Is Ukraine’s Biggest Foreign Investment Now Safe?

KIEV, Ukraine -- The Kyiv Economic Court on Oct. 12 withdrew a case against ArcelorMittal, Ukraine’s biggest foreign investor, which had denounced the proceedings as an attempt to overturn the landmark privatization of a steel mill in 2005.

Kryvorizhstal has been owned by ArcelorMittal since its 2005 purchase of the plant, the nation's largest steel mill, for $4.8 billion.

The international storm of bad publicity may have had a lot to do with prosecutors ending their lawsuit.

The government lawyers had accused the world’s largest steel producer of violating the terms of the purchase agreement of the $4.8 billion sale of the mill, then called Kryvorizhstal. The alleged infraction was ArcelorMittal’s deal with the State Property Fund in 2009 to postpone investments in the steel plant.

Representatives of ArcelorMittal said they were pleased with the result, but warned that the threat might not yet have passed.

Svitlana Romanova, an attorney for international law firm Baker & McKenzie, which is defending ArcelorMittal, told the Kyiv Post that Tuesday’s ruling by Judge Oleh Khrypun may not preclude the state from reopening the case and possibly repossessing the prized mill.

“The question I have is: Was the claimant in this case the Ukrainian state, thus ruling out a repeat lawsuit? Or was it just the general prosecutor’s office, meaning that another state entity could file a similar suit against our client somewhere down the road?” Romanova asked.

Khrypun, who in the opinion of Romanova and her client should never have been chosen to hear the case, dismissed the dispute after the general prosecutor’s representative on Tuesday withdrew the state’s claims without commenting on the reasons.

On Oct. 5, during the second hearing of the state’s case against ArcelorMittal, a representative of the Cabinet of Ministers in whose name the prosecutor had filed its lawsuit also mysteriously dropped its claim.

When questioned by the Kyiv Post during the Oct. 12 hearing, the cabinet representative said the governing ministers had no grievances against the global steel giant, while the general prosecutor’s representative directed all questions to his office’s press service.

The prosecutors’ decision to end the legal attack on ArcelorMittal came only days after President Viktor Yanukovych, on Oct. 8, said ArcelorMittal would not lose the plant.

“Was today’s decision a result of President Viktor Yanukovych’s recent meeting in Paris with [French] President Nicolas Sarkozy? I don’t know,” pondered Romanova.

Yanukovych made the remarks during an official visit to Paris.

“In my opinion, it will not develop further. In any case, I told President Nicolas Sarkozy yesterday that this question will most likely not reach court, and the question of re-privatizing or cancelling the agreement on privatizing this plant will not arise,” he said in Paris.

Indian tycoon Lakshmi Mittal's steel company bought Kryvorizhstal (now ArcelorMittal Kryvyy Rih) for a whopping $4.8 billion in the country’s cleanest state auction ever, and a signal at the time that Ukraine was open to foreign investment.

But these facts alone may not be the only reason why Yanukovych is sensitive to the controversy surrounding his country’s biggest producer of steel – Ukraine’s largest export.

The celebrated 2005 auction of Kryvorizhstal had followed its controversial sale a year earlier to a leading member of Yanukovych’s Regions Party, billionaire Rinat Akhmetov, and Viktor Pinchuk, son-in-law of then-President Leonid Kuchma for only $800 million.

Over the years leading up to the lawsuit filed in July, ArcelorMittal Kryvyh Rih has been accused by Ukrainian trade unions of reneging on its investment obligations. More recently, the Security Service of Ukraine, the successor agency to the Soviet KGB, began investigating the company for customs violations on imported coal.

Both grievances have been vigorously denied by top company executives, who for their part draw attention to the hundreds of millions of dollars in value-added tax returns withheld from them by the government.

In line with earlier official statements made by his company, the Kryvyh Rih plant’s new chief executive officer Rinat Starkov noted the official origin of the problems encountered by his company. Starkov told the Kyiv Post that he understands Yanukovych “has been fully briefed on the case against ArcelorMittal and knows exactly what is happening.”

The defunct lawsuit related to a 2009 force majeure agreement between ArcelorMittal and the State Property Fund, allowing the steel plant to postpone investment commitments made under the terms of the original share purchase agreement of 2005 in view of the global economic crisis that caused steel prices to plummet starting in 2008.

The July lawsuit named Arcelor Mittal Duisburg GmbH. as well as Ukraine’s State Property Fund as co-defendants.

ArcelorMittal’s primary defense has hinged on the contents of both the 2005 share purchase agreement and its 2009 force majeure addendum, which specify that the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry are the jurisdiction where all disputes should be decided, as this court is a non-state independent arbitrage court.

Both Starkov and Baker & McKenzie’s Romanova expressed concern over the fact that judge Khrypun had been allowed to hear the case in the first place, as well as the speed with which the proceedings were held.

“Three sessions in 10 days [Oct. 1, 5 and 10] is unheard of for such a case,” Romanova said.

Some observers suggested that the authorities aren’t looking to take back the mill, but to bring pressure to bear on ArcelorMittal.

“Although courts do all kinds of things in our country, the idea of taking back this plant from such a serious international investor would be going too far,” Oleksandr Bondar, a one-time head of Ukraine’s State Property Fund. “The damage to the country’s investment reputation would be too great.”

More likely, according to Bondar, is that Arcelor Mittal will have to come to some kind of agreement with the cash-strapped government of Prime Minister Mykola Azarov.

“They [ArcelorMittal] aren’t the only company under pressure,” Bondar said.

Source: Kyiv Post