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By John Helmer, Moscow

In a decision announced last week, the US Department of Commerce did Victor Pinchuk, owner of Interpipe, the Ukraine’s leading pipemaker and exporter, a favour worth between $6 million and $9 million per annum for the next three years.

At the same time, the International Monetary Fund (IMF) has ordered the government in Kiev to end the delay in collecting $38 million from Interpipe in overdue debt for deliveries of gas by the state gas supplier Naftogaz; and raise the price of this year’s gas deliveries to Interpipe by roughly two-thirds over last year’s subsidized price. Based on an unaudited estimate of energy costs which Interpipe paid in 2013, the IMF rescue will cost Interpipe the difference between $173 million for 2013 and $259 million estimated for this year; that’s $86 million. Add the Naftogaz debt; subtract the value of the US government benefit from the IMF obligation; and Pinchuk’s Interpipe will be poorer by about $100 million.

This is just one of the solvency calculations which Pinchuk and his Interpipe managers have so far been unable to resolve with Interpipe’s auditor, Ernst & Young, whose analysis of the financial results for 2013 has been delayed in release. Instead, Deutsche Bank, the trustee for Interpipe’s $200 million Eurobond, sent bondholders last week an 8-page selection of financial data, without auditor’s notes or conclusions.

The Deutsche Bank substitute reports that Interpipe’s sales revenues for 2013 fell 14% from the previous year to $1.5 billion, while the bottom-line loss grew 5% to $73.4 million. Debts and other liabilities totalled $1.4 billion, and there was just $34.5 million in cash and cash equivalents on hand on December 31. This number appears to breach one of Interpipe’s covenants with its banks to maintain a minimum cash balance of not less than $41 million. Click to page 40. The committee of creditors with which Interpipe is now negotiating to relieve the defaults is composed of ING, Royal Bank of Scotland, Commerzbank, and the Italian export credit agency, SACE.

When Interpipe first defaulted on its bank and bond obligations in 2009, Ernst & Young reported in the annual financial report for that year “the existence of a material uncertainty that may cast significant doubt about the Group’s ability to continue as a going concern”. The new defaults, which began last November, raise even more uncertainty because of the shutout from the Russian and CIS market, and the lack of demand to compensate in markets elsewhere.

The cancellation of Russian imports of Pinchuk’s pipes did not begin until last July, so a relatively normal first-half sales and export performance cushioned the impact. This year the loss of the largest of its traditional export markets will be more severe, as Interpipe conceded in a December briefing for bondholders.

-Interpipe’s cost of sales for 2013 was $1.2 billion. Energy has been identified in audited reports for earlier years as the second largest of the production cost items: since 2011 it has risen modestly from 13% to 14% of the cost total. For an account of the Naftogaz debt, and the Ukrainian court cases to enforce payment, click here. Interpipe has been trying to offset the growing Naftogaz debt with a supply of pipes to subsidiaries of the state gas distributor; still, there has been no agreement on what the barter valuation should be. It is unlikely that the IMF and the new Naftogaz auditors will be as generous as Pinchuk expected Naftogaz to be at the start of this year, before the overthrow he backed of President Victor Yanukovich.

Between now and July 25, the IMF has said it will decide whether to release the second tranche of its $17 billion Ukraine aid programme; the second payment will be about $1.4 billion. The head of the Ukraine mission, who must make the initial assessments and substantiate the recommendation to deliver the money, is Nikolay Gueorgiev (left). He reports to Aasim Husain (centre), currently Deputy Director in the European Department, and the director, Reza Moghadam (right).

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In order to release the money, they must convince the Managing Director of the IMF, Christine Lagarde, to accept the results of their review of Ukrainian compliance with the IMF conditions, signed in mid-April; and the reports of compliance from the Ukrainian Finance Ministry and the National Bank of Ukraine, and Naftogaz since then. Raising the energy charges for Ukrainian corporations, cutting the state budget’s subsidies for energy consumption, and clawing back large corporate debts to Naftogaz are all requirements for the next IMF payout to Kiev – unless the IMF staff and the IMF board decide to postpone looking too carefully.

Officially, the IMF requires that domestic gas tariffs must be raised to “cost recovery level.” According to the IMF programme, “Ukraine’s national energy and utility price regulators NERC and NURC will adopt decisions to raise retail gas tariffs by 56 percent on average from May 1, and retail heating tariffs by 40 percent on average from July 1.”

By the start of this month, the IMF claims, a special auditor should have been appointed with IMF supervision to “conduct quarterly audits of Naftogaz operations to improve transparency.” In other words, to stop favouritism and kickbacks between corporations and Naftogaz; recover past-due bills; and end delays in collecting new higher-priced gas. Officially, there ought to be a transparent audit trail. “The results of the audits will be shared with the IMF within 30 days of each period, initially on a monthly basis beginning with data for end-May 2014, and then on a quarterly basis for end-September data forward.”

In contrast to the IMF’s tightening of price, cost and payment discipline, the International Trade Administration of the US Department of Commerce last week decided to reject claims by American pipemakers that Interpipe was landing its products in the US market with a below-cost, or dumping price margin of 26% and 31%. Instead, Commerce has ruled that the dumping margin for Interpipe should be 6.73%, and then agreed with Pinchuk to suspend collecting this duty on his pipes for three years. The suspension agreement, as it’s called, requires Interpipe to maintain certain restrictions on volumes and pricng of its sales to the US market. “In light of the suspension agreement, no antidumping cash deposits will be required, and no duties will be collected, while the agreement remains in effect…If the ITC makes an affirmative finding of material injury with respect to imports of OCTG [oil country tubular goods] from Ukraine, the suspension agreement will remain in force until no later than July 10, 2017, at which time Commerce will terminate the agreement and issue an antidumping duty order.

The value of the suspension agreement for Interpipe is thus what the import duty would have been on the value of the imports to the US. In 2012, this total was $129.6 million, making the nominal duty $8.7 million; in 2013, total import value was $87.3 million; duty, $5.9 million.

According to one of Interpipe’s bondholders, there is too much fudging and not enough of the accountability which the IMF and the acting Ukrainian Goivernment promised each other. The Deutsche Bank report fails to meet the new standard set by the IMF for Ukraine, and is unacceptable. “We are insisting that this version (e.g. minus qualifications from the external auditors, notes etc.) is not what the [bond] prospectus required Interpipe to deliver.”

Michael Dunlaevy, a London-based director of the Deutsche Bank trustee department engaged with Interpipe, refuses to discuss the fiduciary responsibility and liability issues. Deutsche Bank ought not to be acting instead of Ernst & Young as Interpipe’s stand-in auditor, the bondholder said — especially if the audited financials will differ in material respects from Deutsche Bank’s excerpts. “The Deutsche trustees will be asked whether they truly believe the pages sent. At some stage the bank trustees will need to become concerned about their own perceived integrity.”

Interpipe refuses to say when or if the audited financial report for 2013 will be released.

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