Kazakh Smelter's Revival Masks Woes

ALMATY, Kazakhstan -- Just one year ago, the Zhezkazkantsvetmet copper mine and smelter in central Kazakhstan was virtually comatose, worn down by $190 million in debt.

One year later, production has doubled to 18,000 tons a month, salaries are paid on time and new equipment is replacing outdated production lines. But while Zhezkazkantsvetmet appears well on the road to financial health, many of its suppliers, clients and creditors are ailing -- a dubious side-effect of a controversial alternative to outright privatization known as "trust management."

"There's nothing like it in the Soviet Union, or the world for that matter," said Alexander Mashkevich, vice chairman of Eurasiabank, an Almaty-based investment bank that took three metallurgy plants and mines in trust and claims to have spent close to $1 billion reviving and then buying them. "People come in and pay the debts, pay the salaries and promise to invest. For the state, this approach is simply ideal."

The Kazakh government last year hired Samsung Deutschland, a subsidiary of the Korean industrial group, to revive production and improve management at Zhezkazkantsvetmet. In return for pledges to invest and pay off debts and overdue wages, Samsung would get 2 per cent of the smelter's profits, a variable margin on copper sales abroad and a first option in any privatization.

But the plant's debts turned out to be twice as high as expected, and Samsung found it employed 6,000 more workers than were on the books.

To keep Samsung on, the government allowed it to delay payment of about $100 million in debts and to suspend contracts at will.

And although the plant is recovering, the government recently allowed Samsung to file for the plant's insolvency by counting its investments and debt payments as debts owed by the plant. This has enabled Samsung to buy a 40 per cent stake in the plant at a price the government calls "a commercial secret." Samsung is exempt from paying debts for another two years.

Financial recovery by such means is hardly good news for the plant's creditors.

"This should not happen in business," said Valentina Zhuravlyova, vice chairman of Alem Bank, a large Kazakh bank that is being sued by a Russian bank for $10 million, an advance payment it had guaranteed for Zhezkazkantsvetmet shortly before Samsung took over.

"This is a heavy blow to us," Zhuravlyova said. "For us, $10 million is a lot of money. There had to be some serious inflow of cash into that enterprise. But you should solve that problem in a way that does not hurt the other partners of that enterprise."

One construction company that is owed $12.8 million has been unable to pay its 25,000 employees for five months. At least one foreign metals trader, the American International Ore Corp., has gone bankrupt partly because its contracts with several Kazakh firms were canceled as soon as they were put in trust.

Trust managers say that many traders and suppliers, hurt when their contracts were suspended, do not stand a chance in court because their contracts were fraudulent. In return for kickbacks, Soviet-era enterprise directors would sign unfavorable supply and sale contracts, robbing the state-owned plants of millions in revenue.

"A lot of contracts were fictitious," said Jong-Wan Lim, commercial director for Samsung Deutschland in Almaty. "And the money disappeared."

Because the managers are offered only a minor percentage of the profits, some have opted to raise revenue by plundering their plants -- selling production back to themselves at artificially low prices or providing equipment at artificially high rates.

"We knew there were abuses," said Sarybai Kalmurzayev, chairman of the State Property Committee. "But for the sake of keeping the investor, so that he would invest money, we looked the other way."

For every three successful management contracts, two have gone sour. But investors and businessmen who have not been hit with bad debts rate the program a success.

"The government quickly succeeded in stabilizing the enterprises," said Nurzhan Subkhanberdin, chairman of KazKommertsBank, the largest commercial bank in Kazakhstan. "Those plants are no longer overdue on salary payments or contributions to the budget.