was reportedly blocked by former energy minister Constantin Nita.

It is not clear why CE Hunedoara, which owns several coal mines, decided to import Russian coal via intermediaries. In most cases the coal, which was sometimes of low quality, was purchased at above market prices.

Until last autumn, the government had been trying to rescue CE Hunedoara, which employs around 6,500 people and has a strategic position in the country’s energy sector. However, for unclear reasons, a state aid payment approved by the European Commission was received too late and cash flow problems pushed the company into insolvency in December.

CE Hunedoara owes some RON1.5bn (€337mn), of which RON1bn is owed to the state budget. The court-appointed manager at CE Hunedoara, GMC, warned in its preliminary report on March 20 that the company faces imminent liquidation.

A large part of the company’s debt was accumulated because it imported expensive, low quality Russian coal instead of using local coal, according to Rise Project, a Romanian non-profit investigative journalism organisation. The investigation is based on reports from the Romanian tax authority and direct interviews with the company’s management.

According to the report, between 2011 and 2015 CE Hunedoara imported 570,000 tonnes of coal at a price of RON340-436 per tonne, compared to just RON200-232 per tonne for higher quality local coal. The local coal would have been delivered from CE Hunedoara’s own mining units.

Instead, imports were carried out through intermediaries, the investigations revealed. There were two import routes: the coal was either imported by commodity trader Vitol through Constanta port, or through Hungary by an intermediary controlled by local businessmen. In both cases the source was Russia.

Some 440,000 tonnes of coal were imported from Hungary by companies controlled by Romanian businessman Victor Benga. This coal was of particularly low quality, sources quoted by Rise Project indicated. It was formally declared at a high value, in order to justify the prices, but an inspection by the tax office revealed that that the coal was of low quality and included thousands of tonnes of coal dust, the tax office’s report consulted by Rise Project specified.

“In some cases, the coal was mixed with soil,” Rise Project concluded, based on sources within the company.

An attempt has been made to probe the transactions. The Hungarian authorities informed Romania in 2013 that the indirect imports might hide money laundering activities, but Nita stopped the investigations, Rise Project reporters claim.

Local daily Hunedoreanul reported in 2013 that the government’s control body and the tax authority had started investigations into CE Hunedoara’s imports. At the time the probe was launched, the company’s coal storage capacities were full of imported coal and its miners were sent on temporary forced leave.

Nita told Rise Project reporters that he did not know the intermediaries and had not approved the imports. Nonetheless, the reporters claim that Nita rejected a written request from the government’s control body for more investigations.

Former Russian intelligence officer Boris Golovin was a shareholder in two of the intermediary companies - Power Coal Resources and Global International 2000. Golovin has represented Oleg Deripaska and Igor Ziuzin in Romania and reportedly delivered outdated technology, which was never used, to CE Hunedoara in exchange for $21mn worth of claims held by the Romanian state for its participation in the Krivoi Rog steel plant before the collapse of the USSR, according to Rise.

CE Hunedoara’s coal production has steadily decreased from 2.8mn tonnes in 2008 to 1.58mn tonnes in 2015, during which time imports carried out through intermediaries increased. However, the region has substantial reserves; with the current outdated technology an estimated 100mn tonnes could be extracted, but as much as 510mn tonnes could be extracted with modern technology. At the current output rate, there are sufficient reserves for the next 36 years, according to government estimates quoted by GDD daily.

The decision to file for insolvency at CE Hunedoara was made on December 28 after RON167mn in state aid extended by the government reached the company too late to cover the required allowances for greenhouse gas emissions.

The company delivers 5% of the country’s electricity and its power generation units are more or less profitable, though its coal mines are not. However, former energy minister Gerea hinted last June that there were investors interested in taking over the mines.

Remus Borza, who carried out a successful insolvency process at power company Hidroelectrica, said in an interview with state news agency Agerpres on March 3 that CE Hunedoara faced imminent bankruptcy unless it fired at least half of its miners. The statement from Borza, whose firm Euro Insol had hoped to take on the insolvency process at CE Hunedoara, implies that the company’s core assets could still be preserved.