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07KYIV1092, Ukraine: Struggle for Nikopol Ferroalloy Works Nearing

May 10, 2007

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Reference ID Created Released Classification Origin
07KYIV1092 2007-05-10 07:38 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

DE RUEHKV #1092/01 1300738
R 100738Z MAY 07

E.O. 12958: N/A 
SUBJECT: Ukraine: Struggle for Nikopol Ferroalloy Works Nearing 
KYIV 00001092  001.2 OF 003 
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 
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 
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? 
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 
KYIV 00001092  002.2 OF 003 
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 t
he 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 
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.) 
KYIV 00001092  003.2 OF 003 
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. 
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. 


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