A bill from Rotterdam, or How Poroshenko and Akhmetov made money off of Ukrainians

Investigation of pricing in the Ukrainian electric power industry, initiated by the National Anti-Corruption Bureau of Ukraine, has made public one of the large-scale schemes of robbery of their fellow citizens by the authorities.

First, its cynicism is that the billionaires are not shy to take the last money out of the pockets of millions of citizens, who are already below the poverty line by the standards of the UN and the World Bank.

Secondly, the Rotterdam+ scheme united oligarchs, who are formally on different sides of political barricades. And it turned out that party flags and slogans are not so important when you are presented with a sudden opportunity to make money "out of thin air".

DTEK and its debts

Holding DTEK, managing assets of Rinat Akhmetov in the energy sector, got into debt in 2010, having borrowed $500 million by issuing bonds of an external corporate loan.

It had to redeem them, i.e. to repay the debt, in 2015.

Probably, the money was going to finance the privatization of a number of large power generating companies: Zakhidenergo, Kyivenergo, Dniproenergo and Krymenergo, since DTEK bought state-owned shares in these companies, reinforcing its position there in 2011-2012.

Also, then, the largest supplier company, Dniproblenergo, was bought for $529 million.

But shortly after that, a new wave of economic crisis began in the country: the gross domestic product and industrial production began to decline again.

Top-managers and analysts of DTEK took the only right decision in this situation - debt restructuring. To this end, in March 2013, new bonds were issued for 5 years, but for $600 million. At the same time, in 2013, there was another bonded loan for $150 million, as the company made certain investments in modernization of power units and development of coal mining.

However, the change of power in the country in February 2014 coincided with the collapse of the Ukrainian currency rate from UAH 8 up to UAH 26 for USD 1. This seriously affected DTEK's financial stability.

The fact is that, according to the estimates of the Fitch Rating agency, the company receives only 6% of income in foreign currency. The rest is in Ukrainian hryvnias. As a result of the devaluation, the income of Akhmetov’s energy holding declined in more than 3 times in dollar equivalent.

In this situation, it was impossible to give $200 million for a bonded loan in 2015. In addition, DTEK also had a $300 million debt in the form of a bank loan.

Therefore, the company began negotiations with creditors and as a result was able to receive a deferred payment due to the re-issue of bonds for $160 million and redeem them in 2018.

Rothschild SA connected us...

The placement took place in the first half of the year, and in the second half of 2015, DTEK hired the investment company Rothschild SA as a financial adviser in the framework of debt restructuring.

The very same Rothschild SA was hired by President Petro Poroshenko as well: at first allegedly as an advisor for the sale of his Roshen confectionery company, and then announced the transfer of this asset to the management of Rothschild SA.

The negotiations with Rothschild SA were conducted by the company ICU, which for many years is engaged in legal support of the president's business.

Meanwhile, further restructuring was vital for DTEK. Still, the drop of income by 3 times is not a joke.

Plus, the loss of a number of coal-mining assets in the territory seized by the "DNR" militants was added. That is why in 2016 the power company of R.Ahmetov, according to Fitch Rating, missed payment terms for a number of bank loans. In this regard, in March 2016 the agency assigned the default rating RD to DTEK's bonds, some of which are in free circulation on the Irish Stock Exchange ISE.

That is, anyone can buy them. The price is based on the rating of the debtor-issuer and is tied to stock quotes. They are formed by stock analysts taking into account all possible factors that can affect the business of the debtor company and its financial stability.

Therefore, the price of bonds can both grow and fall relative to the face value (most often it is $1000).

For certain financial groups, fluctuations in the value of securities are the source of earnings. If you buy them cheaper, and then sell at higher price in sufficient quantities, you can raise hundreds of millions of dollars.

But, of course, these hundreds of millions can be lost as well, because the purchased securities do not necessarily have to rise in price. That's why serious exchange players do not rely on the will of chance, but try to manage events in the right context for themselves. And then the value of securities moves in the desired direction.

Now back to DTEK. At the end of 2016, Akhmetov's energy holding managed to agree on a new debt restructuring with the assistance of Rothschild SA.

Thus, on December 29, 2016, bonds worth $750 million with payment on April 4, 2018 and $160 million with payment on April 28, 2018 were redeemed.

Their owners received new securities – DTEK’s bonds with maturity until December 31, 2024. That is, the payment of main debt was postponed for 6 years.

In addition, the new bond issue also includes a portion of the company's bank debt of about $300 million. As a result, the total amount of the issue was $1.275 billion.

Now Akhmetov and his top managers can breathe freely: they won’t need to think about the debt for next 6 years thanks Rothschild SA!

Saving "Rotterdam"

And again, it is necessary to return to 2014-2015, when the war in the Donbass was in full swing. From December 2014 to April 2016, Volodymyr Demchyshyn was the Minister of Energy and Coal Industry of Ukraine.

Prior to his appointment, he worked as a director of the investment banking department of Investment Capital Ukraine for 6 years. Yes, yes, the same ICU, which is providing legal support for business of P.Poroshenko. And the ICU-born minister had an irreconcilable public stance towards DTEK and its owner.

Demchyshyn appealed to the Antimonopoly Committee of Ukraine with a request to investigate the monopoly position of DTEK in the field of thermal power engineering (in case of recognition as a monopolist, DTEK would have to sell part of its assets).

"It would be ideal if these mines, managed by DTEK, were not related to one company but to three or four, then they would compete among themselves, then there would not be an issue that we will cease to extract or deliver coal", - the minister noted.

In media statements, he also accused Akhmetov of organizing miners' protests in Kyiv (although it is not entirely clear what he had to do with workers of state mines, to whom Demchyshyn himself did not pay wages for several months).

"Our relations with DTEK are very simple. We say: "Colleagues, let's work on market conditions and transparently". They answer: "We do so, but we will not disclose the cost price of coal", - the then minister said in April 2015, responding to a question about the cause of the conflict with DTEK.

According to him, "the key problem is that DTEK earns solely on coal - where the company has an actual monopoly and where it is easy to hide this money".

Let us pay attention to the last statement of the minister that all DTEK's earnings come from coal, where it is easy to hide the money, that is, unjustifiably overstate their expenses on coal mining and receive compensation from the state in the form of a tariff covering these inflated costs from the pocket of electricity consumers.

For reference: in the sales tariff for electricity for thermal power stations (TPS), the share of coal reaches 80%. The tariff is approved by the National Energy and Utilities Regulatory Commission (NEURC).

For a short time, this Regulatory Commission was headed by Demchyshyn himself, from August 27 to December 3, 2014. He was replaced by Dmytro Vovk, yet another manager of Petro Poroshenko.

From 2009 to 2013, he worked as an assistant vice president for corporate finance at ICU, and from March 2013 to December 2014, he was the national manager of Roshen in Moscow. There D.Vovk was in charge of relations with the leading Russian retail networks, marketing and pricing of products. And in the NEURC, he began to approve tariffs for producers of electric power, including for DTEK.

At first, the company of R.Akhmetov was definitely not very impressed with his decisions. For example, back in early April 2015, DTEK's CEO Maksym Tymchenko announced at a briefing that the price $42/t of coal, laid by NEURC in the tariff for the TPS company, does not cover the costs of its production and purchase.

At the time, as M.Tymchenko claimed, they were $57/t. According to him, only in April, DTEK made a loss of $38 million because of this.

Now we will move from the briefing of DTEK's CEO in Kyiv to ISE office. How should they react to such a statement? Or to minister V.Demchyshyn's appeal to the AMCU asking for an investigation into DTEK? And to his criticism of the company for allegedly opaque pricing, etc.?

That's right – DTEK bonds on ISE became significantly cheaper. After all, you do not need to be extra to understand: if a company has any problems with the authorities, it worsens its solvency.

However, another year passed and the situation for DTEK miraculously changed for the better. Since May 2016, a new methodology for calculating the price of coal in tariffs for electricity for TPS comes into operation.

It was approved by the NEURC headed by D.Vovk. It was this methodology that was named Rotterdam+. It provides the following calculation formula: "the price of coal in the ports of Amsterdam - Rotterdam - Antwerp + the cost of its delivery to Ukraine for TPS warehouses, including sea transport to the Ukrainian port and railway transport in Ukraine".

Official explanation of the NEURC was the following: we eliminate the manual regulation of coal prices in tariffs, when it was possible to put any figure. Another argument is that this methodology allows taking the expenses of energy companies for the import of coal into account in the tariff and thus getting rid of the dependence on supplies from the mines in CDDLO.

However, this justification carries little conviction for a number of reasons. To start with, mainly anthracite is being imported, and R+ is also used to calculate the tariff for TPS operating on the coal of the gas group, i.e. mined on the free territory of Ukraine.

But this coal is not bought in Rotterdam and is not transported from there to Ukraine, is it? According to estimates of industry analysts, to which the media make references, in 2016, only 5% (!) of the used coal was imported at Ukrainian TPS.

Whereas according to R+, the tariff for energy companies turned out to be as if all the used coal was imported. The difference in price of imported and Ukrainian coal is big: about 2 times.

In addition, we should take into account a couple of significant nuances. First of all, the quality of Ukrainian coal is worse than foreign analogues, the content of harmful impurities is about 2 times higher than in Polish, Russian, American and South African coal.

That is, if our coal was brought to Rotterdam exchange – nobody would buy it there at current quotations. Only with a deep discount.

Thus, the difference in the real price of coal used in the production of electricity in Ukraine and the one that NEURC takes for calculation according to R+ is even greater than it appears in a simple comparison of figures.

The second nuance is that the stock-exchange quotations in R+ are used without a decreasing coefficient. That is, the fact that the prices for any commodity at the exchange are always higher than for deliveries on the basis of preliminary direct contracts between producer and consumer is disregarded.

For example, in the I quarter of current year, the price of Australian coking coal on the Asian-Pacific exchanges was within $200-205/t fob Australia. And Japanese companies bought it at $150-159/t on direct contracts. The explanation is simple: small amounts are sold on the exchange on a "here and now" basis.

The contracts are discussed and signed by large consumers in advance. The second party, the manufacturer, thus gets the opportunity to plan production activities – so he/she agrees to a lower price. But with large sales volumes.

That is why laying spot stock-exchange quotations in the calculation of cost of coal which is purchased under contracts is an unalloyed fraud, by analogy with the shell game.

On the other hand, DTEK's financial indicators immediately improved after the introduction of R+. Already in the III quarter of 2016, EBITDA pretax profit of the company increased by 4 (!) times to the same period of 2015 and by 2 times – to the I quarter of 2016, – up to $158.5 million. The third quarter was even more successful…

Thus, thanks to R+, DTEK regained its pre-crisis solvency – at the expense of millions of Ukrainian citizens, whom the authorities via the NEURC forced to pay for electricity at exorbitant tariffs. And who suffered from the hryvnia crash just like DTEK.

Meanwhile, the value of DTEK's bonds begins to grow on ISE in Dublin …

Strike the iron right off the bat

According to the NABU, from May to July 2016, DTEK securities at ISE rose by 60%. Before that, from September 2015 to May 2016, companies from ICU group were actively buying them.

Let us recall, they appeared after DTEK hired Rothschild SA, with which ICU already had experience of cooperation in the business of P.Poroshenko.

That is, in the course of investigation, the detectives see the following pattern: at first, former ICU managers V.Demchyshyn (in the capacity of minister) and D.Vovk (in the capacity of head of the NEURC) give the appearance of pressure on DTEK. This leads to the depreciation of its bonds on the exchange.

Then they are bought by ICU. And after that, a formula that changes the situation for the issuer is introduced by the diligence of former ICU managers. The value of its bonds grows – and now they can be sold with good trade deal.

Indeed, if ICU had bought up bonds for $100 million at the time, then it would have gained $160 million for them, and if it had bought up bonds for $200 million – it would have had all $220 million.

Now remember the rule of successful stock exchange speculation: do not go blind with an eye to dashing luck, but manage events that affect the value of the Central Bank.

You got that right. Technically, there is nothing difficult here, if you previously put your "people" on high public offices.

It is worth remarking that despite the obvious logical interrelationship between the events described and the facts, it is quite problematic to prove this legally. After all, any lawyer representing the interests of the same D.Vovk in court will ask the NABU to confirm that it was the introduction of R+ that increased the value of DTEK bonds – and not the Pacific cyclone, for example.

ICU limited itself to a brief commentary for the media stating that it was a law-abiding company and operated strictly within the laws of countries in the jurisdictions of which the group's companies are registered and conduct operations.

"ICU always faithfully provides the documents required in accordance with the requests received in accordance with the established procedure and is interested in an objective, non-political and unbiased process of establishing the truth", - the group's statement, spread on March 23, said.

Meanwhile, even the investigation of the NABU, started on March 24, 2017, i.е. a year ago, failed to force the NEURC to abandon R+. This may also indicate the futility of trial for the prosecution.

It is worth remarking that in numerous publications about R+, the media focus on how well this "magic" formula "fed" R.Akhmetov.

At the same time, the presence of such company as PAO Centrenergo (CE) that manages Trypilska, Vuhlehirska and Zmiyivska TPS is completely overlooked.

Technically, CE is state-owned, but in fact, it is under the control of owner of UkrDonInvest company Vitaliy Kropachev.

He himself admitted to the media that he was the main supplier of coal products for CE. Market participants and the media consider V.Kropachev "underboss" in the public sector of coal industry from Ihor Kononenko, the long-term business partner of P.Poroshenko. The owner of UkrDonInvest denies this, but the fact remains: Centrenergo and those who are behind it also made good money from R+.

So according to the results of 2016, net profit of CE increased 17.7 (!) times, up to $14.84 million, gross profit – 9.1 times, up to $38 million, aftertax earning – by 55.8%, up to $410.3 million.

This may be a motive explaining the appearance of R+ in the Ukrainian thermal power industry. Yes, the "magic" formula was a great help to R.Ahmetov and DTEK, but why would the current authorities take such care of the prosperity of his business?

It is another pair of shoes if you can make money on it yourself two times: on the exchange and directly on the market where the share of Centrenergo amounts to 15%.

Valeriy Baykalov, OstroV