Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

UES Struggles to Explain Debt Deal

APForeign Minister Igor Ivanov meeting his Czech counterpart Kavan for talks Thursday.
Unified Energy Systems held a meeting with analysts Thursday to explain its part in a fuzzy deal last year to settle a $2.5 billion Soviet-era debt to the Czech Republic. But the picture that emerged after the meeting was not much clearer.

Ever since the agreement was reached last fall to settle the debt through two companies -- UES and Falkon Capital, a Czech debt and energy trader -- investors, journalists and financial analysts have been trying to figure out who paid what and how in this obscure deal.

Falkon Capital bought the rights to the Russian debt for about $550 million and then agreed to transfer them to UES. The Russian government then agreed to write off debts of $1.35 billion that UES owed to the budget. What was not clear was how Falkon was paid.

Vedomosti reported Dec. 28 that UES transferred $550 million plus some interest to Falkon, which left UES with a net profit of $770 million from the intergovernmental deal. To pay Falkon, UES borrowed the money from a commercial bank, the newspaper said.

The Financial Times on Thursday cited two U.S. economists, Michael Bernstam and Alvin Rabushka, as calling it an "electrifying -- taxpayers could say 'electrocuting' -- switch of budget money to UES."

UES spokesman Andrei Yegorov, however, said Thursday that "no money was involved between Russia and the Czech Republic in the settlement of the debt whatsoever."

He said the debt (which Falkon discounted to $1.35 billion) would be paid in full within the next 10 years by electricity exports only and no cash whatsoever was transferred from UES to Falkon on Dec. 17 and then from Falkon to the Czech Finance Ministry on Dec. 19, as Vedomosti reported.

Yegorov said that part of the deal, though not directly connected to the Russian-Czech debt settlement, was another debt settlement. He said the Russian Finance Ministry provided UES with 40 billion rubles ($1.35 billion), which was used to settle debts between UES, the Tax Ministry, Gazprom, Rosenergoatom, some UES daughter companies and several coal companies.

He said it was an internal Russian arrangement. "Effectively, none of the cash ever left the treasury. And I swear to you that nothing was paid to Falkon," he said.

But at the same time, speaking at a meeting organized by UES for Moscow-based analysts, UES financial director Dmitry Zhurba gave another version of events, according to those in attendance. Zhurba's version, however, was short on details, they said.

"What I understood was that UES took a loan from some commercial bank and bought the debt from Falkon," Andrei Abramov, an analyst with NIKoil, said in an interview.

He said Zhurba refused to say how much was paid to Falkon, but said only $30 million worth of electricity would be supplied as part of the payment, and the rest is cash.

The only part of the explanation that matched between the two UES officials was the scheme of mutual debt settlement based on the 40 billion rubles supplied by the Finance Ministry.

"The problem is that Zhurba refused to answer many questions. In principle, the scheme is understandable, but as the main sums were not named, it is hard to assess the deal," Abramov said.

"Well, it is clear that the budget paid less than $2.5 billion, but it is impossible to understand now whether something was pocketed. No one knows where UES keeps its pocket," Abramov said.

Falkon Capital has not responded to written questions sent by fax last week, and the response to telephone calls this week has been that no one is available to speak for the company.

The Russian Finance Ministry has forwarded all questions to UES.

Abramov said he found it surprising that the UES spokesman, Yegorov, offered such a different version of the deal. But Fyodor Tregubenko, an analyst from Brunswick, said there was no surprise.

"The deal is very complicated," Tregubenko said. "I think even an official spokesman may not know its details because it has never been made public."

At a conference call Thursday evening organized by Troika Dialog, the first deputy head of the UES administration, Leonid Melamed, also did not answer the question of how much was paid to Falkon.

"You will have to read it in the financial report, because I am bound by a confidentiality statement," he said.

Troika analyst Kaha Kiknavelidze, who anchored the call, agreed that UES has not revealed the most important figure. "I believe that the margin between $1.35 billion and what was paid by UES to Falkon -- somewhere from $550 million to $1 billion -- is a gain from the deal and went to UES and, probably, also to Gazprom." He did not explain why or how he thought Gazprom benefited.

Charles Joselind, a director at PricewaterhouseCoopers, which audits UES, also was unable to explain the deal. "We have not yet gone through all the legal documents," he said in response to a question during the conference call.

The most he would say was that it was a restructuring of the debt by moving some of it to longer-term and improving the capital of UES.

Kiknavelidze said, "I can't speak for the Czech government, whether it was a good deal for them, but it is obvious that it was for the Russian government. We often accuse our officials of various sins, but it looks like this time we should be speaking about the imperfection of the Czech procedures and, perhaps, about corruption there."

The secrecy surrounding the deal, the potential for such large profits and suspicions of insider deals -- between Falkon and the Czech government, and between Falkon and UES -- have led to sharp discussions and speculation in the media in both countries.

Czech government officials said Falkon won a tender for the debt last summer, but Czech journalists have denied that a tender ever took place. Some have alleged that Falkon is run by people linked to the intelligence services of Russia and the Czech Republic.

Jan Kovalik, a reporter from the Czech political weekly Respekt, said in an interview conducted by e-mail that the UZSI special police told him that one of the founders of Falkon, who is no longer with the company but serves as an adviser, was a former officer of the GRU, the intelligence department within the FSB. Another Falkon employee was involved with the Czech special police, Kovalik said he was told.

Czech Foreign Minister Jan Kavan was in Moscow on Thursday, and among the issues Kavan said he planned to discuss with Cabinet members was Russia's debt, The Associated Press reported.

The $2.5 billion in debt that was sold to Falkon for roughly one-fifth its value was from a total debt of $3.6 billion, and Kavan said the Czech government has no intention of selling the remaining part of the debt. He said the Czech Republic would consult with Russia on ways to settle it and would be happy to accept part of the payment in the form of goods and technologies.