Another joint venture in Ukraine is on the rocks, this time a $15 million project by chemicals giant Norsk-Hydro to rebuild a phosphate and fertilizer transfer complex in the port of Yuzhniy. Now both Oslo and Odessa are bombarding the media with diametrically-opposed versions of how and why their marriage soured.
And both the Scandinavians and the Ukrainians say their side will win the next round in the International Arbitration Court in Stockholm, which is where the dispute goes next.
But the root cause of the problem – why a western company and its Ukrainian partner could not simply get down to the business of making money – is as clear as the vodka and aquavit tossed down at the joint venture founding party back in 1995.
Ukrainians say the Norwegians dragged their feet on providing the promised investment. Norwegians say they were just being careful.
The only thing both sides agree on is that they can no longer tolerate their foreign partner.
'We can't go on any longer in this way' declared Odd Groenlie, Norsk-Hydro's vice president for the CIS region at a press conference in Odessa on March 22. 'We will not submit to Norsk-Hydro's dictates' shot back Groenlie's partner Alekseij Stavnitser at an impromptu meeting with reporters the same day. Stavnitser is president of Transinvestservis (TIS), the joint venture Yuzhniy port formed with Norsk-Hydro a year-and-a-half ago. Groenlie, a tall, florid, massive man who prefers conservative suits, a striped tie, and restraint and politeness even when effectively calling his partner a liar, projects calm and reason underlain with a latent Norwegian stubbornness when it comes to sending company funds abroad or changing the terms of a signed contract. A good foot shorter than Groenlie, Stavnitser prefers wide lapels, pleated slacks, and a bright tie. Smooth-talking, smiling or serious as appropriate, and adept at pushing his point of view without getting pinned down to hard public commitments or accusations; Stavnitser gives the impression of a sophisticated Ukrainian businessman who – although admittedly from a poor country with little international trading experience – is not about to let some western multinational conglomerate run roughshod over him and his motherland.
Like so many other Ukrainian foreign investment projects, the idea was a good one. After the break-up of the Soviet Union, the port of Yuzhniy, built during the 1950s to export Soviet chemicals, mostly to Armand Hammer's Occidental Corp., retained a near-monopoly on the CIS's export capacity for nitrogen-based fertilizers. These are produced in places like Kemerovo in Russia, and consist of dark gray 2mm pellets, which create a dust harmful to the environment but which are critical for nitrogen-based fertilizer manufacturing.
The chemicals are transported by train from Russia, and loaded onto ships at Yuzhniy
But after five years of post-Soviet economic tailspin, Yuzhniy's ship-loading equipment was dilapidated. 'In 1995 we [at the port of Yuzhniy] had no money. That's why we contacted our western partners' explains Stavnitser. Norsk-Hydro is the world's largest producer of nitrogen-based fertilizers, handling about 25 percent of the world market. Since it had over 50 years of experience in the Soviet Union, and was already purchasing Russian and Ukrainian phosphates and fertilizers for trade abroad, the Oslo-based conglomerate was a logical foreign partner for the project to rebuilt the port. Yuzhniy needed some $15 million to rebuild two piers so that the port could load phosphates and fertilizers on ships faster, safer, and more cleanly.
On Aug. 29, 1995, the TIS joint venture between the port of Yuzhniy and Norsk-Hydro was born. The Ukrainian government – which owns the port – got 49 percent of the shares and contributed the two piers and on-site equipment to the joint venture. Norsk-Hydro received 24.5 percent of the profits and a 12-year lease on the terminal, for which the Norwegian company was to invest $15.2 million. Two small Ukrainian management companies and a U.S.-based financial group – all of which were to be non-operating partners got the remaining 26.5 percent of the shares. According to the contract, Norsk-Hydro would have a 'controlling-interest' in the joint venture's operations and management.
'Of course we agreed that Norsk-Hydro should have the leading role. After all they're the biggest fertilizer producer in the world' said Stavnitser.
However, Stavnitser alleges that Norsk-Hydro failed to deliver the promised investment, investing just $300,000 the joint venture and giving it only a brief glimpse of another $5 million that Norsk-Hydro transferred into and out of Ukraine last September.
'This is in violation of Ukrainian joint venture law. …The money must remain in Ukraine permanently,' said Stavnitser. He charged that Norsk-Hydro got cold feet about putting its money in Ukraine. Because Ukrainian law requires foreign investment to enter the country before a joint venture becomes operational, the deal with Norsk-Hydro is off, Stavnitser said.
'There was no money. That's why there's no joint venture.' Stavnitser told reporters.
'We Norwegians are very careful about how we spend our money, especially when we're sending it overseas' responded Groenlie when asked why Norsk-Hydro has not yet transferred significant funds into Ukraine.
Norsk-Hydro Yuzhnij Project Director Michel Delville said that his company to date 'has spent about $5 million on equipment … which is about 80 percent of the equipment necessary to convert piers 16 and 17.'
Groenlie showered the press with company paperwork and photos of some of the purchased equipment to demonstrate that Norsk-Hydro has fulfilled its end of the joint venture bargain in good faith.
'All the equipment is bought, we're just waiting for the order to ship it to Odessa and set it up,' said Steen Madsen, who is the Odessa representative for Videbaek Maskinfabrik (Denmark) – the contractor which is providing the dust filters, enclosed conveyer lines, loading towers, and other equipment for the project.
'We [at Norsk-Hydro] performed proper analyses in accordance with practices which we've learned from long experience – after all, fertilizer production is our business– and we were able to obtain the necessary equipment at not too bad a price' said Groenlie. Last summer while Norsk-Hydro was spending millions of dollars in Denmark and Bulgaria acquiring equipment to fix up the two piers, the Ukrainian side of TIS began looking for new partners. As far as TIS was concerned, the present Norwegian ones were not only awfully tight with the investment funding purse strings, but when they did choose to spend money, they did it abroad and not in Ukraine. So Stavnitser and his associates struck a three-way deal with the Sumykhim factory in Sumy, Ukraine, which makes phosphates; and the Monanco-registered and Moscow-managed Fetkominvest, which trades in phosphates and fertilizers internationally, according to Stavnitser.
On Aug. 28, 1996 the Yuzhniy transportation prosecutor served a court order on TIS to halt construction at pier 17, where Norsk-Hydro had been planning to ship equipment for the TIS joint venture's fertilizer export terminal. Yuzhniy port and its new Ukrainian and Russian partners restarted construction work at pier 17 in October, said Stavnitser.
'Fetkominvest has already invested $1.5 million in setting up a phosphate export line on pier number 17…and the entire investment could be as much as $8 million' he said. Then, on Oct. 24, an Odessa regional arbitration court ruled the TIS joint venture null and void for three reasons: the contract was in Russian rather than Ukrainian; the parties' signatures appeared only once on the contract rather than twice as is stipulated by Ukrainian law; and Norsk-Hydro's contractual role as 'the controlling party' violates Ukrainian anti-monopoly legislation. Norsk-Hydro appealed the ruling to Ukraine's National Court of Arbitration, which is continuing to review the case. According to the joint venture agreement, if either side doesn't like what the Ukrainian arbitration court decides, it can appeal to the International Court of Arbitration in Stockholm.
On Feb. 19, TIS shareholders voted to kick Norsk-Hydro out of the joint venture because the Norwegians did not bring investment into the country as promised. On March 5, TIS management (minus Norsk-Hydro) ordered Norsk-Hydro workers out of the port.
At present, TIS is busily increasing fertilizer-handling capacity while Norsk-Hydro marshals its barristers. 'We nevertheless hope for a successful outcome of these differences' said Groenlie, before flying back to Oslo. 'The divorce is final. The joint venture is finished' said Stavnitser, who remains in charge of one of the few facilities in the region where fertilizers can be exported and imported by ship.
But divorces often involve expensive alimony payments. Asked whether TIS could afford to pay over $5 million in compensation if the case gets to the International Court of Arbitration and the court rules in favor of Norsk-Hydro, Stavnitser was noncommittal: 'If we live to that day, we'll see what happens.'
