Ukraine: Struggle for Nikopol Ferroalloy Works Nearing

UNCLAS SECTION 01 OF 03 KYIV 001092

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TAGS: EIND EFIN EINV PGOV UP
SUBJECT: Ukraine: Struggle for Nikopol Ferroalloy Works Nearing
Endgame?

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Summary
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1. (U) Pitting oligarch against oligarch and featuring surprising
plot twists and turns, the two-year struggle over the ownership of
Ukraine's Nikopol Ferroalloy Works (NFW) makes for nearly as good
drama as the country's prolonged political crisis. The State
Property Fund (SPF) has been trying since 2005 to reverse its
questionable 2003 sale to oligarch Viktor Pinchuk of a majority
share in NFW, but despite court victories, has been unsuccessful.
In April, after a secret Supreme Court ruling favorable to Pinchuk
and under the threat of a share dilution scheme that would have
devalued the disputed majority holding, it appears that the GOU and
Pinchuk are on the verge of reaching a settlement that could allow
him to retain his control of the company by paying an additional sum
to the state. In getting to this point, Pinchuk temporarily teamed
up with rival oligarch and NFW minority shareholder Igor Kolomoiskiy
against the SPF, but now seems to have double-crossed Kolomoiskiy in
order to seek a deal with the state. The case illustrates clearly
the shortcomings in Ukraine's laws and court system. End Summary.

The Prize
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2. (U) Nikopol Ferroalloy Works is one of the world's biggest
producers of ferroalloys, accounting for about 10% of global
production. It is the world's leading producer of manganese alloys.
NFW's estimated total value is now around $1 billion, and its
annual profits, though allegedly understated for tax purposes, could
be as high as $500 million, according to the press. NFW is owned by
the two leading Dnipropetrovsk oligarchs: Viktor Pinchuk, Chairman
of the Interpipe holding company, and Ihor Kolomoyskiy, who heads
the Pryvat Group. In May and August 2003, the State Property Fund
(SPF) sold blocks of stocks totaling 50% plus one share of NFW to
Interpipe's 'Prydniproviye' consortium for $77.5 million. At the
time, Pinchuk already owned 23% of the NFW's shares, with 26% under
the control of Kolomoyskiy. Like the subsequent sale of the
Kryvorizhstal steel plant, it was apparent that the two NFW tenders
were rigged in favor of Pinchuk--the son-in-law of then-President
Leonid Kuchma--for a cut-rate price. Then SPF Head Chechetov,
currently a Regions MP, admitted to investigators that he had
steered the two tenders to Pinchuk on the direct orders of Kuchma.
The true value of the share was likely closer to the UAH 350 million
a Russian consortium allegedly offered Pinchuk for it in early 2005.


NFW Reprivatization and Tymoshenko's Downfall
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3. (U) After the Orange Revolution, with the public support of both
President Yushchenko and Prime Minister Tymoshenko, the Prosecutor
General launched the NFW reprivatization effort in court. In August
2005, the High Economic Court in Kyiv declared the 2003 sale of
50%+1 stake invalid on the grounds that the sale was conducted below
market price and ordered the transfer of the NFW shares back to the
state. Immediately thereafter, and allegedly with Tymoshenko's
support, Kolomoiskiy's Pryvat group held an emergency shareholders
meeting at which he maneuvered the election of new management,
giving nominal control to the State Property Fund, but placing
Pryvat figures in key positions. In response, Pinchuk arranged for
public demonstrations of his workers, which induced the Ministry of
Interior to send in riot police. Yushchenko intervened, and, while
he said the court ruling had been "deeply correct," he called
Tymoshenko's involvement in favor of Kolomoiskiy "the last straw,"
in citing his grounds for firing her along with her government in
September 2005.

Legal Shell Game: Best Justice Money Can Buy?
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4. (SBU) Pinchuk used three tactics to defend his NFW interest: he
conducted a public relations campaign pointing out that
reprivatization under Tymoshenko was almost exclusively directed
against him; he took advantage of the jurisdictional ambiguities in
the Ukrainian judicial system, winning court decisions to counter
other court judgments against him; and, he blocked execution of the
court order that the shares be returned to the state. (Comment: It
was not difficult for Pinchuk to portray Tymoshenko's ill-starred
reprivatization campaign as a vendetta aginst Interpipe, since her
chief targets were indeed part of his empire, while Kolomoiskiy's

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Pryvat holdings were suspiciously absent from the list of planned
reprivatizations. End Comment.)


5. (U) In January 2006, the Supreme Court confirmed the illegality
of the 2003 privatization and ordered the transfer of the 50%+1
share back to the state. An inability to determine which of two
stock registers actually controlled Pinchuk's NFW shares delayed
execution of this order. In September 2006, however, Pinchuk struck
back, winning a decision in the Kyiv economic court declaring
Prydniprovia the rightful owner. The Kyiv Economic Court of Appeal
upheld this ruling in October, 2006. The GOU countered with a
victory in the Supreme Commercial Court on February 1, 2007,
annulling the two pro-Pinchuk rulings and ordering Pinchuk's
Ukrsotsbank to hand over the stake to the SPF. Ukrsotsbank, backed
by yet another court decision--this time from the Kyiv Vyshhorod
District Court--did not comply, on the grounds that it had already
transferred the stocks to Ihor Kolomoyskiy's Pryvatbank.

Rival Oligarchs Seem to Join Forces
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6. (SBU) This transfer of NFW shares from Ukrsotsbank to Pryvatbank
was a sign of a rapprochement between Pinchuk and Kolomoiskiy that
had two elements at its heart: a withdrawal of Kolomoiskiy's
evidence against the 2003 NFW privatization, and a scheme to devalue
the disputed majority share of the company. (Note: In mid-February,
Pinchuk told Ambassador that he and Kolomoiskiy had agreed to
cooperate in the metallurgical sphere, and that both were now
equally opposed to an SPF takeover of NFW. End Note.) The alliance
with Kolomoiskiy paid off in the courts. On April 20, 2007, a
spokesman for Pinchuk announced that the Administrative Chamber of
Ukraine's Supreme Court had quietly issued a ruling a month earlier
(March 14) canceling the 2005 and subsequent rulings that the
Nikopol privatization had been illegal. According to the press, the
chamber based the decision on Pryvat's retraction of evidence it had
originally presented proving the illegality of the 2003 sale. The
Chamber referred the case for reconsideration to the Kyiv High
Commercial Court, where, in the absence of Pryvat's evidence,
Pinchuk is likely to prevail. The SPF, apparently until then
unaware of this ruling which had somehow not been made public, vowed
to appeal.


7. (U) The second element was a plan to have an April 26 NFW
shareholders meeting increase the company's statutory fund and issue
new stock, thus diluting the value of the disputed 50%+1 share block
down to 10%. (Note: Such schemes are a Kolomoiskiy specialty.) The
additional shares would go to Pinchuk and Kolomoiskiy, presumably in
proportion to their shares in the company. As a consequence, even
if the SPF ultimately prevailed in court, the prize it would win
would be greatly reduced in value. The SPF lodged a last-minute
appeal to a Dnipropetrovsk court to block participation by
Prydniprovia in the shareholders meeting, even persuading Deputy
Prime Minister Azarov to submit a letter to the court requesting it
grant the SPF's request. Despite the pressure tactics, the court
ruled against the SPF on April 25, permitting the shareholders
meeting to go forward.

Stab in the Back?
--------------


8. (SBU) Nonetheless, the planned Pinchuk-Kolomoiskiy stock dilution
scheme did not come to pass. On April 26, representatives of
Pinchuk's Prydniprovia failed to appear at the shareholders meeting,
depriving it of a quorum. According to press accounts, this came as
a surprise to the Kolomoiskiy forces assembled at the meeting hall.
In the meantime, press reports emerged that Pinchuk was negotiating
directly with the Cabinet of Ministers on a final resolution of the
dispute. The newspaper "Kommersant" quoted privatization expert
Alexander Rabchenko, who contended that the negotiations were aimed
at a "peaceful solution," i.e. most likely a plan whereby Pinchuk
would pay the state a sum of money and be allowed to retain the
stock he purchased in 2003. (Comment: Ironically, Pinchuk has been
telling us since 2005 that he would be willing to reimburse the GOU
for some or all of the difference between the price he actually paid
and a fair market value (ca. 2003) of the shares he purchased. In
February 2007, he reiterated that willingness to the Ambassador, but
complained that the GOU had never approached him to make such a
deal. His recent court victory and the threat of stock dilution may
have motivated the GOU to reconsider. End Comment.)


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9. (SBU) On May 4, SPF First Deputy Chairman Viktor Petrov confirmed
to Deputy Econ Counselor that such negotiations were underway, but
indicated that the SPF itself was not involved. He said he was
eager to see the proposal of the "other side." Petrov blamed the
NFW fiasco on the ambiguities in Ukrainian law, and in particular in
the unclear jurisdiction of its various courts. Although the status
of the Pinchuk-GOU negotiations are not known, Interpipe has since
renewed its threat to participate in the stock dilution scheme at a
prospective May 17 shareholders meeting.

Comment
--------------


10. (SBU) If Interpipe's no-show at the shareholders meeting came as
a surprise to Kolomoiskiy, it would seem that, in addition to
outplaying the SPF, Pinchuk has neatly planted a ferroalloy dagger
between Kolomoiskiy's shoulder blades. Having persuaded Pryvat to
withdraw its legal case against the 2003 NFP privatization, Pinchuk
perhaps saw the opportunity to gain undisputed control of NFP as
more attractive to him than a stock-dilution scheme, which might
well have left Pryvat as the largest single shareholder in NFW. A
double-crossed Kolomoiskiy would not be likely to take defeat
graciously, however, and his collaboration with Pinchuk may be more
complex even than meets the eye. More chapters of the NFW saga are
surely still to be written. Meanwhile, the episode underscores that
in Ukraine's business world, as in its politics, problems are solved
through deal-making between powerful individuals, not through the
manipulable court system.

TAYLOR