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Agro business shooting star in Ukraine turns into nightmare for investors


On January 20, the name of Mykola Huta, the co-owner of the defaulted Mriya Agro Holding, was placed on the Interpol’s list next to the former President Yanukovych and other top government officials wanted for embezzlement. Huta is sought by the Ministry of Interior for fraud committed “on a large scale or in an organized group”. Huta is suspected of defrauding over USD 100 million from foreign investment funds. The decision came after creditors and the company’s owners had failed to agree on ways how to restructure the company and avoid insolvency.

Interpol’s warrant for Huta is only the pinnacle in a long story of fraudulent appropriations on the side of the company and insufficient assessment on the side of enchanted investors and creditors. The case also provides a curious example of how investors have been rushing to invest in Ukraine’s agricultural sector while overlooking the risks associated with their investments. And while investors are likely to be most concerned about financial risks, a range of negative environmental and social impacts have been associated with the expanding agro business in Ukraine as well.

Steep rise …

But coming back to Mriya: For years, Mriya stood as a text book case of a success story of a family-owned business that turned into one of the largest agro holdings in Ukraine. From owning 50 hectares of arable land in 1992, Mriya grew to operate 320 000 hectares growing mostly wheat and corn on the rich black soil in the country’s west. [1]

Mriya’s explosive growth attracted the attention of international public creditors who treated the company as a reliable partner worthy of generous support. Since 2010 the World Bank’s International Finance Corporation (IFC) has provided Mriya with three loans amounting to at least USD 175 million that helped Mriya finance the commodities, land lease rights, storage capacities, and working capital. [2]

The European Bank for Reconstruction and Development (EBRD) supported Mriya’s pre-harvest and post-harvest production with a EUR 18 million loan (USD 24.1 million). Additionally, export credit agencies such as the Export-Import Bank of the United States and Danish EFK have provided credit and guarantees for Mriya to purchase machinery and equipment from the US and Danish companies.

… and not so sudden decline

On August 1, 2014 Mriya surprised the market when it reported its failure to make bonds interest payments. The total amount of Mriya’s debt to commercial banks, investment firms and international financial institutions was later estimated at USD 1,28 billion.

Yet, apparently clear signs of Mriya’s troubled stock could have been observed years before the default.

In July 2012 the Ukrainian investment house MillenniumCapital published a report on Mriya’s business activities entitled “Too good to be true”. Warning against high default risks, the report presents evidence for the company’s financial mismanagement. The analysts note that since 2008 the company reported unusual cost reductions, used inflated production numbers, was involved in questionable land lease acquisitions, had dubious relationship with affiliated sugar mills and operated a commercial bank with capital of unknown origin.

Surprisingly, the fact that the company was historically manipulating numbers went unnoticed by its creditors. Only six months prior to the default, the IFC’s board of directors authorised a USD 65 million loan for Mriya to finance crop production. As a result of wrong project assessment, the IFC is currently Mriya’s largest bank creditor. The EBRD was more far-sighted or luckier with its debt recovery as Mriya repaid its loan to the Bank in January 2014.

It is a matter of speculation, what role Hans Christian Jacobsen, the Danish national and Mriya’s former director, played in sealing financial deals with the individual IFIs. Coincidentally, Mr. Jacobsen had worked as the Director of Agribusiness at the EBRD for 15 years. After a five year grace period he accepted the position with Mriya where he stayed from March 2011 until he left the boat at the verge of sinking in August 2014.[3]

Conclusions

The Ukraine government treats Mriya as a case which might decide about the trust of foreign investors to support the recession-hit economy. Agribusiness is a vital cash bearer for Ukraine, accounting for about ten per cent of GDP and 20 per cent of total exports.

On the other hand, the growing land concentration and the increasing number of agro companies with international ownership demonstrate that foreign investors and international creditors are ready to take high risks when tapping the potential of the “global breadbasket”.

This is all the more lamentable when these risks are taken with public finance, when they happen under dismal due diligence and when the direct project impacts – including bad labour conditions, land use without the owners’ consent, biological waste pollution, etc. – trigger fierce opposition by locals.

Notes:

1. Mriya Agro Holding’s parent company HF Asset Management Limited incorporated in Tortola Virgin Island is ultimately owned by four members of the Huta family.

2. In addition to the three primary agriculture loans, the IFC signed an investment project for energy efficiency at Mriya’s sugar plants in 2012. The size of the loan is not specified and it is unclear whether the project went ahead.

3. Hans Christian Jacobsen led the Agribusiness team at the EBRD from 1991 to 2006. From March 2011 to June 2013 Mr. Jacobsen had a directorship with Mriya Agro Holding. From June 2013 he served as an Independent Non-Executive Director Mriya Agro Holding resigning on August 13, 2014.

EU priority gas pipeline faces fierce opposition in Italy


Cross-posted with kind permission from the Counter Balance blog.

The Southern Gas Corridor, a gas pipeline that has to bring gas from Azerbaijan all the way to Italy and which has been prioritized by the European Commission has come under serious pressure because of strong opposition from local communities where the pipeline enters the land.

Marco Potì, mayor of the town Melendugno in Southern Italy explained why the pipeline which he considers “useless and non-strategic” threatens the security of his citizens on Italian national television earlier this week.


Link to video: https://www.youtube.com/watch?v=yONPBkcbyH0

Read also

Pipe Dreams: Why the Southern Gas Corridor will not reduce EU dependency on Russia (pdf)
Study | January 21, 2015

European Investment Bank confirms plans to finance Trans-Adriatic Pipeline
Blog post | February 4, 2015

He challenged the national government for excluding the local administration from the decision making process and fears the pipeline “will have a devastating impact on our environment, on our landscapes and agricultural land.” But more than that, Potì speaks as a mayor responsible for the safety of his citizens and demands a full assessment of the industrial risk of the plant, as required by the Italian and EU law.

He assured the regions of Lecce and Apulia and a coalition of local mayors will do whatever it takes to stop it: “We are fighting [the project] on all fronts”, Potì said.

In addition to local opposition also the Ministry of Cultural Affairs and Landscape have stepped in denouncing a violation in the procedure of the environmental assessment which the Italian authorities are currently investigating.

The political opposition against the project follows massive popular protest in the region which increased in the last years. It included various demonstrations, and a huge music festival last year where singers and artists expressed their opposition against the project.

The local opposition and the different ongoing procedures against the project suggest that final approval may be delayed significantly and may undermine the timely completion of one of EU’s top priority projects in the framework of its energy security agenda. It raises serious questions about how “priority” projects are identified by the European Commission when the people and local authorities are de facto being excluded from the decision making process.

European banks: it’s time to quit coal in Ukraine


European commercial banks (such as Deutsche Bank, UniCredit Bank, ING Bank, Raiffeisen Zentral Bank, Erste Group Bank, RBS and Barclays) are major investors in the coal industry in Ukraine, most notably in the integrated coal and energy company DTEK (see its entry on coalbanks.org).

DTEK established itself as the strongest player in the energy sector of Ukrainein 2012 after a series of privatisations of state-owned utilities. It even obtained a monopoly on electricity exports. In 2013, DTEK controlled 46.1 per cent of coal production in Ukraine and 37.8 per cent of the distribution and sales of electricity. The company’s growth was also supported by European commercial banks which between 2005 and 2013 have invested more than 1.5 billion euros in DTEK, mostly in coal mines and thermal power plants.

A strategic approach to Ukraine’s energy policy is more urgent than ever before. Focusing on renewable energy sources and energy efficiency measures is the only way to increase the country’s independence from Russian fuel imports.

DTEK’s main assets are privatised mines and coal-fired power plants, all built in the Soviet era, when environmental concerns were not considered to be of significance.

Between 2010 and 2013, DTEK strategically increased its coal production and power generation. Among others DTEK acquired two coal-fired power plants in western Ukraine (Burstyn and Dobrotvir) and significantly increased their output and electricity exports to Ukraine’s neighbours in Hungary, Slovakia, Romania and Poland. In 2012, the company’s CEO Maksim Timchenko announced the construction of new coal-fired units and transmission lines in western Ukraine as part of a plan to ‘export coal through electric wires’.

Pollution financed by EU banks

Yet the cheap electricity from Burstyn and Dobrotvir that EU businesses and households enjoy result in increased greenhouse gas emissions and toxic air pollution in Ukraine.

Report

Why Ukraine must address inefficiency and pollution at its ageing coal-fired power plants

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Emission levels per kWh of electricity produced in Ukraine are much higher due to the low efficiency of plants and the inadequate equipment for pollution control. None of the coal-fired power plants have any pollution control for sulphur (SOx) or nitrogen oxide (NOx) and dust emissions are up to 45 times above the exceed limits of EU regulations. Basically, none of these plants would be allowed to operate in any EU country because of their emissions, or they would have a strict deadline for closure, like the Varna power plant in Bulgaria which was closed down on 1 January 2015 due to incompliance with EU environmental regulations.

Nonetheless, European commercial banks finance the export of coal-based electricity from Ukraine to the EU. In 2013 Deutsche Bank (together with Raiffeisen Bank, Erste Group, Uni Credit Austria and the Russian Gazprombank) granted a structured pre-export financing loan for DTEK, providing funds for export-oriented activities.

This stands in stark contrast to the often generous commitments to sustainability by these banks.

The times they are a changin’

The state of play around fossil fuels is rapidly changing. Public institutions such as international development banks and national export credit agencies are revising their energy strategies and some are already phasing out support for coal. Public multilateral development banks like the World Bank, the European Investment Bank and (to some extent) the European Bank for Reconstruction and Development have introduced energy lending policies that heavily restrict or rule out financing for new coal power plants.

On the other hand, Ukraine faces unprecedented threats associated with its dependence on imported fossil fuels. In addition to gas, Ukraine is now forced to import anthracite coal from Russia because it has lost a large part of its coal supplies that were mined in the now militarised Donbas region.

A strategic approach to Ukraine’s energy policy is more urgent than ever before. Focusing on renewable energy sources and energy efficiency measures is the only way to increase the country’s independence from Russian fuel imports.

Public and commercial investors must realise that real commitment to sustainability means financial support for innovation, energy efficiency measures and the transition to renewable energy sources. This is what is most needed in Ukraine and it is what concerned citizens in Kiev demonstrate today during a street action for the Global Divestment Day.

Guest post: Pljevlja shareholder A2A must resist pressure to build new lignite unit in Montenegro


A group of 16 leading NGOs from the Balkans and Italy dealing with energy and its impact on the environment yesterday sent a letter to Italian company A2A, a major shareholder in Montenegro’s electricity company EPCG, concerning ongoing negotiations about the construction of a second unit at the Pljevlja lignite-fired power station.

In spite of fierce pressure from the Montenegrin government, A2A has been reported by Montenegrin media to be sceptical about the construction of a new unit at Pljevlja due to concerns about the project’s economics, and our letter aims to encourage the company to stay firm in its position.

We believe that construction of a new unit would be harmful for the people and economy of Montenegro, as well as for its environment.

Read also

All we want for Christmas is to be able to breathe …
Blog post | December 23, 2014

Pljevlja II lignite power plant, Montenegro
Project background

The energy sector in Montenegro
Country profile

As an EU candidate country, Montenegro needs to bring its legislation and policies into line with those of the EU, including climate and decarbonisation policies, increasing the share of renewable energy and improving air quality, all of which would be made more difficult by building a new lignite-fired power unit.

The project would further burden the over-indebted public budget, as it is expected that the Montenegrin government would have to provide a state guarantee for the loan that would finance the majority of the project.

The economic feasibility analysis of the project and estimated electricity price from the unit presented by the government are not convincing and the government has never publicly proved this unit is needed to satisfy demand – except by inflating Montenegro’s future demand growth figures. Nor have alternatives ever been seriously discussed.

The air quality in Pljevlja is so poor that local people held a protest on 22 December 2014 to demand the implementation of the relevant laws and policies. However EPCG and the Montenegrin government have so far made no commitments to rehabilitate the existing power plant and bring it into line with the EU Industrial Emissions Directive and other environmental legislation, or to replace it with non-lignite generation capacity. The Montenegrin parliament has several times discussed the fact that the original plans for the existing plant stipulated the inclusion of an appropriate heating solution in Pljevlja, which would have reduced pollution from residential sources, however this has never been implemented, and we do not see any progress on this issue.

Online toolkit for coal campaigners in Turkey and the Balkans

A multilingual website that explains how to contact the investors behind a project, which policies guide their decisions and how best to influence them.

KINGSOFCOAL.ORG

The Energy Community has estimated that the rehabilitation of the existing unit at Pljevlja would cost around EUR 50.9 million, while a new unit would cost between EUR 277 and 356.7 million, not including the expansion of the mine, new ash dump or heating for Pljevlja. Nor does this cost include CO2 costs, or rehabilitation and recultivation of the existing ash dump and mine sites.

We therefore doubt that Montenegro can afford both rehabilitation of the existing unit and the construction of a new one and believe that rehabilitation of the existing unit, as well as rehabilitation and recultivation of the damaged areas should be an urgent priority. Therefore we call on A2A to take this into account as it considers its future engagement in Montenegro.

Natural gas left, right and centre at Energy Union conference in Riga


In his speech in the opening panel of the Energy Union conference in Riga on February 6, EU Commissioner for Climate Action and Energy, Mr Miguel Arias Cañete, summarised his priorities for the Energy Union. Evoking a competitiveness – security – sustainability triangle, he said the aim is to “craft an energy policy that will deliver a 40% CO2 reduction by 2030, but does so in a manner that becomes a motor for both competitiveness and energy security”.

Laying out how this could be achieved, his priorities include some positive aspects with regards to sustainability, in particular concerning energy efficiency and grid access for locally produced electricity, i.e. prosumers. Overall, however, I cannot help thinking that they will too easily be overshadowed by a focus on natural gas. In his speech Cañete mentioned among others an EU LNG Strategy, a Mediterranean Gas Hub, strategic alliance with key gas transit country Turkey, the European Projects of Common Interest (PCIs) (that include a large amount of gas infrastructure).

Moreover, Cañete implied that the massive Southern Gas Corridor, a chain of projects meant to bring natural gas to Europe from the Shah Deniz offshore gas field in Azerbaijan, is a done deal – he mentioned in passing that it will be delivering ten billion cubic metres of gas by the end of the decade. There can certainly be no doubt about the political backing that the project enjoys, but to be clear, the Corridor is facing numerous challenges and is far from shovel-ready in its entirety. The Trans-Adriatic Pipeline from Greece to Italy for example is (among others) still facing strong opposition (pdf, pg. 21) from regional and local administrative bodies.

Read more

Pipe Dreams: Why the Southern Gas Corridor will not reduce EU dependency on Russia (pdf)
Study | January 21, 2015

European Investment Bank confirms plans to finance Trans-Adriatic Pipeline
Blog post | February 4, 2015

In its recent study Pipe Dreams – why public subsidies for Lukoil in Azerbaijan will not reduce EU dependency on Russia, Bankwatch raised a number of other issues with the Southern Gas Corridor, most fundamentally the fact that the EU’s own projections suggest that the additional gas imports are not necessary. The project would also turn Azerbaijan into the new gas supplier for Europe, thus strengthening Aliyev’s authoritarian regime.

Still, the role of natural gas in achieving the EU’s Energy Roadmap 2050 seemed to be shared by a majority of participants at the conference in Riga. How reasonable it is to invest in gas infrastructure that will be ready in 10-15 years while the share of renewables should be two thirds by 2050 is still left without answer.

Bankwatch stops cutting of another 22 hectares of forest for coal mining in Romania

In a file launched by Bankwatch in 2014, a Romanian court annulled [ro] 27 deforestation permits last week, preventing 22 hectares of forest in the country’s south-west to be cut for the expansion of an open-pit coal mine.

All 27 decisions were issued in 2012 by a regional forestry agency for the Oltenia Energy Complex to extend lignite mining operations in Rosia quarry (located near Rovinari, Gorj County). This court decision comes six months after the Bucharest Court stopped the clearing of another 59 hectares of forest by cancelling the environmental permit for deforestation in the Tismana quarry area (also located near Rovinari).

Coal in the Balkans

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The Forest Code stipulates that the regional forestry agency can issue deforestation permits in the case of small areas, under one hectare, while a Government Decision is required for perimeters larger than 10 hectares. The Oltenia Energy Complex uses a practice of slicing the total area it needs to destroy into fragments of up to one hectare, enough for a few weeks of mining operations. Thus it avoids going through a procedure to identify the social and environmental impact of mining expansions and the measures to reduce it.

With this handy legislative loophole, the Oltenia Energy Complex can ask the forestry agency to issue deforestation permits for tiny areas compared to the scale of the work that it does. The 22 hectares of forest that have now been saved represent the approximate area of 44 football fields.

Bankwatch Romania initiated the court case in February 2014. Eight similar law suits are pending, concerning forests around nine lignite open pits. We estimate that the Oltenia Energy Complex obtained at least 49 deforestation decisions for at least 200 hectares near the Rosia quarry, in 2014 alone. As defendants, the forestry agency and the Oltenia Complex can appeal the court decision within fifteen days of its notification. So far, the court’s decision was not formally transmitted to the parties.

The attorney who represented Bankwatch Romania in court commented:

“The court’s decision in this case is not surprising. It comes after the European Commission initiated an infringement procedure in this case last month [ro] and after an illegally issued environmental permit for cutting of over 59 hectares of forest was cancelled in the first instance last summer [ro]. We believe that the Oltenia Energy Complex must begin to implement environmental legislation that is currently in force for lignite extraction and it has to understand that mining expansions must be done according to the principle of sustainable development.”

In the last 25 years, in addition to forests, expanding lignite pits wiped out at least three villages and many others suffer from the proximity to the pits. Mihai Stoica, a freelance photo journalist, traveled to the affected areas and made a video about the impact of the lignite quarries. The documentary “When mines expand…” captures people’s problems in three villages bordering lignite pits that are affected by their expansion.