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By John Helmer, Moscow

Evraz, the Russian steelmaker listed on the London Stock Exchange main board, is being sued in the UK High Court for $35.8 million by a group of Swiss investors over a failed project to build a terminal for iron-ore and coking coal at Yuzhny port, on the Ukrainian Black Sea coast near Odessa. The dispute is over an asset on which Evraz has put a substantially higher value on its own balance-sheets than the Swiss investors are claiming in valuation and compensation in court.

The High Court claim papers were filed on April 26. At the same time, a court in Cyprus agreed to impose a freeze over money in the accounts of an Evraz subsidiary operating in Cyprus called Watney Ltd.

The court claims indicate that Evraz had signed an agreement in 2007 with Revolution! Enterprises, a British Virgin Islands-registered company owned by a Swiss investment concern called Leman Services et Investissements Sarl, to construct the new terminal. Their joint venture vehicle was a Cyprus-registered company called Frotora. Evraz company records confirm it owned 51% of Frotora.

Records at the Swiss canton of Vaud indicate that Leman is a limited liability entity, first established in 2002, and jointly owned by Bruce Littman and Daniel Littman. The former is listed as senior vice president at EFG, the Geneva-based private banking group. EFG’s Cyprus banking subsidiary is also identified in the court documents as involved in the port project.

The plan of the joint venture was to acquire the land for the terminal, relocating a village of 120 people, and spend up to $500 million on construction of new facilities, including railway, roads and berths. The site, according to the Yuzhny port authority, is outside the port boundaries, and is owned by a Ukrainian company called Prichaly Kominterna. This is described in the court papers as having been owned by Frotora.

In its annual report for 2007, Evraz reported it had bought several production assets in Ukraine, including the Sukha Balka iron ore mining and processing complex, the Dnepropetrovsk Iron and Steel Works, and three coking plants. “These acquisitions,” Evraz announced in the annual report, “will allow us to increase our iron ore self-sufficiency and ensure further upstream integration. It will also create captive intra-group demand for coking coal for the surplus production of Evraz Group’s coal mines in Siberia.” For that deal, Evraz paid $1.1 billion in cash and 4.2 million in shares.

The annual report also discloses: “In 2007, the Group acquired a 51% ownership interest in Frotora Holdings Ltd. (Cyprus). This purchase does not qualify for a business combination as the acquired company does not constitute a business. The company’s assets comprise only rights under a long-term lease of land to be used for a construction of a commercial sea port in the Ukraine. These rights were valued at $65 million and included in contract terms category of the intangible assets.” The same notice reappears in Evraz’s annual report for 2008.

Evraz was aiming, the 2007 report leaves no doubt, to use the port to service its newly acquired iron-ore mine, coking batteries, and steel mill. “With this transaction Evraz Group also aims to enter one of the lowest cost steel producing regions, and thus to further diversify Evraz Group’s asset geography.” Note that if Evraz was valuing its 51% stake in the port project at start-up at $65 million, then its joint venture Swiss partner’s stake must have been worth $62.5 million. If the entire asset value of Frotora was valued at $65 million, then the Evraz share was worth $33.2 million, the Swiss share $31.9 million.

The two partners also agreed that Evraz would be obliged to buy out the 49.05% stake in the project owned by Revolution! Enterprises if the latter exercised its put option to sell at a price fixed by an independent market appraisal of the terminal asset. Then the steel and commodity trade crisis struck Evraz in autumn of 2008, triggering the group’s near-insolvency with more than $10 billion in debts, and the Kremlin was asked to rescue Abramovich and bail out his assets in the US. Evraz then ran into trouble over the Sukha Balka iron-ore mine with Ukrainian shareholder, Igor Kolomoisky.

In its annual report for 2010, Evraz discloses that it had unilaterally devalued the port project assets and rejected its Swiss partner’s claim. “In 2010, the non-controlling shareholder’s right to put a 49% share in Frotora Holdings Ltd. (‘Frotora’) to the Group at fair value of the ownership interest became exercisable. The Group derecognised a 49% ownership interest in Frotora amounting to $6 million and accrued a liability for the same amount. The assets of Frotora comprised mostly the rights under a long-term lease of land to be used for a construction of a commercial sea port in Ukraine. These rights are included in contract terms category of the intangible assets. In 2010, the Group recognised an impairment loss of $30 million in respect of these rights due to the change in plans for the use of this land.”

That statement was prepared in March of 2011. Evraz appears to suggest that it valued the Swiss 49% at $6 million, and its own 51% at $30 million. The statement also appears to imply that evraz didn’t intend to pay its partner the $6 million, but was charging its own balance-sheet, and thus its shareholders, $30 million.

In the same month, another valuation, prepared for Revolution! Enterprises and Leman by the International Chamber of Commerce (ICC), estimated $35.8 million as the price of its stake for sale to Evraz under the option agreement.

According to the UK and Cyprus court documents, Evraz refused to agree to pay anything to the Swiss. But it has subsequently sold its own stake in the project in April of this year for $9.2 million, one-quarter of the sum Swiss have demanded. The latter then applied to the Cypriot court to freeze whatever money may have come to Watney for this transaction. The freeze order is dated April 27.

Kseniya Petrushko, a spokesman for Evraz in Moscow, says the company is not commenting on the court claims for the time being.

The buyer of Evraz’s stake is reported in the court documents to be a Ukrainian company called Bravex. It is identified on the internet as a wholesaler and distributor of imported goods, including cars, and a specialist in cargo handling and warehousing. Whether it is connected to the major Ukrainian steelmaking and mining groups is not known. Noone picks up the telephone at its Kharkiv office numbers.

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