Poor Rich Imereti: Part Two

Journalist: Studio Monitor
Divider dot 12 February 2015


The Zestaponi Ferroalloy Factory is one of most important industrial enterprises in Georgia – the fifth largest silicomanganese-producing country in the world.Half of the silicomanganese imported into the US in the recent years was produced at the Zestaponi plant, making it a highly covetable target for entrepreneurs.In the first part of this investigation, Studio Monitor discovered how, in the turbulent and corruption-blighted years after Georgia became independent in 1991, the factory’s ownership changed hands several times, sometimes in questionable deals, while small shareholders and workers entitled to dividends were never paid what they were owed.

In December 2006, the plant again got new owners after it was sold for 30 million US dollars, more than three times the price it had been sold for by the previous government of Eduard Shevardnadze.
In the following two years, according to the Tax Service, it made a 154 million US dollar profit.
But despite its apparent wealth, the plant remains a major polluter that threatens the health of the local population, violates regulations on toxic emissions and breaks the law by operating without a legally-compulsory environmental impact permit from the authorities.

Ukrainian oligarchs take charge

The Zestaponi Ferroalloy Factory was bought in 2006 by a company called Georgian Manganese, which also went on to buy the cash-strapped company Chiaturmanganum at auction for 14 million US dollars. Then the state privatised the Vartsikhe Hydroelectric Plant to Georgian Manganese for 57 million US dollars.
The business symbiosis that inspired these purchases was clear: ores are extracted by Chiaturmanganum from mines in the Georgian town of Chiatura and then processed and turned into alloys at Zestaponi, while the Vartsikhe Hydroelectric Plant produces cheap power.
Georgian Manganese is an offshore company registered in Cyprus, about which there is little information in the public domain.
A Ukrainian website, ukrrudprom.ua, proved to be the only public source of information about the company.

According to ukrrudprom.ua, Gennady Bogolubov and Igor Kalamoyski, the billionaire founders of PrivatBank, Ukraine’s largest commercial bank, were the new owners. In an interview with the same website, Bogolubov confirmed this.
According to the same source, the owners of PrivatBank also own Felman Production (Highlanders Alloy), which produces silicomanganese in the US; Consolidated Minerals Australia; Ghana Manganese in Ghana; Ferral in Romania; and the Zaporozhe, Stakhanov and Nikopol ferroalloy factories in Ukraine.
As well as metallurgical enterprises, the PrivatBank shareholders control dozens of companies in Ukraine in the fields of oil, aviation, medicine, football, food production, mechanical engineering and agriculture.
In 2013, Georgian Manganese changed ownership again and became the property of Georgian-American Alloys, a company founded in Luxemburg with its headquarters in Miami, Florida.
Georgian Manganese never answered Studio Monitor’s question about the identities of the Georgian-American Alloys owners. The authorities in the US state of West Virginia did however provide information about its shareholders.
The Public Service Commission of West Virginia said that “Igor Kalamoyski and Gennady Bogolubov are the largest shareholders of PrivatBank”, and that “Mr. Kalamoyski and Mr. Bogolubov are ultimate minority shareholders of Felman Production… and Georgian Manganese”.
A 2010 court case file at the district court in West Virginia in the US established that Felman Production was owned by Haptsic Investments, a Cyprus-based company owned in turn by Divot Enterprise. The representative of Felman in the case said that Kalamoyski owned Divot Enterprise in full.

Workers demand pay, not promises

In 2006, the new Ukrainian owners said that their mission was clear: to revive the three companies and, as a result, boost the local economy and its people’s living standards.
When asked to outline Georgian Manganese’s goals, Chiaturmanganum director Alexander Silberman responded: “To rebuild all three enterprises. To make them close to a European level. To provide work for at least 7,000 people. To upgrade the economy’s technology up to the best examples of the world’s production. To reach good results, to increase employees’ salaries. In short, to give life to this region.”
However, when pressed by workers who gathered outside the Zestaponi plant when he visited it after Georgian Manganese took control, Silberman quashed workers’ hopes of immediate pay rises.
“I am a representative of the owner today. And to make a decision about raising salaries on these steps of this building is not realistic,” he told the disgruntled employees.
Their discontent about pay and working conditions erupted into a series of protest rallies and several hunger.
At one rally in July 2013, workers demonstrated holding placards with slogans like ‘We refuse to be slaves’ and ‘We demand a raise’.
“We want a 50 per cent raise, overtime pay raised by 20 per cent, and a collective contract,” said one protesting worker who was taking part in a hunger strike.
Pay rates had increased since the 2006 takeover but workers insisted that they remained inadequate.
The 2013 hunger strike ended with an agreement to link pay rises to production output.
The director of the Energy Department of Georgian-American Alloys, Davit Chanturia, said that the workers have been given a fair deal.
“Now we produce more, so we have a larger percentage per worker at Zestaponi Ferro,” Chanturia said.
The employees, however, said that this was still not enough reward for tough and potentially dangerous work in a polluted environment.

The disappearing silicomanganese

In 2010, the Tax Service carried out another inspection at Georgian Manganese. An interim report on the inspection, seen by Studio Monitor, said that this time the company was fined 202 million Georgian lari for various violations.
The report also revealed how the company lost huge amounts of silicomanganese – between 2007 and 2010, these losses were worth 438 million Georgian lari.
Ninety-four million lari worth of silicomanganese (116,000 tons) were lost in 2007; 224 million (143,000 tons) in 2008; 43 million (64,000 tons) in 2009, and 78 million (58,000 tons) in 2010.
The report described how manganese was first lost during its extraction and processing in Chiatura and then during its transportation to and production in Zestaponi.
The authorities considered these losses excessive and fined the company.
“Expenditure caused by the loss of pure manganese is primary here. It qualifies as the loss of goods,” said tax expert Zviad Rogava.
“According to the then applicable legislation, it was taxable. These goods were lost in the process of production and delivery,” Rogava said.
The authorities believed that the company was actually lying about how much manganese had gone ‘missing’ in transit.
The interim report also revealed that Georgian Manganese had violated other provisions of the tax code as well.
The company borrowed materials to produce their goods. Then it provided its goods on credit, but never received payment in return, accumulating a debt of 119 million Georgian lari.
This led to Georgian Manganese LLC taking loans from its founders – who are not identified by name in the report – but it failed to generate enough revenue to repay these loans, simply borrowing and paying the interest.
The unnamed founders received over 20 million GEL in interest alone. Abendale Management is one of the companies, registered in the British Virgin Islands tax haven, that owes Georgian Manganese 119 million Georgian lari for silicomanganese that it never paid for.
One contract seen by Studio Monitor shows that Abendale sold 5,000 tons of manganese to the Alcor trading company for 1,600 US dollars. The contract specifies that the goods should be shipped ‘FOB’ (‘free on board’, meaning that the buyer pays for the transportation) from the Georgian port of Poti, thus giving Abendale more financial benefit.
The contract also reveals that goods produced by Georgian Manganese are sold through a number of intermediary companies. After having been loaded on board at the port in Poti, silicomanganese would be sold by Georgian Manganese to Abendale, then Abendale would resell it immediately to Alcor Trading. Alcor Trading, in turn, would subsequently sell the goods to the end users – Turkish companies.
However, according to the interim report, the Tax Service did not fine Georgian Manganese for running an illegal ‘transfer pricing’ scheme in order to dodge tax.
Transfer pricing is typically used to shift profits to countries with low tax rates, such as the British Virgin Islands, and avoid paying taxes in countries where companies have substantial trading operations – Georgia, in this case.
Georgian-American Alloys also denies using such illegal schemes to avoid Georgian tax.
The interim report was completed on February 11, 2011. On March 8, 2011, one of the company’s owners, Kalamoyski, visited Georgia. According to Studio Monitor’s information, he met senior Georgian officials, but it remains unknown whether or not his visit was followed by any changes to the company’s tax debts. Studio Monitor addressed the Ministry of Finance, Tax Service and Georgian-American Manganese in an attempt to find out, but never received an answer.

The stench of pollution

The other major problem facing the ageing Zestaponi plant is pollution. The plant operates two workshops, whose air filters were installed in the 1980s. According to Zestaponi workers, no substantial renovation has been done since the 1990s.
“One of the main tasks of the administration is to improve results. However, progress is very slow. Let us bear in mind that the factory is 80 years old,” admitted Chanturia, speaking on behalf of Georgian-American Alloys.
“The main point is the configuration of the furnace which we simply cannot replace, yet it doesn’t meet today’s standards. Nonetheless, we are trying to wed modern technology and our outdated furnace configurations. We are producing additional equipment to keep contamination from entering the ventilation system. In 2012 and 2013, the handle filters in all 11 furnaces were replaced, so have positive results in this regard,” Chanturia said.
But locals in the area around the factory alleged that the Zestafoni management has been cutting corners on pollution reduction to reduce costs.
“They don’t have these filters on 24/7. They turn them off at night. So you are sleeping at night and breathe this poisonous smoke. This is how they save money,” said one, Omar Nebieridze from the nearby village of Zemo Sakari.
“This smoke is unbearable. You cannot raise children here. Nobody cares about this problem,” he said.
According to experts, the milky-white smoke that rises from the factory is caused by the pouring of slag into water. During this process, sulphur dioxide is emitted into the air.
Nebieridze said that the smoke was emitted “three or four times a day”.
“The smoke is white, but it is saturated with sulphur and it stinks,” he said.
“This dust stings just like fibreglass. The milky-white smoke emits this dust,” said former Zestaponi worker Leri Nebieradze (no relation to Omar).
The management however said it had changed its working practices.
“Technology has been replaced. We no longer produce friable slag. This is why you cannot see the milky-white smoke anymore,” said Chanturia.
However, photographs that Zestaponi workers said they took after Chanturia made this statement showed that the white smoke was still being emitted into the air.

Condemned for contamination

Zestaponi is at the top of the list of the worst contaminators in the country, according to Georgia’s National Environmental Agency.
The agency says that the dust emitted by the plant exceeds the Georgian legal limits three times over, sulphur dioxide two and a half times, and manganese dioxide seven times.
The Minister of Environmental Protection and Natural Resources, Khatuna Gogaladze, confirmed this was true.
“You too have seen that the limits are violated,” Gogaladze said.
“Excess manganese dioxide is emitted into the air with the dust. Manganese dioxide is the main contaminator. Naturally, the lion’s share in this type of contamination goes to ferroalloy factories,” she said.
But the truth about this pollution could be more even disturbing than these statistics suggest.
“These facts have been mitigated. The situation is much worse in reality,” said Oleg Abashidze, a municipal councilor in Zestaponi.
Abashidze explained that the hydro-meteorological station in the town, which is supposed to monitor air pollution, had been allowed to become dilapidated and its staff had been reduced in recent years.
“In addition, they use outdated equipment from the 1990s, which prevents us from learning what is going on in reality,” he said.
Environment minister Gogoladze also admitted that the station in Zestaponi was “outdated”.
“In addition, one station is not enough to have a full picture. There must be more,” she said.
According to the law, Georgian Manganese was supposed to submit a document on its environmental impact to the Ministry of Environmental Protection before the end of 2011, but has so far failed to do so.
“We carried out an inspection more than once,” said Gogoladze.
“First they were fined for unlicensed activities in May 2012, then again in December 2012 or early 2013, so we were legally obligated to refer this case to the Ministry of the Interior. This case was supposed to be investigated. They can have their own analysis results and they can turn to the courts,” she said.
The ministry told Studio Monitor that “the investigation is underway” but said it was unable to provide more information.
“I don’t know why this investigation is dragging out so long,” said Nino Gujaraidze of the campaign group Green Alternative.
But the facts of the case are clear, she said: “The factory has no [environmental] permit. In fact, it has been operating for four years with no permit, illegally.”
The company did not deny this.
“The environmental impact permit is the toughest issue. In this regard, we are in close cooperation with the Ministry of Environmental Protection. We are facing this problem in Zestaponi,” said Chanturia.
But although he admitted that the case had been referred to the interior ministry a year earlier, he hinted at hopes that, after a change of government in Georgia in September 2012, negotiations with the new administration that came to power could yield positive results for the company.
“We have a new government now, so we are discussing certain issues with the new government,” he said.
The losses detailed in the 2011 Tax Service report on Georgian Manganese, if transformed into profits, could have been used to address Zestaponi’s problems, suggested Gujaraidze.
“These sums mentioned in the report – I mean these losses – would probably benefit the factory tremendously and change the situation,” she insisted.
“Yet when we are talking about profits and technological re-equipment, companies often profit bypassing the law and avoid solving concrete problems. Unfortunately, this is reality, and it is especially true of Georgian Manganese,” she said.

High-risk labour

Inside the factory, it is even harder to endure the dust that is emitted by the production process, workers insist.
“I work right where all the smoke, exhaust and gases are. There is no visibility a few feet away, and I end up working there eight hours in a row,” said one.
“Sanitary conditions are horrible. Moreover, the factory is a danger zone. There are no safety rules, and contamination is all over the place,” said another.
Most employees are at high risk and workplace safety rules are ignored, according to an analysis at the plant conducted in 2011 by the Labour Medicine and Ecology Scientific Research Institute, which was commissioned by Georgia’s National Centre for Disease Control.
The experts divided workplace risks into four categories.
“There are several criteria, such as dust, noise, sanitary conditions, etc,” explained Amiran Gamkrelidze, director of the National Centre for Disease Control.
All of the jobs at the Zestaponi plant fell into highest or second-highest risk categories, the analysis found.
Chanturia insisted that problems with a vacuum system used to extract dust from the area around the furnace had been solved, but admitted that other risks remained, such as noise.
“We cannot avoid it [noise], of course, but our equipment has been renewed in the past few years. Although there were complaints, the situation is much better today,” he said.
Locals in Zestaponi fear meanwhile that the plant’s emissions could cause long-term damage to their health.
“I live on the territory adjacent to Ferro and three of my family members died from cancer, my wife of 38, my grandmother and my aunt. In addition, my mother has stage-four cancer,” said local councillor Abashidze.
“This is the environment we live in. It’s horrible,” he said.
However the director of the National Centre for Disease Control said he believed that such fears are exaggerated and possibly groundless.
“Zestaponi and Chiatura have always had a bad reputation as contaminators. Yet if we browse through basic statistics, we’ll see that Zestaponi is no different from other regions in terms of disease outbreaks,” said Gamkrelidze.
“If we carry out comprehensive epidemiological analysis, I am convinced we will see that the level of the spread of diseases is much lower here than in other districts,” he said.
But no large-scale analysis has even been carried out in Zestaponi that could allay local people’s fears.
Like the murky financial situation of the company that runs the plant, and the way its products are sold, what is really happening to Zestaponi residents’ health remains yet another mystery.