Oleg Deripaska
Russian oligarch Oleg Deripaska is approaching the moment of truth in his long-running legal battle over the Zaporizhzhia Aluminum Plant – ZALK
Recently, the structures of RusAl, which he heads, appealed to the Supreme Court of Ukraine the October ruling of the country's Supreme Commercial Court on the return of over 60% of the company's shares to the state.
The stake remains in the ownership of the Cypriot Velbay Holdings Limited, which is linked to Deripaska, but the Zaporizhzhia plant has already been shut down.
Aluminum litigation
Approximately 380 million hryvnias were paid for the currently disputed 68,01% stake in ZALK OJSC in February 2001. The State Property Fund of Ukraine approved the Russian company AvtoVAZ-Invest as the buyer.
This structure was later acquired by the Russian company SUAL, which in 2007 became part of the merged company Russian Aluminum – RusAl. The Cypriot company Velbay Holdings acquired the aforementioned stake in the Zaporizhzhia plant in 2006.
The winning bidder was required to allocate $200 million for the company's technical development and refinance its $76,45 million loan, which was provided in the late 1990s by the state-owned Ukreximbank.
These figures are key. For several years, the promised investments were not made, and the loan issue was resolved by terminating the investor's loan refinancing agreement at the plant's initiative.
These circumstances became the basis for the Ukrainian Prosecutor General's Office to initiate proceedings to return the asset to state control in 2008.
In court, RusAl representatives defended their control over ZALK, citing a number of arguments. Among them was the fact that the Ukrainian state had failed to fulfill its part of the privatization obligations: the foil-rolling equipment paid for with the loan was not transferred to the plant for its needs.
Whether the arguments played a role or other circumstances, in August 2011, the Supreme Commercial Court of Ukraine overturned the lower court's decision to return the plant's shares to the state. The case was then remanded for a new trial.
In early 2012, the head of the Zaporizhzhia Regional State Administration, Oleksandr Peklushenko, took an active role in ZALK's fate. He tried to persuade the Russians not to shut down the enterprise. He failed. After this, Peklushenko famously declared, "We won't be able to make any porridge or aluminum with Mr. Deripaska."
Then, former head of state Viktor Yanukovych began to pay attention to the plant's problems. As a result, in March 2012, a new trial against the plant was initiated in the capital's Commercial Court, with the same interested parties and similar demands.
Shell plant
The Zaporizhzhia official was right. The Russians preferred to "develop" the plant through the courts, while production steadily declined. While in 2007-2008, Ukraine's only primary aluminum producer produced over 110 tons of the metal, in 2009 it produced less than half that amount.
In 2010, the plant produced 25 tons of aluminum, and in 2011, the main electrolysis equipment began to be mothballed. Following this, the plant transformed from a major aluminum producer into a reroller.
The owner announced a priority for Zaporizhzhia, namely the production of finished products—wire rod—from aluminum raw materials supplied from his plants in Russia. Sources claimed that the Zaporizhzhia plant was simply "relabeling."
On the surface, this move had a positive impact on ZALK's financial performance, with its net loss in 2013 reduced sixfold to almost UAH 76 million. This improvement, however, did not lead to "priority development."
In the summer of 2014, the plant shut down completely. The company's outstanding losses at the end of 2013 reached almost 2 billion hryvnias.
"The issue of electricity tariffs, which account for a significant portion of the cost of primary aluminum, has been raised repeatedly in connection with ZALK," recalls industry expert Vyacheslav Popov.
Here's how the plant's press service argued the unprofitability of production in the spring of 2012: "With a tariff of over 11 cents per 1 kWh, Ukrainian aluminum is uncompetitive. This tariff is three to four times higher than in other aluminum-producing countries."
They say that if Ukraine concludes a ten-year contract with the company for the supply of electricity at an "economically justified price," it will agree to restore metal production and modernize its facilities.
The current president also addressed aluminum issues. Visiting Zaporizhzhia in mid-October, Petro Poroshenko expressed interest in keeping the plant operating regardless of its ownership. He also emphasized the bankruptcy process.
Deripaska's response was that production in Zaporizhzhia makes no economic sense, as the cost of Ukrainian aluminum is three times higher than that of Russian aluminum. This applies not only to primary aluminum but also to rolled aluminum. ZALK's press service also called bankruptcy "the right solution."
If not by hook or by crook, then by bankruptcy
Why then so persistently challenge the deprivatization? "Giving up ZALK without a court battle is contrary to business logic. Otherwise, the asset is presented as a gift to a potential competitor. Such a position could become a catalyst for creating a similar precedent for NGZ," Popov speculates.
In addition to ZALK, RusAl also owns the Mykolaiv Alumina Refinery (NAR) in Ukraine, which plays a significant role in its production chain. This asset, unlike its Zaporizhzhia plant, operates quite reliably.
In 2013, the Nikolaev plant produced 1,49 million tons of alumina—the raw material for aluminum production. In 2014, it plans to reduce production to 1,45 million tons due to price fluctuations on the London Metal Exchange.
But the Zaporizhzhia plant, apparently, doesn't fit into the global plans of the world's largest aluminum producer. It's more profitable for RusAl to import wire rod from its Kandalaksha, Russia, plant to Ukraine for sale than to even maintain its production in Zaporizhzhia.
Deripaska is simply phasing out ZALK as a production facility. The enterprise has become redundant for RusAl's asset structure, but he doesn't want to give it up. Many observers have held this opinion for years.
Bankruptcy of a company is a separate legal process.
"It's possible that the current owner will lose control of the plant through corporate rights in court. However, through bankruptcy proceedings, he will be able to control its operations through, say, his representatives on the creditors' committee," comments Igor Sidorenko, a lawyer at BIM.
As a last resort, Deripaska has an additional tool. In addition to the 68,01% he is deprivatizing, his Cypriot offshore company owns another 30% of the Zaporizhzhia plant. This is enough to block important decisions regarding the asset, such as restarting the plant.
Oleg Deripaska and Vladimir Putin
Sergey Kukin
According to the materials "Economic truth«
Subscribe to our channels in Telegram, Facebook, Twitter, VC — Only new faces from the section CRYPT!