State lawsuit threatens Ukraine’s largest foreign investor

Graham Stack for Kyiv Post

Another Ukrainian court seems set to turn the clocks back, this time threatening a landmark 5-year old privatization deal that brought the government $4.8 billion in the cleanest auction of government assets ever held.

The general prosecutor is bringing a lawsuit in Kyiv Economic Court against the country’s largest steel plant, ArcelorMittal Kryvyy Rih, which is owned by the country’s largest foreign investor. Steel is Ukraine’s top export.

The litigation follows the Oct. 1 decision by the Constitutional Court to cancel changes to the Constitution agreed to six years ago in 2004, paving the way for Ukrainian President Viktor Yanukovych to seize even more presidential powers to control government appointments.

Now, with many of Kuchma’s people returning to office following the Feb. 7 election of Yanukovych, a lawsuit brought by the prosecutor general against the ArcelorMittal plant could see the 2005 privatization reversed, and the company returned to the state.

This time, the 2005 privatization of the huge Kryvyy Rih plant in Dnipropetrovsk Oblast is in play. Its sale to Indian tycoon Lakshmi Mittal’s steel company, for $4.8 billion plus large-scale investment commitments, was the high point in the otherwise disappointing presidency of former President Viktor Yushchenko.

The lucrative privatization was all the more celebrated because it followed an earlier suspect privatization of the same company that had seen it go to oligarch Viktor Pinchuk, son-in-law of ex-President Leonid Kuchma, and billionaire Rinat Akhmetov for only $800 million.

Now, with many of Kuchma’s people returning to office following the Feb. 7 election of Yanukovych, a lawsuit brought by the prosecutor general against the ArcelorMittal plant could see the 2005 privatization reversed, and the company returned to the state.

A top ArcelorMittal executive, Christophe Cornier, said that the first hearing in the case on Oct. 1 was more disappointing than even the company’s worst expectations.


Kryvorizhstal steel mill in Kryvyy Rih

“We are taking this very seriously,” said Cornier, a 25- year veteran of the company flown in from London to confront the emergency situation. “We paid $4.8 billion for this plant, and put $500 million worth of capital expenditures into it. We feel it is a very good plant and we don’t want to lose it.”

“But it is very difficult to assess what the outcome will be,” acknowledged Cornier, who said he will be meeting with German and French ambassadors in Kyiv. “We are outside the boundaries of a normal law and order situation.”

The steel plant is a defendant along with Ukraine’s State Property Fund. Prosecutors are disputing a 2009 agreement between ArcelorMittal and the State Property Fund that declared a force majeure – an emergency situation — in view of the global economic crisis that caused steel prices to plummet. The deal allowed the steel plant to postpone investment commitments made under the terms of the original share purchase agreement of 2005.
“The dispute is that the addendum is not legal because it was not signed by the Cabinet of Ministers,” Cornier said. “But when you look at the original share purchase agreement [of 2005], it is written nowhere that it has to be signed by the cabinet.”

Furthermore, according to Cornier, the plant’s shareholder, ArcelorMittal Duisburg GmbH, has not been informed of the lawsuit, an apparent breach of the law.

And thirdly, according to Cornier, both the original share purchase agreement and the additional agreement of 2009 specify the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry as the place of jurisdiction for all disputes. The court is a non-state independent arbitrage court.

But on Oct. 1, the first hearing in the lawsuit took place at Kyiv Economic Court with presiding judge Oleh Khrypun dismissing claims the court had no right to hear the case.

“Normally the justice system in Ukraine is not as fast as one would expect it, but this time it is proving to be fantastically fast.”

– Christophe Cornier, top ArcelorMittal executive

“This is very strange. I have never heard before that a judge from the Economic Court handles a case stipulated for the” International Commercial Arbitration Court, said Yevdokia Paschenko, vice president of the court. Khrypun was only named to preside over the case one day before the hearing, replacing the original judge.

“If you see the pile of paper regarding the case he had to get through,” Cornier said. “I doubt if it was possible for him to have read much of it, even if he did not sleep.”

According to Cornier, Khrypun then showed that he wanted to proceed with the case at top speed. He ignored or rejected all the defendants’ petitions and scheduled the second hearing for Oct. 5, a gap of only one working day between the first and second hearing.

“Normally the justice system in Ukraine is not as fast as one would expect it, but this time it is proving to be fantastically fast,” Cornier said.

Khrypun has previously aroused controversy over his handling of cases, most recently a lawsuit of Transbank against Ukrainian TV channel Tonis in August. “This seemed to us more like a raider attack than a fair hearing,” said Larissa Rudenok, head of Tonis legal department. Khrypun has denied any irregularities in his rulings on the case.

All of this fills ArcelorMittal with a sense of foreboding as the five-year anniversary of the privatization auction approaches.
“If the general prosecutor wins the case, then they go back to the previous agreement and they say that you have not fulfilled your investment commitments, which would be true, because they were suspended during the force majeure,” Cornier said. “Then he would say that because you have not fulfilled your investment, the sale is invalid, and the shares are returned to the state.”

Such a prospect may threaten ArcelorMittal’s entire investment.

“I doubt we would see our money back. I don’t see the country is rich enough to give us back $4.8 billion, when they are not capable of returning our VAT [value-added tax], and when by the end of this year we will have paid three years corporate tax in advance.” said Cornier.

Cornier said ArcelorMittal had received no offers for the company, nor knew of anyone trying to acquire it, nor does it want to sell. “It is not the ArcelorMittal style to sell,” he said.

But he said he did not believe the pressure on the company was coming directly from the government.

“Yanukovych seems to travel a lot these days. every week he is in a different foreign country, and every time they claim Ukraine is friendly to investors and transparent, and they will restart the privatization campaign. I cannot imagine that they can say that and then do this. So maybe this is not coming from the top,” Cornier said. “I think Yanukovych is not aware of the situation.”

The Kryvyh Rih plant’s new chief executive officer, Rinat Starkov, was quoted by the Financial Times as saying he believed an attempt was under way to return the company’s shares to the state. Starkov said business interests, not the government, were behind the move.

The Prosecutor General’s lawsuit is not the only problem suddenly confronting the company, a fact that adds to the impression there is an organized campaign under way. The Security Service of Ukraine, the successor agency to the Soviet KGB, is currently investigating the company after the state Customs Service brought criminal charges allegation that the value of coal imports were under-declared.

In November 2009, Alexei Pertin, chief executive officer of Smart Holding, owned by Russian-born oligarch Vadim Novinsky, told Kommersant Ukraine newspaper that his company wanted the plant returned to the state because of its failure to meet investment commitments.

In the privatization of 2005, Smart Holdings came in third place behind the then-separate companies of Arcelor and Mittal. According to Pertin, if Arcelor and Mittal reneged on the investment commitments regarding the Kryvyh Rih plant, this would give Smart Holdings a claim to the company.

Cornier said he had not heard of Smart Holding’s claims. He also said ArcelorMittal had satisfactory relations with Akhmetov, the Ukrainian steel tycoon who owns mining and metals giant Metinvest. Smart Holding holds a 25 per cent stake in Metinvest.

The Prosecutor General’s lawsuit is not the only problem suddenly confronting the company, a fact that adds to the impression there is an organized campaign under way. The Security Service of Ukraine, the successor agency to the Soviet KGB, is currently investigating the company after the state Customs Service brought criminal charges allegation that the value of coal imports were under-declared.

“The customs service have suddenly declared that the real value of our coal imports should be $360 per ton, when you only have to open a newspaper to see that the price is $200,” Cornier said.

Trade union representatives at the plant have also raised their voices, accusing company management of failing to fulfill a collective agreement signed in 2009. Cornier played down the topic, saying: “Everyone has trade union issues, and we fulfilled 99 percent of the agreement.”

Cornier said recent developments could cause the company to rethink its plans to expand into coal mining in Ukraine and to complete a plant for processing oxidized iron ore at Kirovohrad. “Mr. Mittal is a little upset,” he said of the response of ArcelorMittal’s Indian owner and chief executive officer.

“We like our plant. We like the country. It is a good place to make steel. There is good iron ore, and skilled people,” Cornier said. “But we don’t see our Ukrainian competitors having problems with the prosecutor general.”

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