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COLOUR PETRO IN, COLOUR PETRO DOWN AND OUT — POROSHENKO’S ASSETS AT RISK

petro_in

By John Helmer, Moscow

The assets of Petro Poroshenko, frontrunner in the Ukrainian presidential election called for May 25, are facing growing pressure in Crimea and mainland Russia.

If US and French Government proposals now in discussion in Brussels expand anti-Russian sanctions to strike at the offshore assets of Russian oligarchs, Poroshenko is likely to be targeted for retaliation, and lose the Bogdan auto assembly and sales outlets in Crimea; the Sevmorverf shipyard in Sevastopol; Roshen confectionery plants in Lipetsk; and roughly half the Roshen group’s trading revenues. The Crimean assets are relatively small in value. The Lipetsk assets have been estimated by Roshen to have cost more than $100 million. About $80 million, half the Roshen group’s annual sale revenues, is accounted for by Poroshenko’s exports to Russia.

On March 17 an unidentified group in Simferopol, the Crimean capital, claimed [1] to take over the Bogdan car dealership, part of Poroshenko’s Bogdan automobile holding. Hours later in Moscow, Dmitry Rogozin, Russia’s deputy prime minister for the military-industrial complex, announced that “enterprises under private ownership must be respected. [Former Ukrainian] State [property] will be determined by the leadership of the Crimea,” Rogozin added.

In 2011, before the current crisis, Poroshenko’s assets were valued by Ukrainian business media between $980 million and $1.2 billion. The Forbes Ukrainian edition valued them at $1 billion in 2012. According [2] to a Polish study of June 2012, the principal lines of Poroshenko’s business are food processing, including confectionery; trucks, buses, cars and tractors; shipyards; batteries; and television and print media. Poroshenko’s Roshen [3] Corporation, Ukraine’s leading confectionery manufacturer and exporter, does not release production or financial results. Neither does the Bogdan [4] auto group.

roshen_cherryIndependent industry sources, both Ukrainian and international, reveal that until the middle of 2013 the Roshen confectionery business was generating most of Porosenko’s free cash, bottom-line profit, and the largest share of Poroshenko’s estimated asset wealth. A UN source estimated that in 2012 total Ukrainian exports of confectionery totaled $158 million. Of that number, $81 million (51%) was earned from exports to Russia. Another $28 million came from exports to Kazakhstan and Belarus, which are members with Russia of the Eurasian Customs Union. Export value to the US and European Union came to less than $10 million [5].

NOSIS, an Argentine food trade source, reports [6] that in 2012 total cocoa preparation (aka chocolate) exports from the Ukraine came to $294 million, of which $99 million were Russian sales (34%). At best and at trade peak, Roshen was generating sales revenues of about $200 million, half attributable to the Russian trade. Depending on the cost of cocoa, milk, sugar and other ingredients, Roshen’s profit margin has ranged between 7% and 20%. If Poroshenko took all of Roshen’s net profit for his dividend, he was drawing $20 million in a good year.

Russian customs data for imports of chocolate and cocoa products from Ukraine provide more precise, possibly larger revenue and profit numbers for Roshen. In 2011 the volume of Ukrainian imports came to 103.1 million tonnes, worth $361.2 million. In 2012, volume was 111.9 million tonnes, value $381.7 million; in the first half of 2013, 43.1 million tonnes, value $143.3 million.

On July 31, 2013, Russia cut that last number to a fraction by introducing an import ban on Roshen imports. Rospotrebnadzor (RPN), the Russian Consumer Protection Agency, announced [7] it was investigating Poroshenko’s chocolates for excessive levels of benzopyrene, a carcinogenic compound in cigarette smoke, and also in roasted coffee and cocoa beans.

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At first, Roshen denied there was a contamination problem. It then held negotiations with RPN in mid-August. The Russian agency reported [8] it had agreed on a review of Ukrainian biochemical laboratories required to certify the safety of Roshen’s products as a first stage towards renewing the trade. By the end of November, however, RPN announced [9] it was sending inspectors to Roshen’s Ukrainian plants (not his Russian ones) to carry out further chocolate checks. The trade did not resume, and production cuts and layoffs commenced at Roshen’s plants in Ukraine [10].

The timing of the trade collapse was also awkward for Poroshenko, who reportedly had been in talks in mid-2013 to sell a large stake in Roshen to the Norwegian food products and beverage group, Orkla. The Norwegians have also been suffering a contraction of their Russian-brand chocolate business, and last month Orkla announced [11] it is trying to sell out of Russia.

On October 29 Roshen claimed the industry reports [12] of the Orkla sale attempt were “groundless”. The claim was published on the Roshen website in Russian and Ukrainian, but not in English. Orkla said nothing at all. In December Roshen told [13] a food industry reporter that it was hoping for a “phased return” to its Russian trade.

Last month a Russian food industry publication [14] reported that Roshen had declared unaudited earnings of $39.1 million for 2013, and net profit of $1.7 million. The revenue damage from the Russian export ban was said to be $17 million per month. Roshen’s long-term debt at year’s end was reported to be $251.4 million; short-term debt, $18.6 million.

RPN said through a spokesman this morning: “We do not link our activities with the political situation in Ukraine, but we direct control over the circulation of products in the Russian market. When products are identified which do not meet the requirements of our national technical regulations or the technical regulations of the Customs Union, we take the necessary measures, wherever the producers of these products are.” As for Roshen imports, the RPN spokesman said: “We have set out certain conditions for the return of Roshen chocolates [to the Russian market], but still we did not receive any answer to the questions we asked. In the most recent period, there is no information from there.”

In Crimea the Russian government has announced that it has begun to take stock of the capacities for ship building and ship repair at commercial yards located around the peninsular coastline. Legally [15], the Crimean ports are the property of the state, and since June of last year the assets have been allowed for privatization. Control of the ports had already passed into private hands through leasing concessions and other devices, but no privatization had been undertaken by the government in Kiev by the time President Victor Yanukovich was ousted on February 21.

Without the new and costly links to Russia now promised by Moscow, the Crimean ports will face a potentially ruinous contraction of Ukrainian cargoes. There are currently nine ports on the peninsula; the largest of them the Sevastopol Maritime Trade Port and the Avlita Stevedoring Company, also located at Sevastopol. Together, in 2013 they accounted for 9.1 million tonnes of cargo; the total for all the Crimean ports was 15.6 million tonnes, 70% of which were export cargoes shipped from mainland Ukrainian sources.

The contraction of the Ukrainian economy last year saw these volumes shrink significantly. Kerch, in the northeast, saw a 59% decline to 2.8 million tonnes, while Sevastopol suffered a 5% decline. Except for Yevpatoriya, whose 970,000-tonne result was up 6% over 2012, throughput at the Crimean ports counted together was down 14%.

The intensification of the political crisis in Kiev in January and February, and the disruption in state funding, suspension of wage payments, and the collapse of Ukrainian bank lending have caused Avlita to report a 20% decline in its shipments over the two-month period. Steel and scrap, which comprise 80% of the exports from Avlita, come from plants owned by Rinat Akhmetov, Ukraine’s dominant business figure. He also owns Portinvest, to which Avlita Stevedoring belongs. Grain exports, representing another 10% of Avlita’s cargo volume, were down by almost 50%, compared to a year ago.

A Sevastopol port administrator Sergei Tarakanov said early this month that an order from Kiev banning the export of ferrous scrap was one cause for the contraction at Sevastopol. A relatively poor harvest in the Crimean area and the redirection of grain shipments by rail to Odessa and Nikolaev ports triggered the grain trade losses.

Poroshenko owns Sevmorverf (“Sevastopol Sea Wharf”) at Sevastopol, and also Leninskaya Kuznya, which builds river-class vessels in the Kiev region. Other Crimean port assets owned by Ukrainian oligarchs include Yevpatoriya port, on the west coast of the peninsula; this is controlled by Dmitry Firtash, the oil and gas magnate now under arrest in Vienna on a US warrant. Firtash also controls Feodosia port, across the peninsula to the east. At Kerch port, operations are controlled by Palmali, the Turkish shipping group. The Zaliv shipyard at Kerch is owned by Konstantin Zhevago. Until now Yalta, primarily a tourist destination, has been controlled by the Yanukovich family.

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Source: Washington Post

Deputy Prime Minister Rogozin said [16] this week that in addition to work for the Russian Navy, “we are estimating the potential of ship repair and shipbuilding at Feodosia, Kerch and Sevastopol. We understand that it is necessary to have them fulfill state orders. But we also believe that it is likely there will be orders from the civil marine and civil engineering sectors”.

A spokesman for the Navy General Staff has said there will be fresh investment in shipyards and machine shops on Crimea for “the main base of the Black Sea Fleet, which over time will be improved, along with the whole infrastructure system for vessels based [at Sevastopol]. Eventually there will be a modern and repair facility to support the introduction of new ships to the fleet.” Part of the new investment will come from the $90 million in annual rent previously paid to the government in Kiev, according [17] to the Sevastopol base agreement. For the alternative Russian naval shipyard option at Novorossiysk, 750 kilometres due east on the Black Sea shore, read this [18] report from December last.

Yesterday the state-owned United Shipbuilding Corporation said from its St. Petersburg headquarters “we have started to get acquainted with the situation in Crimean shipbuilding. But there almost all businesses are in private hands, the owners [are] in Kiev.” Legally, this is incorrect, and now that authority for privatization of state assets passes into the hands of the Crimean Republic, ownership of the ports has yet to be decided.

One reason there was no rush to privatize the port assets by the Yanukovich government is that ship-building orders have been scarce for the Crimean yards. Five years ago, Zaliv said it was counting on additional investment from Zhevago to refill its order-book. First constructed in 1938 in a cove between the Black and Azov Sea, protected from the prevailing easterly winds, Zaliv occupies a land area of 140 hectares.

yard

During the Soviet period, it built and maintained frigates and other naval vessels, and constructed tankers of up to 150,000 tonnes. After 1992, when the last state-commissioned newbuild rolled down the slips, there were no orders from the Ukrainian government, except for a floating oil production platform; there was nothing at all from Russia.

Faced with competition from Ukrainian yards at Nikolaev and Kherson, Zaliv stopped work in 1996. After Zhevago bought into the shipyard in 2005, work resumed. This was primarily for vessel hulls and components to be assembled at other shipyards in Europe, and also for bulk carriers promised for Zhevago’s iron-ore and pellets business, London-listed Ferrexpo. Only one outlay between Ferrexpo and Zaliv can be found in Ferrexpo’s financial reports: this is for design of a vessel conversion by Zaliv for which $483,000 was paid in August 2011 [19]. A source at the yard acknowledged this week that the Zaliv order book is close to empty again, and there have been layoffs.

According to Alexei Bezborodov, a Moscow-based maritime expert, Poroshenko’s shipyard at Sevastopol has also ceased to operate. It has received no repair work from the Russian Navy, which has three yards of its own; currently these too are less than fully loaded. “There’s nothing serious at Sevmorverf, just ship repair. It’s not for ship-building. It is not a full-cycle shipyard. They can build a small boat, but cannot build a steamboat. It is a repair shipyard.”

Bezborodov believes Poroshenko’s shipyard has no profitability. “It is a pile of scrap metal which is rented by someone. There is nothing going on – there is no work there at all. There’s not much to say about the asset, not even to confiscate it. Only a complete idiot would take it.”

In Kiev the Roshen press office was asked if Poroshenko advocates sanctions against Russians, and if he anticipates tit for tat against his own assets. There has been no reply.

Yesterday, according [20] to Ukrainian and Russian media reports, Russian police entered Roshen’s main plant at Lipetsk, barred entry for the workers, and began a search for company documents and records.