As Liepaja’s Metal Works Falter, KVV Group Holds Latvian Government to Ransom

  • 2015-06-04
  • By Richard Martyn-Hemphill

LIEPAJA - The fairy tale is over.

On the afternoon of March 6, politicians and journalists gathered in the seaport town of Liepaja to celebrate the re-opening of Liepajas Metalurgs, the largest metalworks plant in the Baltics.

A proud symbol of Latvia’s industrial sector, Liepajas Metalurgs made up almost 1 percent of Latvia’s entire GDP until its funding evaporated in 2013 and it was forced to close.

This March, however, the plant’s reopening appeared to have all the makings of a re-industrialisation fairytale come true for the Latvian government, which has been at pains since the global economic crisis to prop up the country’s GDP growth and hammer down the country’s unemployment levels.

So after the hot drinks and hard hats were handed out alongside the souvenir keyrings — and after the celebratory speeches had all been made — it was up to Latvian Prime Minister Laimdota Straujuma to mark the special moment. Standing in front of a vast hallway of clanking machinery, Straujuma picked up a freshly made pair of steel scissors, smiled to the press, and cut the ceremonial ribbon ...

But cut to less than three months later, and the plant is in deep trouble. KVV Group, the Ukrainian steelmaking company that purchased Liepajas Metalurgs on the cheap for 107 million euros in September 2014, has already laid off over a hundred employees, and has not ruled out laying off hundreds more.  

When The Baltic Times spoke to a number of employees at Liepajas Metalurgs in March, they pointed out they were happy to be back to work, but complained, speaking on condition of anonymity for fear of losing their jobs, that there were already “far, far fewer” employees than before the plant’s initial closure in 2013.

The complaints were made prior to KVV Group’s sweeping job cuts announced this May.

“150 employees have been laid off so far, and they have received about 100,000 euros in compensations,” KVV Group’s board member Igor Kovalenko told LETA news agency on May 27.

According to a statement released by the company, the layoffs were due to sharp reductions in production volumes at the plant’s steel melting facility: the actual costs exceeded their predictions and prevented the company from competing with similar metalworks companies in other countries.

Extortion attempt

But the Latvian government is not convinced by this explanation, and will be humiliated if the metal works has to close once again.

“If the company is already trying to find reasons [to curb production], then I perceive it as an extortion attempt,” said Latvia’s Economy Minister Dana Redniece-Ozola.

Redniece-Ozola, 33, who is one of Latvia’s new generation of politicians and a former chess grandmaster, will need to use all her strategic abilities if she is to hold her ground in the ongoing negotiations with KVV Group.

“This is no ‘banana republic’, and everyone must comply with the rules,” Reizniece-Ozola told reporters before meeting for negotiations with KVV Group last week.

KVV Liepajas metalurgs representatives have indicated that the company needs a full exemption from a set of government tariffs called the “Mandatory Procurement Component” during the first months of its production. However, according to the minister, the government cannot make a decision that would provide preferential treatment to one single company.

Meanwhile, Prime Minister Straujuma has taken a more conciliatory tone, saying that the Economy Ministry and Finance Ministry are trying to find solutions to limit the high Mandatory Procurement Component for electricity, thus supporting “KVV Liepajas metalurgs” along with other high-capacity companies, too.

Limited due diligence

Several businessmen had been critical of KVV Group from the time when it first purchased Liepajas Metalurgs in September 2014, but the Latvian government went ahead with the deal and ignored warnings about the integrity of their prospective business partners. Speaking in an interview with the LTV show Rita Panorama, the company’s former shareholder Kirovs Lipmans mentioned that Ukrainian and Russian investors knew the situation KVV Group long ago.

“Two years ago, I already said what this will lead to, the company should have never been sold because they are swindlers,” said Lipmans.

The company’s new owners have debts of more than one billion euros in Ukraine, Lipmans claimed.

“They are refusing to fulfil their obligations in Latvia as well; therefore, they should be legally forced out of the country. The government has every right to do so,” said Lipmans.

Though Lipman is himself a controversial figure, who is widely blamed for the plant going out of business in 2013, similar views regarding KVV Group can be found in Ukraine itself, where the company has been a controversial exporter of scrap metal since the 1990s.

According to the Ukrainian lawyer Liubov Alekseeva, KVV Group has been pillaging scrap metal from the conflict zones in eastern Ukraine and transporting it to Europe.

“KVV Group is not familiar to Latvians; they do not care about the origin of Ukrainian investments. The plant in Liepaja works and produces the rolled steel from Ukrainian scrap,” Alekseeva writes on her blog. “And it is obvious – there is more and more scrap in Ukraine, and its price is getting lower and lower. Ukraine is big, a lot of companies go bankrupt, so in addition to the mangled equipment from the warfare area, they get engineering tools from bankrupt enterprises. They will get scrap metal from the front and rear.”

Before buying Liepajas Metalurgs in Latvia, KVV Group was considering purchasing a Donetsk electrometallurgy plant owned by Mechel, a Russian affiliated branch of a global mining and metals company.

The purchase of Donetsk electrometallurgy plant seemed to be the perfect
solution for KVV’s owner Valeriy Krishtal and his co-owner Evgeniy Kazmin, but military actions in the region of Donbas, where the plant is located, crossed out all the benefits of this decision.

Instead, they purchased Liepajas Metalurgs in 2014, and according to the local Ukrainian news portals, have launched at least one corporate raid on other companies. With the help of volunteer battalions of the Ukrainian militia, they have seized control of scrap metal in warzones.

The scrap is then sent to Latvia to be melted down and exported.

“At the moment, 90 percent of the company’s produce is exported to Algeria. However, exports to Poland, Germany, and Finland are also slowly kicking off,” one of KVV Group’s board members, Igor Kovalenko, said on May 15.

What next? Bankruptcy, or buckling down?

Liepajas Metalurgs’ investors have, so far, fulfilled all their payment obligations, said Finance Minister Janis Reirs (Unity) in an interview with the Latvian Television show Rita panorama on May 29.

Nevertheless, the minister doubts that the company’s owners could decide to cease operations at the plant, considering the amount of money invested so far. Investing 35 million euros and stopping production would be “insane”, said Reirs. “Keeping the plant running is the only option,” he stressed.

The minister said that even if the plant ceased production completely, the state would lose nothing, as according to the agreement, the state would retrieve all property.

Reirs believes that the situation is as it is now is because the company’s investors come from a different business environment. Taking into account that the business environment in Latvia is similar to that of the European Union, state representatives and the investors in question have different understandings about the possibility of state aid, said Reirs.

Uliana Domasheva contributed reporting from Kiev, Ukraine.