01 March 2000 – The Guardian, Finance section
It is less than 10 years since the break-up of the Soviet Union opened the door on a feast of business opportunities for western companies willing to hazard the money, time and know-how for which the bombed-out Soviet economy was crying out.
During the past few days, settlement of a half-billion pound legal case fought between one former Soviet republic and a dig player in the London metals market shows how sour such gambles can turn.
At stake in the case was no less than 20% of the GDP of Kazakhstan, once a bulwark of the Soviet Union’s central Asian flank. While the case was underway, the now-independent country could not be sure that the shipments of its critical alumina, chrome and iron ore would not be seized in jurisdictions where judgment had been given favour of partner turned courtroom enemy Trans-World, a Geneva minerals and industrial group founded by David and Simon Reuben, whose trading arm is based in London.
Spanning three jurisdictions and pitting against each other two of the new breed of “wild east” tycoons, the case has produced conflicting accounts of just what happened to resources-rich Kazakhstan in the 1990s.
On Monday, both sides said they were pleased with the outcome, an undisclosed payment by Kazakh interests to Trans-World to buy the company’s rights in three metals plants. This mutual pleasure was the first thing either side had agreed on for a very long time.
Trans-World’s case is that the Kazakh interests – the government plus businessman Patokh Chodiev – represent the worst side of post-communist commercial life, letting the Geneva conglomerate invest in what had been an insolvent minerals industry then forcing the company out of the country just as the plants were turned around.
The Kazakh’s case is that Trans-World and its allies were predators. Mr Chodiev told a court in the British Virgin Islands: “In the period of Trans-World’s management … the plants were managed in such a way as to bring them on the verge of bankruptcy.”
The precise size of the settlement is confidential. There have been suggestions of £94m, a considerable comedown from the £500m Trans-World has been seeking. This figure is denied by those close to Trans-World.
What is certain is that a £63m award made against Trans-World in January last year by the Kazakh supreme court now will not be paid. On the other hand, neither will Trans-World share in the plants profits at a time when commodity prices are strengthening after years of slump.
Meanwhile, Trans-World’s prize fighter in the ex Soviet tycoon championship, businessman Lev Chernoi, is sharing in the settlement, although to what extent is not known. Mr Chernoi was a central figure in the Kazakh venture, striking a verbal contract for the whole deal in August 1994 with the Chodiev Group.
What happened between summer 1994 and October 1997, when Trans-World was effectively evicted from Kazakhstan, depends which side is telling the tale.
According to Trans-World, huge sums of money were invested in clapped out facilities, with a £104m loan arranged from United Global Bank, the Samoa-based banking vehicle of Simon Reuben, at competitive rates. Come October 1997, with Trans-World preparing to inject a further £620m into the industry, its representatives were forced out of plants, and on one occasion at gunpoint.
Frustrated in the local courts, Trans-World sued in the British Virgin Islands, home of the joint venture.
Come October 1999, and Mr Chodiev told the islands’ court that he would be in contempt of its order to hand over joint venture shares to a local receiver, ahead of the case being next year.
Finally, Trans-World points to last week’s announcement that the World Bank is having to subsidize a special political risk insurance for firms doing business in Kazakhstan.
The Kazakhs tell a different story. According to the Kazakh interests, Trans-World’s actions were “intended to ensure the financial and economic dependence” of the industry on the company. The UGB loans fitted this pattern and charged excessive interest.
In autumn 1997, the state property committee investigated the plants, disclosing “numerous violations” of the civil law.
In January 1997, the Kazakh supreme court ruled in favour of the Chodiev / government interests and voided interests payments on the UGB loans.
Summing up, the Kazakhs said of the industry under Trans-World management: “A paradoxical situation was artificially created, where the more product … [we] shipped out the deeper [we] became in debt.”
With the parting of the ways, Trans-World remains entangled in a second court case, this in Switzerland against Russian entrepreneur Oleg Delipaksa and associates regarding another joint venture, the Syanks aluminium plant in Siberia.
By 1997, David and Simon Reuben briefly controlled two thirds of the former Soviet Union’s aluminium industry. But perhaps they are more than happy no longer to do so.