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By John Helmer, Moscow

A decade ago, before the Annie-get-your-gun ladies got control of US policy in Ukraine, their Hopalong Cassidy predecessors were in charge. Back then, the menfolk tried an identical combination of bribery and democracy-funding, the point of which was to make sure Serbians lost their right to go to their own beach – that is to say, Montenegro. If the children reading would go to bed immediately, it would be possible to reveal how the unconventional sexual orientation of Annie and Hoppy usually leads to such jolly, if not gay American combinations – bribery, democracy, and beaches.

The war between Moscow, Washington, and Brussels over Montenegro went to the wire on May 21, 2006, when 55.5% of Montenegrin voters approved their secession from Serbia, and applied for recognition, first as an independent state, then as a candidate member of the European Union (EU). Russian policy opposed the breakaway, backed the union with Serbia – rump of the former Yugoslavia – and offered Montenegrins a Russian cash-and-carry alternative to EU grants and conditions. The validity of the super-majority required for the US-EU option to carry was just 0.5% of the 419,236 votes cast – 2,096. In Podgorica, the country’s capital and site of the Podgorica Aluminium Combine (KAP), the US-EU vote came to 53.2%, not enough for the European option to prevail.

A lot of money was spent corruptly but peaceably to buy votes. Not a shot was fired, and the local cutthroats and cutpurses in the employ of Washington, Brussels, and Moscow kicked up a lot of sand, but spilled no blood. By the time Montenegro declared itself European, though, Russians controlled the beachline from the Gulf of Kotor to the Albanian frontier, and many of the industrial assets in the Montenegrin hinterland too.

montenegro_map

How much Oleg Deripaska, owner of KAP since 2005, did in the run-up to the referendum on Montenegro’s secession, and how much help he got from the Kremlin, is not quite a secret. Now that Montenegro’s government is in the middle of negotiating full membership of the EU, on March 20 Deripaska launched a lawsuit against the Montenegrin government for €600 million. With state revenues last year of just €1.3 billion, Deripaska is threatening almost half the Montenegrin budget, and if he wins in court, paralysis for the state.

If there is a Kremlin purpose behind this action, that is a tightly held secret at the Moscow headquarters of United Company Rusal, where Deripaska remains the chief executive officer and control shareholder. According to a Rusal insider, “this [KAP] plant was a closed subject, so very few people in the Moscow office have been in the picture.”

Officially, Rusal releases and reports do not mention KAP, claiming it’s the property of Deripaska, and so nothing to do with Rusal. “Mr. Deripaska,” Rusal reported to the Hong Kong Stock Exchange in 2011, “owns CEAC [Central European Aluminium Company] (which operates an aluminium smelter in Montenegro called KAP and a bauxite mine called Rudnic Boxita Niksic which supplies raw material for the smelter). KAP manufactures a wide range of aluminium alloys. CEAC employs more than 1,700 people and produces 80,000 tonnes of aluminium annually. KAP’s main suppliers are the electricity company of Montenegro, the Port of Bar, Montenegro Railways and bauxite mines. KAP’s largest customers are aluminium traders (KAP sells most of its aluminium into the market at LME based prices).

dzhazoyanDeripaska’s claim is before the International Centre for Settlement of Investment Disputes (ICSID), a tribunal associated with the World Bank in Washington, DC. It has jurisdiction over disputes between governments and commercial businesses or companies. The filing record at ICSID commenced on March 20. The tribunal to hear the claims has yet to be appointed. Representing Deripaska in the case is a lawyer named Egishe Dzhazoyan (right) from the London branch of King & Spalding. According to his lawfirm bio, Dzhazoyan “has amassed a wealth of expertise in complex offshore disputes related to commercial fraud and asset recovery in numerous jurisdictions including BVI, Bermuda, Cyprus and the Isle of Man.”

According to another of Deripaska’s lawyers, a German working for CEAC named Dr Matthias Menke at a Frankfurt law firm called Graf von Westphalen – retained by Deripaska to pursue a separate €100 million arbitration claim — CEAC is going against the government because it “has made substantial investments in Montenegro which have been consistently undermined”. The legal proceeding alleges corruption and lawlessness in the way CEAC has been treated at KAP. Deripaska is thus helping the EU to understand what a poor candidate for accession Montenegro will make. “It is of fundamental importance,” Menke said in December, “that the EU officials negotiating Montenegro’s accession recognise the very grave problems that still need to be addressed regarding Montenegro’s lack of respect of the rule of law in view of the vested legal interests of foreign investors in the country.”

Menke also reveals that the Russian state bank VTB, acting through an Austrian subsidiary, is a major creditor of KAP seeking repayment of its loans, along with another Deripaska entity, EN+, the holding through which Deripaska holds his shares in Rusal. VTB is reported to be pursuing recovery from the government of €60 million in loan guarantees for KAP dating back to 2009; this claim commenced in July of 2013 before the London Court of International Arbitration (LCIA). VTB finds itself at the back of the creditor line, behind Deutsche Bank, which has already recovered €23.4 million, and OTP of Hungary, which is in negotiations for its €49 million loan.

The size of the debt claimed by EN+ has not been reported. EN+ appears to have been the conduit for delivering Rusal-made aluminium ingots to Montenegro for resmelting and finishing into the aluminium products KAP exports to its clients in Italy, Switzerland and elsewhere in Europe. How much KAP was charged by EN+ for the supply of the semi-finished metal, and how much Glencore paid KAP for taking the metal off its hands and selling it abroad remain secrets yet to be disclosed in the ICSID proceeding. Glencore’s contract with KAP required the plant to deliver all its metal for sale by Glencore, a provision the Montenegrin government is now challenging.

According to Menke, the Montenegrin government sold Deripaska a lemon from the start. “From the misrepresentation of the financial health of the company at the outset, to the inappropriate use of bankruptcy proceedings to the removal of CEAC from the management role and now the recent decision to sell off KAP assets, Montenegro has waged a sustained campaign aimed at undermining CEAC’s interests.”

potrubachPrivately, the Montenegrins have long accused CEAC of operating a cash-stripping scheme at KAP, over-charging for inputs and under-paying for output; and of failing to honour the 2005 privatization contract terms for investment, pricing, output and employment. CEAC’s trustee in charge of KAP, Dmitry Potrubach (right), has been arrested in Montenegro on charges of obtaining zero-cost electricity for the plant (aka stealing). Before working for Deripaska at KAP, Potrubach ran Rusal’s alumina operations in the West African Republic of Guinea.

Menke says Potrubach has been targeted by “ridiculous trumped-up charges of stealing electricity from the EU grid, despite the fact that KAP has no direct connection to the regional interconnector and that, therefore, KAP could not consume electricity without the authorisation of the state-owned electricity supply operator in Montenegro.” Potrubach has been released on bail, and forbidden to leave Montenegro.

“We call on the European Union,” says Menke, “to underscore towards the government of Montenegro the relevance of full and effective protection of all existing and future foreign investments, and provide full redress to those companies such as CEAC that have been the victim of its lack of respect of the rule of law.”

At one time, when KAP was producing 120,000 tonnes of aluminium – 18% above its rated capacity – the plant was consuming almost three-quarters of all the electricity produced in the country. The price and source of this power has been one of the keys to the profitability of the smelter. Dzhazoyan claims the government reneged on a sale and purchase agreement he says guaranteed stable electricity prices between 2005 and 2010, in exchange for investment in the plant of €75 million.

Dzgazoyan also claims that government action last year to put KAP into bankruptcy, and then offer it for sale to a local buyer, has illegally undervalued the asset, shorting VTB and the Deripaska creditors for repayment of old debts. He acknowledges that plant output is now down to 50,000 tonnes per annum.

On October 9 last, a Montenegrin court accepted the government’s application to put KAP into bankruptcy, and appointed an administrator to take over operations from CEAC. The court ruled that KAP had €459 million in liabilities. The largest of the debts, according to the court, was €148 million owed to the state, followed by smaller amounts owed to the state power supplier, Elektroprivreda Crne Gore (EPCG), and En+ itself. At the time of bankruptcy, CEAC held a 29.4% shareholding of the company; the government held a similarly sized stake; another 15% was owned by a Mauritius entity called Minerals Euro-Asia, and 9% by other front companies. These shareholdings appear to have been let go by Deripaska as he renegotiated the terms of his operation of the smelter through the crises that have multiplied since 2008 on account of the rising power price, the falling aluminium price, and the burgeoning debts of both KAP and the government itself.

According to Russian press reports, the final break came recently when EPCG cut electricity to Deripaska’s shoreline villa, near the marina he, Nat Rothschild and others have built on the Gulf of Kotor on the site of the old Yugoslav Navy base and shipyard.

In 2005, when Rusal first acquired KAP by buying 64.5% of the state shareholding, the terms were a down payment of €47.5 million; an additional $27 million in cash instalments payable over 12 months; an investment commitment of €55 million; and a job retention promise for 2,150 KAP employees. There was also no doubt that it was Rusal making the acquisition. Rusal spokesman in Moscow, Igor Itskov, declared at the time: “We reached many compromise solutions at the talks and signed a document that lays a good basis for developing the plant.”

But Rusal wasn’t the “we” Itskov announced. Montenegrin and KAP officials revealed that they suspected Rusal might not honour its commitments because Deripaska’s formal bid for KAP was made by a Cyprus entity called Salamon Enterprises. In trying to lock up Deripaska’s investment promise for the plant, the Montenegrins required bank guarantees they could call on for the money, if Deripaska defaulted.

banjevicAt the time KAP’s chief executive Mihailo Banjevic (right) revealed that he had asked Rusal or Deripaska’s Moscow holding Basic Element to submit their bank guarantees, instead of Salamon. Rusal refused. Banjevic then announced the deal was off. “Rusal could not meet Montenegrin legal requirements and provide adequate guarantees for Salamon Enterprises. They had never offered a detailed investment plan, nor have they ever detailed a plan to deal with environmental problems.”

After four weeks of negotiating, new terms were agreed. In April 2005 Banjevic revealed that these included the requested guarantees, plus an explicit formula linking the price Deripaska would pay for electricity to the price of aluminium on the London Metal Exchange (LME). “Through termination clauses,” Banjevic said, “we have protected ourselves completely as to fall of production, huge debts… In specific cases the Government can terminate the contract one-sidedly and undertake the management of KAP. Rusal has accepted prices and conditions from the privatization strategy of KAP, too. We have agreed that the electricity price [is] to be linked with the price of aluminium at the market, and that will be valid from December 31, 2006.”

The power supply contract agreed with EPCG fixed a price of €20.44 per MW, to which a supplement would be added of 0.024% of the LME price for aluminium in the range of $1,550 to $1,800 per tonne. This pricing was agreed to run until the start of 2010.

Banjevic also confirmed at the time that once Rusal had taken over the plant, it was required to start negotiations with Glencore and Standard Bank of London, then the principal international creditors of KAP, together with a local creditor called Vektra. Bank sources in London commented that they were well informed on the financial condition of KAP at the time, as they had been engaged in debt recovery procedures with another Montenegrin metals producer, the Niksic steelmill.

In time, Deripaska would agree with Ivan Glasenberg of Glencore to cover KAP’s debts by assigning all of KAP’s metal to Glencore for trading – and most of Rusal’s, too. The legality of their deal for Rusal’s aluminium is currently being challenged by Victor Vekselberg at the London Court of International Arbitration.

According to Banjevic, in April of 2005 Rusal and Deripaska had agreed to import electricity to meet the full requirement to sustain KAP’s production level at 120,000 tonnes. “During first four years, KAP shall receive 1,2 billion kWh regardless whether the aluminium production will be increased or not. In the year 5 [2009], KAP will receive 900 million kWh from domestic sources. KAP’s average electricity consumption with the present production of 120,000 tonnes of Al[uminium] is 1,8 billion kWh. Therefore, during first four years, RUSAL/KAP has to import 600 million kWh and in the year 5 – 900 million kWh.”

Deripaska and the Montenegrin government then announced to the press that Deripaska had agreed to invest $1.4 billion to construct new hydro-electric power stations in the Kosovo region of Serbia, and import his extra electricity requirement from this source. “At present,” Banjevic said, “KAP imports one-third of its electricity from Bulgaria at the price of €32/MWh with the obligation to pay to EPCG a transmission fee of €2,21 for each imported Mwh.”

Banjevic acknowledged he didn’t know what Deripaska would do, if anything, in Kosovo. He confirmed there was no ambiguity in the agreement on pricing of electricity. “RUSAL accepted the stated figures in the Sales and Purchase Agreement. We do not have any official information on Kosovo. It is obvious that with the current €/$ exchange rate, the average electricity price to KAP is $31. RUSAL would have a higher average price because it would have the obligation for additional payment to EPCG due to the increase of obligation in the event the LME [price of aluminium] is above $1,550 per tonne. The existing design capacity of the Plant is 102,000 tonnes of Al, but KAP is producing 120,000 tonnes; that is, 18% more than the design capacity. RUSAL has a projection to produce 160,000 tonnes, although it is unclear how they will purchase the missing volume of electricity. However, after year 5 [2010 on], RUSAL/KAP will have to buy electricity at the free market [price].”

In February 2008 Kosovo declared itself independent and seceded from Serbia, over Russian opposition, and with the military backing of the US and NATO forces. If Deripaska’s scheme for investing into power generation in Kosovo had been backed by the Kremlin, the political outcome was a defeat for the Russian side. Deripaska now claims he lost money in Montenegro because he had been misled on KAP’s liabilities, costs, and financial condition.

The Montenegrin government is now hinting that CEAC stripped cash from KAP. “Owing to poor corporate management, KAP’s debt to its creditors exceeded €350 million,” a government official has told the local press. Now under state management, KAP executives do not respond to questions. The Montenegrin Ministry of Economy said last week: “The arbitration proceedings initiated by CEAC against the State of Montenegro are in progress, and all information the Government has, and which is within its jurisdiction, shall be presented to the arbitral tribunal.”

Srdjan Kusovac, spokesman for the Prime Minister in Podgorica, adds: “We have already told to several media that we are not going to give these kind of comments during the arbitration process.”

In its last country report for Montenegro, released on July 3, 2013, the IMF declared that KAP “is not viable at market electricity prices…has heavy indebtedness, over-employment and large investment needs.” The IMF said it supports the government’s move to put KAP into bankruptcy.

“Efforts to sustain KAP have distorted resource allocation, and consumed scarce budgetary resources. KAP has been unable to break even because of high input costs, and so far, interventions to support it have failed to put the company on a sustainable footing despite considerable fiscal costs. Staff’s analysis, including that in the 2012 Article IV Consultation, suggests that the prospects for a durable long-term solution—one that is subsidy-free and extinguishes outstanding debts and liabilities—are limited, and it appears inevitable that KAP cannot be sustained without unduly burdening taxpayers for years. Budgetary support for KAP should be discontinued and eventual liquidation pursued under a clear plan.”

Reporting before Deripaska and VTB launched their costly court claims against KAP, along with their appeal to the EU for support, the IMF claims that Montenegro’s negotiations to join the EU are likely to be delayed for “at least 6–7 years.”

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