Expert Magazine: Togliattiazot May Change Ownership, Fertilizer War in its Finale

by BillPradi February 14, 2013

We have been tremendously bored reporting on Togliattiazot conflict, but the new facts are coming in the Russian media every day and we simply cannot ignore them. Apparently Russian business review magazine Expert had a chance to talk in length with lawyers of Uralchem, and came to the conclusion that the conflict which flurries world fertilizer market may come to an end. Togliattiazot may change ownership, says Expert magazine in its article.

Togliattiazot is the world’s largest producer of ammonia (capacity of 3.5 million tons per annum) and a kind of unique asset to own or to cooperate with — it is one of the few producers of ammonia who didn’t expand vertically into production of fertilizers and sells ammonia on the global market instead. Ammonia is a precious component for fertilizers production which is in a high demand, according to Argus Report. The price is skyrocketing while Indian producers are desperate to get the component necessary to fill the gaps from own lack of resources. Togliattiazot has another advantage — the combine created a unique ammonia pipeline to supply its production to the port of Odessa, hence it is independent from ever changing railroad tariffs.

In the privatization times of 90’s Togliattiazot was consolidated by combine’s general director Vladimir Makhlai. He obtained around 70% stake and ran the factory together with his family. Felling successful while exploiting heritage he has got from the Soviet Union, Makhlai didn’t seriously counted on the future and omit any serious investments. As a result we have Togliattiazot of 2013 which is large, capable of producing a heap of ammonia but not very effective. According to Expert’s article, effectiveness of ammonia producers can be measured by the consumption of natural gas per ton of ammonia produced. Best market indicators are on the level of 850-900 cubic meters, most of Russian combines do 1100-1200 cubic meters per ton of ammonia produced. Togliattiazot consumes 1500-2000 cubic meters.

From the times of privatization Makhlai and his family are in total control of the precious asset. He successfully fought back an attempt of minority shareholder Viktor Vekselberg to get the management access to the plant, but had to hide in London from prosecution initiated against him in Moscow. Later Vekselberg decided to sell his stake in Togliattiazot to Uralchem. Dmitriy Mazepin, the owner of Uralchem, had no idea what a problem-maker he is getting. He had tried to put his man in a nomination to the board and failed. He had tried to participate or at least understand what Togliattiazot is doing and where its production goes, and was refused to.

Being displeased with the effectiveness of its investments, Uralchem started the attack on Togliattiazot with criminal complaints. The situation now develops in three major directions, says Expert article. First is the criminal complaint against Togliattiazot’s management for the denial of access to corporate information. Uralchem initiated a deal with Belport Investments Limited to sell its Togliattiazot stake. The deal failed due to reluctance of Togliattiazot to provide the registry of shareholders in August-September 2011. In relation to that Uralchem on Feb, 10 2012 initiated a criminal investigation where describe its losses to be compensated in the amount of $203 million, plus $1 million fine Uralchem had to pay Belport when the deal fell.

Second criminal complaint of Uralchem had much stronger claims than the first one. Company accuses Togliattiazot in assets stripping. According to Uralchem, Togliattiazot sold assets worth 30 billion roubles ($1 billion) for a ludicrous price and to the affiliated company.

The third complaint, or the hat-trick if you wish, accuses Togliattiazot in transfer pricing. Uralchem supported the claim with custom clearance documents listing the export of Togliattiazot’s production and independent study of Russian Market Research Institute, which highlights that Togliattiazot was selling its production abroad at the prices much below the market. Institute’s study calculated the loses of $560.5 million in the years 2009 to 2012 and around $112 million in underpaid taxes.

According to Uralchem and the investigators, Togliattiazot executives developed the export scheme for their production - ammonia and urea. The plant's production initially sells at knock-down prices to the Swiss company Nitrochem Distribution AG. Nitrochem is affiliated with Ameropa AG led by Andreas Zivy (who, reportedly, might be a major holder of Togliattiazot stock). Afterwards they are selling the production at market prices. The price difference is distributed among Swiss companies and Togliattiazot. This complaint is most serious of all, as it goes far below the romp of Russian ‘oligarchs‘ — these are the money not paid to the budget of Russia.

Expert’s article conclude that Togliattiazot now has been pressed much harder than ever before. Makhlais will likely to lose control over their precious combine. In Russia such conflicts are sometimes resolved by independent arbitrators. How will the Togliattiazot story end? Hope we’ll find out soon.

Tags: Russia , Fertilizers , Togliattiazot , UralChem , Legal Disputes