Russian oligarch suffers metal fatigue in Montenegro

By bne IntelliNews December 12, 2013

Nicholas Watson in Prague -

Montenegro has long been a favoured destination for Russian money, but the Podgorica government - which has played fast and loose with foreign investment for several years now - appears to be now biting the biggest hand that feeds it.

On December 6, the Montenegrin government stepped up its increasingly bitter fight with Russian billionaire Oleg Deripaska by inviting bids for the Kombinat Aluminijuma Podgorica (KAP). The aluminium plant used to be under the control of the oligarch's Central European Aluminum Company Holding (CEAC) until - depending upon whom you believe - it was expropriated through forced bankruptcy proceedings or was a victim of mismanagement and fraud.

In a statement, the court-appointed bankruptcy administrators, led by Veselin Perisic, set a January 8 deadline for submitting offers for KAP's assets, valued at just €54.5m, and the bids would be opened on January 10. "If multiple bidders submit equal highest offers, a well-known bidder from the mining and metallurgical sector ... (with) the best plan for KAP's ... future development, higher revenues and readiness to take over the workforce, will be favoured," said a statement from the administrators, though added that the assets could be sold piece by piece if necessary.

This move by the Montenegrin authorities comes despite CEAC, a Cyprus-based subsidiary of Deripaska's En+ Group, on November 26 launching international arbitration proceedings against the Montenegrin state in Vienna. In a statement, CEAC said it's seeking at least €100m in damages over the government's insolvency proceedings that removed CEAC from its operating role without awarding it any compensation for its massive investments. "CEAC claims that the Government of Montenegro acted inappropriately and breached the agreements entered into in 2009/2010," the statement said.

Smelted down

The picking over the carcass of KAP is an ignominious end for what was once a giant of Yugoslav industry that in its heyday in the 1970s employed over 5,000 people. But its decline has been long-running, inexorable and, inevitably, complicated by twists and turns.

The company that was declared bankrupt by a Montenegrin court on October 9 had €459m in liabilities, with the biggest creditor being the state, which is owed €148m. Other creditors include Deutsche Bank, the state power firm Elektroprivreda Crne Gore (EPCG) and Deripaska's En+ itself. At the time of bankruptcy, CEAC owned 29.4% of the company, the same as the state, though it had been stripped of operational control. A 15% stake was held by Minerals Euro-Asia - a murky Mauritius-based company - and another 9% by "other legal entities". These are suspected to include Montenegrin oligarchs, perhaps with Russian ties.

At one time CEAC held a 65.4% stake in KAP, which it bought for €48.5m in a 2005 privatisation deal that was backed by the Russian government of the time. According to Radio Free Europe/Radio Liberty (RFE/RL), top Russian officials such as then-Duma speaker Boris Gryzlov and then-emergency situations minister Sergei Shoigu visited the plant, which together with a nearby bauxite mine was to form the basis of a leading CEE aluminium producer that CEAC was building to meet the growing demand for the metal in the region.

The relationship between the two sides quickly soured, however, as a series of incidents served to undermine the deal, leading to suspicions the Montenegrin government was thwarting every attempt to allow the investors to make the plant profitable.

In May 2006, CEAC says, "various breaches of representations and warranties" of the deal were discovered by accountants Deloitte, including KAP having "hidden" debts and obligations towards the state totalling tens of millions of euros. In addition, the government-certified 2004 accounts were deemed inaccurate when it came to working capital and other assets. "It became evident to CEAC that KAP's initial financial situation had been misrepresented," the company claims.

The following year, CEAC says, political disputes in the Montenegrin parliament led to the cancellation of the tender to expand the Pljevlya power plant, which supplies the smelter. "As a result, KAP was left without the long-term supply of competitively-priced electricity," claims CEAC. "The prices for electricity supplied to KAP by the state-owned power producer EPCG skyrocketed from 20 euro to almost 80 euro per megawatt-hour."

Failure to find a compromise saw a claim submitted to the Arbitration Tribunal in Germany in August 2008. The global financial crisis struck the next month, which triggered a collapse in demand for aluminium. That saw market prices slump to $1,800 per tonne, even as the cost of production at KAP reached $3,500 per tonne due to the high price of electricity, overstaffing and relatively high salaries.

With KAP facing closure and the loss of approximately 2,400 jobs, the two sides struck a deal in 2009-2010 that involved a swap of equity in return for sovereign warranties on around €130m of debt. This appeared to stabilise the business to the point where it started to make a profit in January 2012 - the first time since 2006, claims CEAC.

However, the truce was short lived. Renewed disputes over electricity prices and supplies, a new restructuring plan, and equity stakes eventually resulted in the company entering bankruptcy procedures on July 8, which the government claimed were "in line" with the law. "It did not make a move which was not in accord with domestic and international legal provisions concerning KAP."

Arrested development

The claims and counterclaims notwithstanding, the Montenegrin government's actions since the 2009/2010 agreement do, at times, seem to have been designed to disadvantage CEAC.

Two days after the bankruptcy procedures began, CEAC-appointed chief financial officer, Dmitry Potrubach - a Russian citizen - was detained as he crossed the border from Montenegro into Serbia in connection with "stealing electricity from the European grid". He has subsequently made bail, though is not allowed to leave Podgorica.

There was indeed some skulduggery over electricity supplies to KAP. The European Energy Commission earlier this year discovered the unauthorised drawing of electricity by the Montenegrin utility Crnogorski Elektroprenosni Sistem (CGES) from interconnectors that link the grids of Balkans states; power which was then supplied to KAP. However, CEAC claims it was kept in the dark by the Montenegrins over the identity of KAP's electricity supplier ever since EPCG unilaterally terminated the smelter's electricity contract in September 2012.

"This charge [against Potrubach] is absurd... KAP had no direct connection to the regional interconnector and could not consume electricity without authorisation from CGES, the state-owned operator of electricity market in Montenegro as well as key Montenegrin government officials; and KAP had no say over whence any energy supplier sourced its energy," notes CEAC. "Lastly, the CFO had no decision-making power in electricity supply issue, which rested with the board of directors."

The arrest of Portubach, argues CEAC, is only intended to "showcase to the European Energy Commission that Montenegro itself is innocent of stealing electricity."

The Montenegrin government has form when it comes to trashing the property rights of foreign investors. bne reported in 2011 on a dispute with Ethemba Capital over its investment in Montenegrin steelmaker Zeljezara Niksic. The UK private equity firm took the unprecedented step of suing the bankruptcy administrator assigned to the company - coincidentally or not, the very same Veselin Perisic working on the KAP case - in the High Court in London. Zeljezara Niksic was eventually acquired by Turkey's Toscelik for €15m in May 2012.

Neither do Montenegro's own citizens trust their state, which has been controlled by the Democratic Party of Socialists (DPS) for the last quarter of a century. The party has been dominated during that time by Milo Djukanovic, as both prime minister (currently) and president, and accusations of corruption and impropriety against officials are legion.

In December, Balkan Insight reported figures from the European Court of Human Rights in Strasbourg that showed Montenegro tops the list for the number of citizens who have made complaints to the court. According to the report, the court has received 1,063 complaints filed against the state. Given the country has only about 600,000 inhabitants, that means there is roughly one complaint for every 600 people.

For some, the key to the episode over KAP is that Montenegro held a parliamentary election in October 2012 (won by Djukanovic's Coalition for a European Montenegro) and a presidential election in 2013 (won by Filip Vujanović of Djukanovic's Democratic Party of Socialists), bringing the election cycle to an end. With four years to rule, some observers believe the government thinks now is the best time to bring the curtain down on a company that, while still providing some 1,000 jobs and 30% of exports, is no longer viable. The International Monetary Fund, for example, has already this year recommended the government close KAP. Meanwhile, subsidies to state companies will become more of an issue as the country moves further toward joining the EU.

"The politicians have obviously decided they can't sustain the cost of this any more, but they have made sure they got their parliamentary and presidential elections out of the way first so they have four clear years to try to put the pieces back together again. That all militates toward the view that government is playing out a strategy here," says David Webb, senior partner for corporate affairs at regional consultancy Webb Dowse. "For Deripaska, he's in the wrong investment at the wrong time."

Montenegrin politicians may also feel now is a relatively good time to take on Deripaska. The oligarch is somewhat of a wounded animal, having seen his core aluminium business (he owns the world's largest producer United Co. Rusal) clobbered hard by the crisis.

While many believe Derpaska has some grounds for complaint, others point to a rich irony that this Russian oligarch, who has a chequered past when it comes to respecting the property rights of minority investors, should find himself at the end of sharp practices. And inevitably, whenever Russia is involved, suspicions of Kremlin involvement follow.

Conspiracy theories abound, particularly at a time when former communist states trying to join the EU are coming under pressure from Moscow to look east rather than west. Podgorica-based political analyst Blagoje Grahovac told RFE/RL KAP's problems are part of a "geopolitical plot" to strengthen Russia's grip in the Balkans.

Whatever the truth, Montenegro is becoming an increasingly risky place to put your money. That won't help this tiny nation as it seeks to engineer an economic recovery and convince Brussels that its future lies in the EU.

"I line up with the Montenegro skeptics," says Webb. "The country has been cut a lot of slack for political reasons - it was anti [former Serbian strongman Slobodan] Milosevic and compliant on Kosovo - but there are undoubtedly transparency issues and the government's approach to this dispute may be a bit complacent. As a result, one can see them getting mauled in an international court. This is big enough to merit [such action] and Deripaska has the resources to pursue his complaint."

In an interview with EurActiv published December 11, Montenegro's chief negotiator for EU accession Andrija Pejović said the country has no "political issues" to solve and should be able safely to consider itself the next EU member. A growing list of foreign investors would beg to differ.

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