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Wednesday 20.09.2017 | Name days: Marianna, Ginters, Guntra

Liepājas metalurgs comes close to becoming the next Parex disaster

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Einars Repse

Einars Repse

Latvia’s industrial giant Liepājas metalurgs (LM) could become the next Parex collapse story. The moment for Latvian politicians to make their final decision draws ever closer every day, Nekā personīga (Nothing personal) programme of TV3 reports.

One of the first preconditions for this is known already – if the state provides the money, the entire Board of LM will be removed as no longer trusted. There is not much time left to act – the first payment of more than 5 million LVL to the Italian UniCredit Bank needs to be paid on LM’s behalf on April 30.

Talks about the fate of LM were going on in Latvia and abroad throughout the entirety of last week. Representatives of LM owners, State Treasury and creditors had departed for Italy at the beginning of the week. Their goal was to knock on UniCredit‘s doors with a request to put off this month’s expected credit payment, which LM cannot afford at the moment.

However, the trip was fruitless. UniCredit refused to change the conditions of the credit without first seeing a clear business-plan of LM. This is why Italians decided to go the easy road – request the payment of the credit from the state of Latvia as a guarantee of LM.

The situation unravelled further at the Economy Ministry. Conflicting shareholders of LM had gathered at the institution. The two sides had agreed on one thing – there is still no investor, all other options are unacceptable. Kirov Lipmans said he is ashamed to have to turn to the state in order to save Sergei Zakharin’s and Ilya Segal’s private business.

“If they led LM to this situation, they should put their owned shares on the table and leave! That is all!”, – Lipmans said, promising to save LM without help from the state.

Zakharin, on the other hand, does not intend to leave. “We, Mr Segals and me, are prepared to hypothecate our shares (71%) for additional credit funds or other investments in order to help LM”, – Zalharin said.

Finance Minister Andris Vilks had previously noted the shareholders’ property is estimated at hundreds of millions. This means this property can be invested in LM. But Zakharin is reluctant to speak of this option and continues to say that he has no money to invest.

In spite of the fact that he told the programme that he is prepared to sell some of his property to help LM, he said no such thing during the meeting at the Economy Ministry. Lipman’s proposal, on the other hand, is judicially impossible, because the state has no rights to simply take shares away from one of the conflicting shareholder sides and hand them over to the other.

If there is no result in the near foreseeable future, the state will need to decide: whether to pay the remaining amount of 51 million LVL on behalf of LM and allow the plant to go bankrupt, or invest in LM even more funds, hoping that the enterprise manages to recover. The option to save LM is currently more viable in terms of available time. Nevertheless, Zakharin and Segals will no doubt be removed from the Board of LM. According to the ministry, the current Board is no longer trustworthy.

“In order for creditors to believe in the company’s viability and the possibility of changing the current business course, changes in the managing team need to be made. This is where our ministry’s specialists and I personally agree. Any normal creditor expects to return his money using a company’s economic activity, its continued functioning, not the realization of the loan. I believe the state has a similar opinion on this matter. With that, we believe we need to do everything in our power to make sure LM continues to function”, – Economy Minister Daniels Pavluts noted.

According to Lipmans, the company’s problems are also largely related to something noted by Ernst & Young and journalists of the Polish television – the enterprise has too many mediator firms as procurement partners. This allows for the possibility that most of LM’s profits come from the black market, circumventing taxes. The company and state budget are suffering losses while the owners are making serious money.

“Simple! There are two possibilities. One – procurement of scrap metal. Now we know that they are buying scrap metal for prices that exceed those of the local Tolmets by 25-30 EUR. Why? Because it is good for them to divide this money afterwards. This is nearly 30 million EUR annually! Can you imagine? Making this much money on scrap alone! The same goes for manufactured products – give it away through a number of third-party hands and imagine the money that forms! How can you sell your products for damping prices!? It’s pure nonsense!”, – Lipmans claims.

Zakharin denies the involvement of LM in the tax scheme. He also claims he doesn’t know how the suppliers, such as the Polish Tormetal, were acting. Members of this scheme were recently arrested in Lithuania.

“I cannot say anything, because I do not know the details of the supply and realization process. We are unable to affect this in any way. We sell our product and receive money. This is where our responsibility ends. What happens next is not up to us”, – Zakharin explained.

Proving one’s involvement is difficult. This is confirmed by the Polish law enforcement institutions.

“It is easy to intimidate a mediator. It is hard to say which side earns more money. Information regarding companies that produce steel without paying taxes is well known in the market. There are other sides to such schemes – the so-called buffers. During inspections, these organizations help companies prove they did everything they could in order to check their suppliers”, – said the head of the Central Bureau of Investigation Poland General Adam Rapacki.

Allegations have been presented to a number of individuals in Poland. A special team of specialists has been called to help with the investigation. The Polish police actively asks for updates from the Latvian State Revenue Service.

“The police is actively working on the criminal procedure. It is too soon to speculate how long it will last. But if the Polish side turns to Latvia with specific proposals, this will would be a wider matter to carry through the Prosecutor’s office”, – Internal Minister Rihards Kozlovskis said.

An interesting fact: some three years ago, when LM was given state guarantees, the State Treasury knew the risks very well. It was known that the projections in the company’s business-plan would not adhere to the industry trends and the fact that “continuous activity will losses could reduce the ready availability of funds.” This is exactly what has happened. The State Treasury’s report on this matter was addressed to then the Finance Minister Einars Repse, who was supposed to make the final decision. When asked as to why he decided to provide state guarantees anyway, the politician replied with a short statement: “There was no indication this would happen. The enterprise needed modernization. Specialists from the State Treasury and Finance Ministry provided good reports. The pledge was good enough to cover the guarantee (provided by the State Treasury). With that, there was no reason not to provide the budget provided guarantee”.

Specialists of the State Treasury, on the other hand, claim that the conclusion compiled on this matter was anything but “a good report”. This shows that then the political decision to help LM at the expense of state funds was based mainly on the argument that the enterprise should be saved because it is one of Latvia’s largest production plants and Liepaja’s main economic engine.

The government plans to discuss LM’s fate in detail on Tuesday, April 16.


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  1. JPR says:

    Liepaja going bankrupt???

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