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Investors are leaving Georgia

Despite the public declarations of Georgia’s leadership after the “revolution of roses” that the most favorable and transparent investment climate would be established, the working conditions in this country do not ensure that existing risks will be redeemed.

Moreover, a direct extrusion of foreign investors is going on. They are being deprived of their property via nationalization, bankruptcy or re-sale of projects. As a result, last year in Georgia the value of foreign investments fell almost by 20 %. Several countries formulate recommendations to their businessmen to refrain from investing in the Georgian economy.

The same viewpoint is advocated by Angela Corna, General Director of ARES International (Italy), which was an investor and a managing company of the Rustavi Iron & Steel Works.

Non-transparent auction with the outcome predicted

The public sale of Georgia’s biggest industrial enterprise – the Rustavi Iron & Steel Works – which was held on the 12th of November, 2005 displayed the insecurity of investors and investments. As was predicted, the company under the name of Energy Industry Complex registered in Tbilisi with an authorized capital of 34,000 Georgian lari (US$18,000) was announced the winner.

ARES International and Metalgeo (both from Italy) which performed the works’ rehabilitation cancelled their participation in sign of disagreement with the rules dictated by the Georgian side. The other possible participants – Industrial Union of Donbass (Ukraine) and Global Steel Holding Ltd. (India) – refused to take part in the auction either as they believed that the bidding process was non-transparent, the ownership was legally not clear, the outcome was predicted whereas the risk of potential international legal proceedings was high.

The Italian side has already brought in a suit to the courts of Strasburg and Washington, raising a question of reimbursing US$40m. Both complaints were accepted. The main point is that under a political pressure the Georgian leadership forced all the three judicial instances to pass a judgment according to which the Italians were deprived of the ownership of the works. At that, the Government of Georgia unilaterally cancelled the earlier signed agreement on selling the assets irrespective of the fact that Metalgeo started to make payments. Moreover, the Italian side, a successful bidder in the tender held by the Ministry of Economic Development of Georgia in April, 2005, effected the payment of a security deposit of US$2m. But later on, the tender was extended without any reason and, after the Italians were re-awarded, substituted by the auction.

When President of Georgia Micheil Saakashvili visited Italy he discussed the problem of the Italian investments in the Rustavi Works with Premier Silvio Berlusconi and the economic ministers. Saakashvili promised to solve the problem and the Italian side offered to widen collaboration, including a set-up of an Italian industrial center with total personnel of more than 5,000 and an investment value of up to US$1bn. Besides, the Italian side offered US$30m for the Rustavi assets.

However the Georgian authorities chose to sell the works to Energy Industry Complex that promised nothing and for a much lower price of US$20.5m. Here Deputy Minister K. Domenia on behalf of the Ministry of Economic Development officially announced that if the Italian businessmen litigated the case the Government would be a defendant.

Due to presidential support

Former President Eduard Shevardnadze suggested that the Italians should be involved in the Rustavi Iron & Steel Works. Around forty specialists from steel companies of Europe and the USA – Luccini, Voest-Alpine, Fuchs, Italimpianti, Dalmine, Tenaris, Podbredzova, Sancinelli, American Steel Company – visited the works to examine its technical condition. Based on the experts’ evaluation and technical recommendations, a legal preparation for the transfer of the works to a new investor’s ownership began. President Shevardnadze requested a speedy production start-up and promised that formalities would be facilitated.

In May, 2002 ARES showed the wish to strengthen cooperation by taking a decision to commission tolling tube-making operations. The investors did not gain any profit as the production costs of such a conversion stage at any European or Russian plant would have been much lower and quality much higher than in Rustavi. However, the corporate managers willfully took the risk in order to prove that their intentions were strong.

It must be stressed that the Georgian leadership fulfilled its commitments as well. The political support was necessary because the Georgian legislation did not grant any preferences to foreign investors and certain enactments were required that permitted a partial offset of high investment risks. President Shevardnadze signed an enactment that made the works free from creditor’s claims and induced the governmental bodies to respond to the questions posed by the Italian side. He entrusted the Georgian diplomats in Azerbaijan, Iran, Turkey, Kazakhstan and Uzbekistan with a mission to promote exports of Rustavi products. He also sent a personal letter to President of Turkmenistan Niyazov with a request to assist in selling Rustavi tubes to the oil-and-gas sector of that country. Early in 2003 Niyazov signed a decree on purchases of tubular products from Georgia for over US$34m.

A legal guarantee for ARES in its work in Georgia was a transfer agreement on the Rustavi assets in favor of ARES International provided the debts amounting to US$108m were paid and US$132m were invested in the modernization of the works. The legal validity of this solution was confirmed by the Rustavi City Court and declared by the decree of the President of Georgia. By the way, the decree has not been cancelled thus being valid up to now.

In so doing, it may be stated that prior to the revolution of roses the interaction of ARES with the Georgian state was business-like in nature. ARES paid for the repair and renewal operations amounting to US$8.82m. The works started to make tubular products from off-side billets delivered from Europe, Ukraine and Russia. By the end of 2003, about 10,000 ton of tubes were produced and shipped to Turkmenistan, Kazakhstan, Azerbaijan and Italy.

By that time the operating personnel at the works numbered more than 2,000 people. In consideration of very low living standards in Georgia and non-availability of earning capabilities (only five out of 86 industrial enterprises of the Rustavi Region were in operation), ARES International was engaged in rendering social assistance. Tubular products were delivered to Turkmenistan as a payment for the national debts for gas supplies. On the instructions of ARES, the works’ administration paid pensions to former workers for two years though it had not been specified in the agreement. Our company voluntarily assumed the duties to pay the entire debt of about US$5m to the operating personnel and injured retirees, from time to time rendered free assistance to the personnel, administered the Rustavi orphan boarding-school. The relations between ARES and Georgia were then based on mutual understanding, responsibility and wish to develop mutually-beneficial collaboration.

The onset of creditors, the omnipotence of clans

The Rustavi Iron & Steel Works was in debt to approximately forty creditors. Many debts were artificial as they appeared in the period from 1994 to 2001 when creditors were used to take advantage of the unprotected position of the works that was in shutdown and not able to pay for legal proceedings. The credotors imposed own terms and conditions of debt payment.

One dubious creditor was an offshore company named Killigard. It is an assign of MetalurgOilGasInvest, a company that managed the works from 1997 to 1999 which resulted in a loss of US$26m. The above fact, like the others that point to the dubious activities of the company, is mentioned in the documents of the Control Chamber of Georgia. Later on, Killigard procured that the US$12.8m debt was acknowledged thus becoming the works’ creditor. When the Italian side started the rehabilitation process Killigard attempted, bypassing the law, to put in baseless claims and initiated legal proceedings. By the way, these attempts failed while Shevardnadze was in power.

The new Georgian leadership radically changed the attitude towards the participation of the Italian investors in the rehabilitation and decided to dispose of the assets at its own discretion. The sustained operation at the works stopped on the 29th of January, 2004 when the Rustavi City Court, without an invitation to ARES to attend the hearing, all of a sudden took a decision to annul the share transfer agreement. Along with it, a defamatory campaign against ARES started in the mass media which went on till the case was tried in the Supreme Court of Georgia in February, 2005. The background of the campaign was dictated by Georgian officials. It was absolutely senseless to appeal against the court’s decision during political baiting.

Some circles were understood to have entered into an agreement with an aim to deprive the Italian company of the ownership of the steel works and then to appropriate it. An actual performer was Kashakhashvili, a new manager backed by one of the leading participants of the revolution of roses Kitsmarishvili assigned the Chairman of the Chamber of Trade and Commerce of Georgia. In summer of 2004 during the negotiations in Paris the representatives of the group offered a deal to the investors – “political support and solution of all problems in the Government” in exchange of a 25 to 35 % share in the project. Aiming to press upon the hard-line investors, Kashakhashvili took several measures to damage not only the company but also the national economy. Further to his written application, the Georgian Railways refused to offer cars to the works which resulted in a disruption of the contract for supply of tubes to Turkmenistan. In April, 2004 it was also he who, based on the court’s judgment, seized the property and the circulating capital of the works thus stopping any production activity.

The investors and the managers of the Rustavi Works many times tried to drive the data on the actual state of affairs to the state bodies. Tens of letters were sent to the Georgian authorities but left without any reply. Meetings with the premier, minister of state, ministers of economy, finance, heads of parliament committees were organized. These meetings attended by Italian diplomats were used to show that the environment artificially built up around the investors was unreasonable. The Italian Embassy in Tbilisi more than once informed the other diplomatic missions in Georgia, among them, the EU Representation, of the situation. For instance, on the 19th of May, 2004 at the meeting of the EU Commission in Tbilisi the representative of the Italian investors submitted evidences that Georgia lacked an operating investment climate.

A resume to the effect that Georgia was not prepared to work with investors was made at the meeting.  

Reference:

The Rustavi Iron & Steel Works was built in Georgia in the middle of the 1950s. It became one of the symbols of the republic’s industry – was even figuratively named “Georgia’s Magnitka” by analogy with the biggest Russia’s works of steel industry. It was an integrated enterprise whose production cycle covered ironmaking to finished rolled products. In the 1980s Rustavi made almost 1.5m tpy of crude steel, approximately 1.2m tpy of rolled products and more than 500,000 tpy of tubes.

Staring from 1995 the works had been virtually at a standstill. By the arrival of Italian investors not a single process able to function without being modernized or reconstructed was alive. Many shops – open-hearth, sheet-rolling, coating – were completely demounted. The facilities were cut to scrap and sold, wages were not paid.

In the other post-Soviet countries steel industry not only survived but even became a key stone of national economies. 

 
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