It’s been three years almost to the day since Vladimir Putin (left), then Russian Prime Minister, visited the Gremyachinskoye potash mine in southwestern Volgograd region.
The mine, the newest in construction in Russia, with one of the country’s largest potash reserves, and one of the most costly ever to be built, is owned by Eurochem. This nitrogen, phosphorus and potash fertilizer company is already, the company’s website proclaims, number-1 in Russia, number-3 in Europe, and number-10 in the world. According to its owner, Eurochem aims to be number-5 in the world once Gremyachinskoye starts operating. Eurochem is 92.2% owned by Andrei Melnichenko (right), who is also chairman of the company board. But Melnichenko was nowhere to be seen when Putin visited his property. Instead, Putin was hosted by Eurochem’s chief executive Dmitry Strezhnev. He is Melnichenko’s placeman. Strezhnev owns 7.8% of the Eurochem shares through an offshore equity and trade proceeds scheme which Melnichenko controls in Cyprus, the British Virgin Islands, and Switzerland. Eurochem issued its press release on Putin’s visit without mentioning names. Putin’s press service published photographs and text showing that Strezhnev, but not Melnichenko, was the host for the visit.
A similar display – Strezhnev present, Melnichenko absent – was revealed when Putin visited a Eurochem phosphate refinery at Novomoskovsk, in the Tula region in September 2009. For an oligarch to miss the opportunity of squiring Putin around his property is not only unprecedented in Russian protocol. It suggests that Melnichenko was unwelcome to the Kremlin.
At least that, sources familiar with the matter claim, is how Putin feels. Why then, even before his newest Russian mining projects have started producing, would Melnichenko dare to announce last week a $1.5 billion project in the US state of Louisiana? Last year Putin explicitly warned against “offshorization” of the country’s capital. He has underlined the domestic priority for investment repeatedly, making certain that Victor Rashnikov’s attempt to build a billion-dollar iron-ore mine in Australia didn’t materialize; that an attempt by Roman Abramovich to buy a new South African steelmaking company was aborted; and that Severstal’s Alexei Mordashov sticks to his promise of not buying more foreign steelmills and selling out of his Liberian iron-ore mine before he must spend $1.2 billion to develop it.
According to Eurochem’s press release, the new project will convert locally produced natural gas into ammonia and urea. Again, Strezhnev was on the spot at the Governor’s Mansion with the Louisiana Governor, Bobby Jindal, to explain that after exporting Russian-refined nitrogenous fertilizers to the US, Eurochem sees the “next logical step to establish our production closer to our customers. Louisiana brings together all the right ingredients, from its favorable political and economic environment, to the availability of energy, labor, infrastructure, and logistics, to fulfill our strategic vision in one of the world’s largest agricultural markets.”
There’s no mention of Melnichenko’s name in the governor’s announcement. He’s missing from the photographs too; that is Strezhnev to the right, Governor Jindal to the left.
The Kremlin indicates that Melnichenko has not consulted with Putin in advance of the Louisiana move. Melnichenko’s only trip to the Kremlin for a public one-on-one meeting was a chin-wag with then-President Dmitry Medvedev. That was on October 23, 2008, when the bottom was falling out of the potash market and Russia’s commodity export revenues were plummeting. As they did so, the state bailout bank VEB was ordered to save Abramovich and Mordashov from defaulting on the international loans they had run up buying US assets.
Medvedev asked Melnichenko about the “liquidity crisis. Has the crisis nevertheless affected you and, if so, to what extent?” Melnichenko admitted that exports were falling, along with domestic consumption. Asked then by Medvedev “despite these difficulties what major projects do you have?” Melnichenko mentioned the Gremyachinskoye project – “this is something that has not been done either in Russia or abroad over the past 20 to 25 years. Our work is in full swing.” Then he told Medvedev that Eurochem was planning to spend $2.5 billion over six years in Kazakhstan developing a new phosphate mine in the Karatau region. “In general we will focus primarily on the CIS markets”, Melnichenko told Medvedev. The latter said he approved: “Good. Large projects are certainly useful, both for us and for Kazakhstan. Thank you.”
In fact, Eurochem has done next to nothing in Kazakhstan since it bought its mining licences there. When asked to explain the reason, the company replies through a London spokesman: “In terms of its activity in Kazakhstan, EuroChem is working through the various regulatory and legal requirements necessary to ensure that its operations conform with Kazakh legislation. Investment has been made into social projects there, with USD 5 million already committed. Further than that, I’m afraid we cannot comment.” Melnichenko’s spokesman in Moscow, Vladimir Torin, describes that report as “dreadful” and refuses to respond directly to further questions.
So what is Melnichenko doing switching Eurochem’s priorities from Kazakhstan, where he has committed $5 million, to Louisiana where he is now promising $1.5 billion? Is the US to be the new destination for the Rb20 billion ($646 million) Melnichenko has borrowed from Sberbank with what Eurochem claimed at the time was a programme of investment in nitrogen fertilizer projects? What reason does Melnichenko have for investing Russian state bank loan funds on products likely to substitute for Russian imports on the domestic US market, and compete against Russian exports elsewhere in the world? If Putin wasn’t warned about the Louisiana switch, what about Credit Committee at Sberbank, which helped underwrite Eurochem’s most recent fund-raising, a $750 million sale of loan participation notes?
This prospectus was dated December 7, 2012. According to Strezhnev and Louisiana officials, “the state began meeting with EuroChem about a potential Louisiana manufacturing and distribution project in August 2012.” Five months later, not a word of the idea of investing $1.5 billion in the US appears in the prospectus. All the prospectus says is that “EuroChem will use the proceeds of the Loan for general corporate purposes.” In the Risks section, it is noted that Eurochem “competes with a number of domestic and foreign producers, including state owned and government-subsidised entities”; it acknowledges that “Government policies beneficial for the Group in those and other countries could change in a manner adverse to the Group’s business”. On the global map of Eurochem’s operations, the American continent doesn’t even feature:
When Melnichenko described his market strategy for Eurochem in April of 2012, he mentioned his phosphate mining plan for Kazakhstan and his key sales markets – “Russia, Ukraine, Belarus and Europe.” Not a word about the US.
The Kremlin indicates that Putin has not met Melnichenko. Reportedly, Putin avoided Melnichenko when he was a target of investigation on the part of bank regulators, prosecutors and the Federal Security Service (FSB). The investigation, sources familiar with what happened say, was of asset looting from the Ministry of Nuclear Industry (Minatom).
A source who worked closely with Melnichenko at MDM Bank describes him as “one of the most cynical persons I have seen, so [for him] no tricks [are] barred. Bluff is also within the pattern.” The ratings agency Fitch implies something similar, if less adverse, when it reported in a December 2012 rating of Eurochem, the “shareholder’s opportunistic strategy”. Another way of describing the same characteristics was that of a well-known oligarch who competed with Melnichenko in several asset contests in the Russian metals sector. That source described Melnichenko as a “punk”; by this he meant that Melnichenko was aggressive, brash, unpredictable. By Russian oligarch standards, these characteristics, if Melnichenko has them, are survival aids.
But can the brash, opportunistic bluffer be serious in challenging the Kremlin? Or is the Louisiana project a ploy, intended to give Melnichenko more leverage to retain his Russian assets free of the pressure to swap, share or sell which he has reportedly been under for several years?
The story of those pressures began in 2000 when Melnichenko arranged to take over Conversbank, when it was the property of the federal Ministry of Nuclear Industry and Yevgeny Adamov was the minister in charge. Adamov has the distinction of being one of a very small number of ministers of state to have been fired by Putin for corruption; he is the only one to have done prison time, first in Switzerland where he was held on a US arrest and extradition warrant, and then in Russia after he was convicted by a Moscow court on bigger charges than the US ones.
Investigations by the Central Bank, the Accounting Chamber and the General Prosecutor reportedly sought to reverse Melnichenko’s Conversbank takeover. But Melnichenko was neither charged with an offence, nor MDM forced to return the Conversbank shares to the state.
A source at MDM claims that for a time Melnichenko was interrogated by government agents and an arrangement reached, obliging him to sell out of his stakes in MDM Bank, TMK the pipemaker, the Siberian Coal and Energy Company (SUEK), and Eurochem. The deal purportedly allowed Melnichenko time and flexibility to achieve the best price for his assets as possible, on the usual Russian terms for such transactions. But there was a threat of sanctions if he failed to implement the agreement by a deadline. If the source’s tale is true, the terms and the deal have proved to be flexible indeed because Melnichenko continues, almost a decade later, to hold control shareholdings in SUEK and Eurochem.
Melnichenko’s version of the episodes in which he was under pressure to sell or merge SUEK and Eurochem with Gazprom is different. He is simply biding his time, he says, before he starts spinning off businesses in separate initial public offerings. The Gazprom takeover transactions have been disclosed by a source close to Melnichenko himself when he thought his boss wanted him to talk; and when Melnichenko believed Medvedev’s influence on the Gazprom board would boost the sale value of his stakes. Then in March 2008 Eurochem described the Gazprom takeover as “ a rootless rumor, that is harmful for the company’s reputation”. Melnichenko issued a statement: “I have no knowledge regarding any alleged investigation of my activities. I have never had any undertakings to sell my assets in Russia, and quite the opposite is true – I have actively invested and will continue to invest in Eurochem’s development.”
Asked in April of 2012 to explain why he and his long-time partner Sergei Popov split their assets, and he sold out of MDM, Melnichenko told a Moscow newspaper: “A necessary condition for the success of any major activity is the availability of simple and intuitive decision-making algorithms. If the algorithm is complex, issues are not resolved and development slows down.”
In parallel, Melnichenko was negotiating with Gazprom for a merger of SUEK, boasting of the closeness of his relationship with Medvedev, according to one of his rivals who heard him.
The SUEK takeover was reported publicly between 2007 and 2008 as a merger of equals in a reorganized SUEK — 50% plus one share for Gazprom, 50% less one share for SUEK. The consensus of bank analysts who did their own asset valuations at the time was that there was a gaping discrepancy in Gazprom’s favour. The total capitalization of the merged company was to be $11.6 billion, of which Gazprom’s stake was an attributable $6.1 billion. The valuation remaining for Melnichenko implied a 50% to 60% discount for SUEK’s coal assets. By June 2008, however, Gazprom withdrew, and Melnichenko was saved.
But has he been saving himself for the benefit of Louisiana? The December 2012 Fitch rating
report suggests that Eurochem’s consolidated debt is about $3.2 billion, including $1.3 billion in pre-export financing and $750 million in 5-year Eurobonds (2012-2017). The bond issue carries a covenant restricting Eurochem’s debt to earnings (Ebitda) ratio of 3.5x. Fitch wasn’t aware that Melnichenko was planning to borrow for the $1.5 billion charge of the new Louisiana plant.
The Fitch report also warns that there’s a risk of self-dealing by Melnichenko. This is potentially negative for the rating of his bonds, Fitch claims. The trigger, according to Fitch, is “shareholders distributions or shareholder-friendly actions detrimental to debt creditors or resulting in sustained increase in FFO [funds from operations] net leverage above 2.5x.”
Eurochem reports that as of March 31, 2013, its debt to Ebitda ratio is 1.75x; that is up from 1.53x as of December 31, 2012. The debt profile for 2012, as reported here – page 13 – indicates the pre-export financing (PFX) of $1.3 billion; the 2017 Eurobonds of $750 million; bank loans of $94.1 million; rouble bonds of Rb9.97 billion; export credit agency facilities of $109.5 million and €35.9 million. The sum of gross debt is Rb98.96 billion ($3.1 billion); net debt Rb. 79.44 billion ($2.5 billion). Eurochem’s loan timing shows repayment pressure in 2015, but not yet. Eurochem calls its position: “comfortable debt structure and maturity profile, remote refinancing risk.”
That was before the Louisiana Purchase, although as the company described it last week “EuroChem expects to finalize its decision on the parameters and location of the facility within the next year.” I n Kremlin politics, a year is a very long time, so Dmitry Peskov, Putin’s spokesman, was asked: “Mr. Putin’s policy aims at the deoffshorization of Russian capital and does not favour massive investment in the US or elsewhere when this investment is needed in Russia. Is that correct?” Peskov’s staff replied that he needs more time to answer.
Governor Jindal was asked if he has met Melnichenko for talks on the new project, and whether Eurochem has said it has received Kremlin permission for the proposed investment. Jindal’s spokesman, Sean Lansing, refused to reply.
