Poor Rich Imereti: Part One

Journalist: Studio Monitor
Divider dot 12 February 2015


A huge cloud of milky-white fumes billows upwards into the air from the sprawling Zestaponi Ferroalloy Factory in central Georgia – one of the country’s most important industrial enterprises.Outside, a group of men are protesting, holding up placards with slogans like ‘We Refuse to Be Slaves’ and ‘We Demand a Raise’.

They are seeking better rewards for their punishing labour in gruesome conditions inside the ferroalloy plant.
“I work where gases and fumes are emitted. There is no visibility a few feet away, and I end up working there eight hours in a row,” one protester says.
“People are suffering. We risk our lives working there,” insists another.
From the road outside, the plant looks rundown, but it’s still a lucrative enterprise, and over the years, its workers should in theory have received significant dividends from the money it has generated through its substantial export revenues.
But instead, they say, they have received nothing.
The story of the Zestaponi Ferroalloy Factory is a tale of intrigue and deception, played out against the backdrop of the collapse of the Soviet Union and the rise of entrepreneurs who transformed Georgian state enterprises into cash for themselves.
In the years since the country became independent, shares in the factory have changed hands repeatedly in murky circumstances and many millions of Georgian lari have been made – but the workers who put their health in danger toiling there have never been given the rewards to which they were entitled.

Jewel of Soviet industry

The factory used to be one of the largest enterprises in the Soviet Union. It was founded in 1933 by Niko Nikoladze and his son, Giorgi Nikoladze, to process manganese extracted from mines in Chiatura and produce silicomanganese and ferromanganese alloys.
Demand was especially high from Communist countries in Europe; Poland, Hungary, Czechoslovakia and other such states all used ores from Zestaponi.
After the Soviet Union fell and civil war in Georgia ended, the government decided to transform state-owned enterprises into joint stock companies and sell shares in them. This is when the ferroalloy plant’s contemporary troubles began.
On March 27, 1995, a conference of workers and employees of the factory was held. It was decided to distribute 10 per cent of the initial shares among the workers and employees free of charge.
But in the end, because of a government-imposed formula that limited how much of a privatised company workers could be given, they never received anything like this.
“Some top economists, who must have been interested in purchasing this property, came up with a law allowing for only five percent to be given to employees,” said Guram Kashakashvili, who was the general director of the Zestaponi Ferroalloy Factory in the 1980s and is now a professor at the Department of Metallurgy of the Technical University in Tbilisi.
“At the same time, they included a provision in the Law on Privatisation, stipulating that the employees cannot have their representative on the supervisory board unless they own 10 per cent. So someone who wanted to take over the country [by grabbing its industrial resources] drew up this law,” Kashakashvili suggested.

The shady Shevardnadze years

The 1990s and early 2000s in Georgia, when Eduard Shevardnadze’s government was in power, were characterised by widespread corruption. Graft was also a significant factor in major privatisation deals.
In 1995, the movie director Davit Shalikashvili became interested in the Zestaponi Ferroalloy Factory. Shalikashvili (now deceased) was rumoured to have links with Shevardnadze’s family and to have been friends with State Minister Vazha Lortkipanidze. He became a representative of Russian-Georgian Bank for Reconstruction and Development and approached the factory on behalf of the bank.
“He was very active. He was closely associated to Shevardnadze’s family,” said Malkhaz Kochiashvili, a former worker at the factory.
Shalikashvili owned Channel One Film Studio but was not an industrial entrepreneur – at least not yet.
“What did Shalikashvili have to do with metallurgy?” Kashakashvili demanded rhetorically.
“That is when metallurgy went downhill. People who are clueless ran and still run this business,” he said.
Shalikashvili appealed to Shevardnadze in writing, requesting the right to run the factory instead of privatisation. The factory was given to two companies to run for ten years, one of them represented by Shalikashvili. But the managing companies failed to meet their contractual requirements and the contract was terminated two years later, in 1999. The company’s representatives however went on to work for Wade Bridge, another firm that would buy shares in Zestafoni.
Then something peculiar happened, according to Kochiashvili: “Those investors who initially opposed the factory’s privatisation became advocates of privatization all of sudden.”
In 1998, the Ministry of Property Management auctioned off 48 per cent of the shares. There were no buyers at the first and second sessions of the auction. The third session, however, saw the shares sold for a mere tenth of the asking price – a total of 1.5 million Georgian lari.
The workers were given 0.8 percent of the shares. The offshore company Wade Bridge, represented by Shalikashvili, purchased 20 per cent. Some 25 per cent was bought by a Swiss company called Novarco Age, which was later transferred to another company called Fontwell. Private shareholders bought three per cent, while 51 per cent, the controlling interest, remained the property of the state.
Under the terms of the privatisation, the state insisted that the new owners upgrade the factory’s equipment or raise salaries. Because the plant was sold for a tenth of the asking price, the government budget did not profit much either.
Later Georgia’s Chamber of Control assessed the privatisation as financially ineffective and useless for the enterprise. The factory’s workers also did not benefit from it.
“No one, neither the president nor anyone else, cared about the people,” insisted one of the workers at a meeting at the plant in early 2006, saying she was only paid 18 Georgian lari a month in the period after privatisation.
However according to information on the US government’s Data and Statistics website, the factory made millions of Georgian lari each year from 1995 to 2003 from exporting silicomanganese to the United States alone.

Football entrepreneur takes control

In early 2003, Ilia Kokaya, a Georgian businessman based in Germany who was well-known as the president of local football club Zestaponi FC, became involved in the factory.
According to a document from the Chamber of Control, Beta Contract, a company associated with Kokaya, supplied the factory with raw materials and received goods produced by it and exported them abroad.
This way, the company generated revenue and strengthened its control over the factory.
On February 10, 2003, Kokaya and his partner Giorgi Kapanadze became members of the Supervisory Board without even owning shares in the factory. Under the leadership of Kokaya, the Supervisory Board appointed his brother, Korneli Kokaya, as the director of the enterprise on the same day. Later, Nikoloz Chikovani, another member of this team, replaced him as director.
Then the management team discovered a way to get hold of the shares that remained under the government’s control. They found a company to invest and presented it to the authorities.
In 2003, Shalikashvili addressed the Permanent Commission for Privatisation, this time on behalf of the Austrian Deco Metal Company. Shalikashvili requested the shares remaining under the government’s control to be sold to him directly.
The government failed to auction off its 51 per cent of the shares or announce a bidding competition. Instead, on June 29, 2003, President Shevardnadze signed a directive and sold the factory’s controlling interest to Deco Metal for seven million US dollars.
Then, in April 2005, Deco Metal sold 25 per cent of its shares to Acremar, a company owned by Kokaya and Kapanadze, according to Giga Bedineishvili, a former representative of Deco Metal.
A month later, Shalikashvili’s company also gave its 20 per cent to Acremar.
Acremar and Fontwell then invested their 45 and 25 per cent shares into the Cyprus-registered Selromex Company, making a total of 70 per cent, enough to run the Ferroalloy Factory.
Deco Metal also invested the 25 per cent share it retained into Selromex. As a result, Selromex became the owner of 96.2 per cent of the factory’s shares, although 25 per cent was still controlled by the Austrian investors.
The real owners of Selromex were Kokaya and Kapanadze, according to Bedineishvili.

The new owners flee

With the arrival of Deco Metal, the factory’s first workshop was renovated and salaries, now reaching 200-300 Georgian lari, were paid every month.
But in December 2003, not long after Shevardnadze was ousted in the Rose Revolution, Zestaponi was gripped by new troubles when armed Financial Police officers arrived at the Ferroalloy Factory.
Kokaya and his partner fled the country.
“They expected to be arrested, so they left Georgia,” Kokaya’s lawyer told Georgian television station Rustavi-2.
According to a decree on December 30 from the Ministry of Finance’s Financial Police, the Ferroalloy Factory was fined 106 million Georgian lari, although the Tax Service then cut the penalty to 52 million lari.
Tax evasion was the owners’ main crime, the authorities said.
“The [factory’s] profit figures were intentionally reduced by 157 million lari [to avoid paying more tax],” a Financial Police document explained.
The Financial Police sent a letter about the fraud to Rohtraut Skatche-Depich, the director of Deco Metal, so the Austrian company sent its representative Bedineishvili to the factory to find out more.
But his investigation angered Kokaya’s representative and triggered fury among workers who had apparently been told by Kokaya that the authorities intended to shut down the factory completely.
Employees held a protest rally outside the plant, where speeches were made in support of Kokaya and against Deco Metal.
Meanwhile Kokaya gave an interview from his self-imposed exile, blaming the government for the factory’s financial woes.
“This is sabotage on the part of the government, not on our part. So many senior officials are involved,” he told Rustavi-2.
Prime Minister Zurab Noghaideli vowed however that “the inspection will continue to the end”.
A meeting was held at the factory where the chief of the Financial Police, Paata Mkheidze, gave the workers detailed information about the financial violations perpetrated by the management.
“As you know, we are investigating a criminal case against top managers of the Ferroalloy Factory, involving the embezzlement of significant funds,” Mkheidze said.
“As you know, ferroalloy ores are in high demand everywhere, in Russia and Ukraine, not to mention on European markets. The price is between 1,200 and 1,500 US dollars and yet it is sold [by the Zestaponi factory] for 400 US dollars, a third of the price,” he continued.
He explained that an intermediary company would purchase silicomanganese from the Ferroalloy Factory at a cheap rate of 400 US dollars per ton, and then sell it to its end users for 1,200-1,500 US dollars. The intermediary company made a profit of 800 dollars per ton, while the factory received just 400 dollars.
A representative of Kokaya denied the scam, calling the alleged profiteering “hypothetical” and blaming Deco Metal for the situation.
But Deco Metal’s representative at the meeting, Giga Bedineishvili, insisted that Kokaya was at fault for turning a potentially profitable factory into an enterprise that made massive losses instead – with the money draining away into the pockets of Kokaya and his associates.
“[Russian-based intermediary company] Beta Contact bought it from the factory for 400 US dollars and then sold it to Deco Metal at a market price, so Beta Contact, owned by Kokaya, made a profit,” Bedineishvili claimed.
“This is why, instead of profiting 50-60 million US dollars in 2004, the factory lost 13 million US dollars,” he said.
The Financial Police chief also pointed out that Kokaya was a representative of the Austrian company and deputy chair of the factory’s supervisory board while also involved in the intermediary company.
Bedineishvili said that Kokaya was to blame for the factory’s losses.
“It is not only about tax evasion. We are talking about stealing from the factory’s staff,” he insisted.
“Kokaya is leading the factory toward bankruptcy. Open your eyes! The factory is in debt up to its eyeballs, while it’s supposed to be making fantastic profits,” he added.

Small shareholders ‘robbed’

Georgian business law expert Akaki Chargeishvili says that if profits were made, as the tax authorities stated, dividends should have been paid to small shareholders who owned 3.8 per cent, including the workers who had held 0.8 per cent of the company since it was originally privatised.
The taxed profit for 2004-5 was 126 million Georgian lari, 3.8 percent of which is 4.7 million Georgian lari. According to Chargeishvili, the shareholders should have received this amount.
But, he said, “as far as we know, nothing of this kind happened”.
One former shareholder, Avtandil Chubinidze, said he received no dividends at all between 1998 and 2006.
“Not a penny. I bought shares for 2,000 Georgian lari, which was a lot of money, but I have not received anything yet,” he said.
Another former shareholder, Hamlet Vasadze, said the same.
“I have not received a penny… Nothing whatsoever,” he said.
In 2006, Selromex made a decision to sell its controlling 96 per cent of the factory’s assets without informing the private owners of the remaining 3.8 per cent of the shares and without holding any kind of meeting of the joint stock company to discuss the sell-off.
Small shareholders lost their assets when the company was liquidated.
“It was outright robbery. We owned this property, and it was taken away from us just like this,” said Chubinidze.
Studio Monitor made contact with Kokaya to ask him about the sell-off and the lack of any dividends for the small shareholders.
Kokaya denied any wrongdoing, saying that he had actually “saved this dilapidated and ruined factory” and blaming the government for any problems.
“I don’t know what dividends you’re talking about. The state showed up and screwed up my factory. What dividends are you talking about?” he asked.
Pressed further, he became angry and issued what seemed to be a threat to Studio Monitor’s reporter.
“Young lady, are you looking for trouble?” he demanded.
A few minutes after the call ended, a man identifying himself as the head of Kokaya’s security telephoned Studio Monitor, asking to know why the reporter had called the businessman.

New government, new hope?

When President Mikheil Saakashvili’s administration was ousted at parliamentary elections in 2012, hopes were raised among the factory’s private shareholders that they might finally find justice.
They sent a letter to the new government led by Bidzina Ivanishvili, asking for help to restore their rights.
But so far, they have received no response.

In the second part of this investigation, Studio Monitor digs deeper to establish the truth about the 2006 sale of the Zestaponi Ferroalloy Factory and about the plant’s environmental problems.