Lawsuit Gives Insight Into Power Industry
Court records the Romanian Center for Investigative Journalism has obtained provide a window on how wealthy businessmen came to work together with politicians in privatizing the aluminum company ALRO Slatina, an industrial giant and big energy trader in Romania .
Energy trading in southeast Europe is frequently a murky business conducted on the edge of the law, where ownership of trading companies is hidden behind paper companies set up in exotic Mediterranean and Caribbean islands.
“ The ( British Virgin Island ) companies were used in order to disguise the identity of the ultimate purchaser of the shares in advance of the privatization bid, ” states a judgment in a case involving the principals of ALRO.
Pressure to Postpone Order
A number of energy trading companies are pressuring the Romanian Ministry of Economy to postpone its order that all traders buy electricity on the stock exchange and not through side deals with the producers, Minister of Economy Ioan Codrut Seres said at a press conference in November.
Seres, a member of the Conservative Party, said pressure is coming from various sources, including from the company Grivco SA. Grivco was established by Conservative Party leader Dan Voiculescu and is now run by members of his family.
The company was implicated earlier in 2006 for being involved in dubious electricity deals with the Turceni and Rovinari power plants. Company representatives denied any wrongdoing, saying that the energy they sell to state-owned companies is imported from Bulgaria and is not produced in Romania.
Alexander Krasner and Vitali Machitski were both Russian-born success stories. Both were smart businessmen with a flair for dramatic deals, but their ultimate disagreement led to an airing of the ALRO story in a British courtroom.
Krasner studied metallurgy in Russia before getting an advanced business degree at the University of Wisconsin . He became a trader with Salomon Brothers and then with Marc Rich Investments.
Two decades ago, Rich was involved in illegal weapons trafficking and sentenced to jail in the United States . He was also wanted on charges of tax evasion and fraud. In one of the most debated actions of his presidency, Bill Clinton pardoned Rich.
Krasner s upervised a number of divisions, including the non-ferrous and precious metals division. However, by the end of the ‘90s, he was fired and sued by Marc Rich Investments, which claimed Krasner cost the company millions of dollars in a deal he masterminded.
Initially, Machitski and Krasner worked together to take over the ALRO, and they succeeded. But their relationship soured. Machitski fired Krasner and Krasner sued. This was the fight that ended up in the Queen's Bench Division, a London commercial court.
While the case was dismissed, but was not before a wealth of details came out about how the two had operated.
An August 2005 judgment in the case makes plain that their plan was to keep Machitski's quest for ARLO quiet, hidden behind a series of companies he controlled, for business reasons.
“ It would be better to negotiate with the Romanian government through a U.S. or Israeli connection, rather than a Russian company, because of the perceived antipathy of Romanians to Russians, ” the judgment quotes David Lee Sherman, a lawyer expert in international corporate transactions, who represented Machitski. Their discussion took place as the Russians were planning their takeover of ALRO and working within a web of hard-to-connect international companies.
According to documents from the Romanian Trade Register Office, ALRO SA is 85 percent-owned by Marco Industries BV, a Dutch company Machitski controls from Moscow . The rest of the shares are owned by the Proprietatea Fund, which belongs to the Romanian state. The controversial privatization of ALRO took place in 2002, when Marco managed to get a majority of the smelter's shares.
A plan is hatched
According to court documents, Machitski and Krasner codenamed their ALRO takeover “The Vostok Project,” Russian for “the East Project.”
Krasner and Machitski flew to Bucharest , where Elian organized a dinner attended by Corneliu Moisescu, the president of Conef, and by a Romanian senator. The court papers do not name him. On the same trip, Krasner and Machitski visited ALRO for the first time and talked about taking over Conef too as a way to secure additional ALRO shares.
After the Bucharest trip, Krasner and Machitski contacted Tendler Beretz LLC, Washington consultants with good ties to the World Bank to help them with lobbying and other logistics of the takeover.
In August 1999, Machitski held a meeting on his yacht in Monaco with Krasner and the partners of Tendler Beretz. They suggested hiring Meir Rosenne, an Israeli lawyer who was born in Romania . His fluent Romanian and status as a former Israeli ambassador to France and to the United States made him a good choice, the lawyers noted, to lobby Romanian politicians.
MIC was a modest U.S.-based metals trading company with a particular interest in aluminium, according to court documents, and its CEO was a son-in-law to Tendler. Things then began to move faster. On Aug. 24 1999, three years before ALRO was privatized, another meeting was held at Machitski's London residence. Krasner and Machitski were joined by Moisescu, the Conef president, and by the general manager of ALRO, Gheorghe Dobra.
“ Discussions centred on the possibility of acquiring Alro and Conef and the extent to which Mr. Moisescu and Mr. Dobra could assist, ” the court judgment says. Their involvement in the Russians' plan in advance of the privatization raises some question about how fair the privatization process actually was.
Dobra didn't answer repeated attempts to talk to him. All attempts to talk to other representatives of ALRO and Conef were denied. CRJI reporters were directed to a public relations company. The representatives of the PR company said all questions would be answered, but never replied to a list of written questions.
According to court records, Krasner met Dobra again in the end of 1999, when the ALRO manager was participating in a conference on aluminum markets in Montreal . Krasner flew to Canada after meetings in New York with Marco executives. According to the judgment, the Vostok Plan was set down on paper, drafted in Russian by Machitski and later translated to English.
The "strategic objective" was defined as the creation of a vertically integrated operation that would give the men power over everything from a plant producing raw materials (eg SC Alum SA which Machitski's enterprises acquired), to a power plant, and a plant producing primary products (ALRO) to a plant for manufacturing products out of the primary products (Alprom of Romania). The plan also detailed the participants and their strategy including lobbying people in positions of political influence, the head of consulting banks and the state privitization agency.
Following this strategy, companies based in the British Virgin Islands (BVI) began quietly buying up ALRO shares from individuals. The BVI companies were financed by companies Machitski owned.
By July 2001, MAL and Conef owned 41 percent of ALRO's shares, acquired for about $62 million. That money had been borrowed from other companies belonging to Machitski.
The massive share purchase had a big impact.
“ The effect, as intended, of building up such a large minority shareholding was not only to bring about a position where a lesser shareholding had to be acquired from the Romanian government in order to give control but also to make the acquisition of the government's controlling shareholding in ALRO unattractive to any other purchasers because of the large minority interest already held by MAL and Conef .” At the same time, Krasner bought 100 shares of ALRO in his own name so that he could participate in shareholders meetings. Machitski and the others thus gained direct access to all of ALRO's commercial operations.
But the most important move was still to follow and it again involved Romanian politicians.
“ Through intensive lobbying by Mr Krasner and others involved in the project, the Romanian government was persuaded in July 2001 to change the Bylaws of ALRO so that a 75 percent majority was required for significant shareholder resolutions. With their chunk of shares, Conef/MAL won the ability to block moves by majority shareholders.
All these moves, backed by Romanian politicians, discouraged other large ALRO shareholders from contending for the company. These included Pechiney, a French company, which was at the time the largest European manufacturer of aluminum, Balli Metal and Glencore. At one point, Pechiney representatives accompanied then French Prime Minister Lionel Jospin to Bucharest and openly declared its interest in ALRO.
The Vostok plan also provided for the creation of a company in Zug , Switzerland . According to the court judgment, this company called ITC Management AG “traded with ALRO in order to obtain as much information about its business operations.” Indeed, Swiss Registry of Commerce records show that ITC went into liquidation after the ALRO takeover was accomplished. Another company used was Dover Resources Ltd., registered in Great Britain . Among the shareholders of Dover Resources were Krasner and Vasily Semivolkov, the manager of a Russian company Raznoimport.
In 2002, the Russians bought ALRO and Krasner became president of the manufacturing unit. According to auditors, ALRO earned $30 million in 2002, $50 million in 2003 and $48 million in 2004.
Krasner and his team were forced to resign and ALRO terminated that contract soon after. ALRO then obtained an ANRE license in order to trade power itself. It was now allowed to buy power directly from Hidroelectrica.
Conef SA, the other company controlled by the Russians, also applied to Romanian authorities and obtained a license to trade energy. Termination of this contract was a huge blow for Energy Holding.