The legal dispute over Russia’s largest ammonia plant

Daniel Mitov

By Daniel Mitov

Daniel P. Mitov is a Bulgarian politician and member of parliament representing the Varna district. He served as Minister of Foreign Affairs of Bulgaria from 2014 to 2017.

24 Jan 2024

Fifty years ago, the United States and the Soviet Union began to reduce tension after a quarter of a century of Cold War. Three crucial arms limitation treaties were signed in 1972, and negotiations began leading to the 1975 Helsinki Accords, which laid the groundwork for the unification of Europe at the end of the 1980s.

The era of détente also included economic co-operation between the two sides – not quite friends but not quite enemies either. One of the most significant of these initiatives was the joint venture between the Soviets and Armand Hammer’s Occidental Petroleum to build a nitrogen plant in the southern Russian city of Togliatti (named after the veteran Italian Communist leader, Palmiro Togliatti).

This plant developed into the largest ammonia facility ever built. To bring the ammonia to global markets, a pipeline almost 2,500 km in length was constructed to link ammonia manufactured in Togliatti by TogliattiAzot (“ToAZ”) with the Ukrainian port of Odessa. There are only three pipelines in the world that are longer than that, and none of them transports anything other than oil and gas.

The ToAz plant in short, is the mainstay of the economy of Togliatti and the surrounding region. But just as its construction was a product of better times, its more recent history reflects the tragic deterioration of Russia’s legal system and the subjection of the Russian economy and legal system to the political whims of the Kremlin and the oligarchs who are close to President Vladimir Putin.

Russia under Putin has seen a dramatic rise in the practice known as reiderstvo, the corporate raiding of a company’s assets, in part by means of exploiting the weaknesses of the Russian legal system. Tactics used in reiderstvo include the unlawful transfer of ownership, backed up by court judgements which have been obtained by illicit means and which often run directly contrary to Russian law. These are usually combined with direct legal threats, false allegations of criminality, and tax evasion, all of which are supported by corrupt courts, against the legitimate owners, who face prison or exile if they attempt to resist.

Companies of all sizes may be victims of reiderstvo; the common thread is that the practice is shielded and permitted by the Kremlin. Notorious cases include the mobile phone manufacturer Yevroset, whose owners were the targets of an Interpol red notice issued by Russia; the oil company Yukos, whose shareholders eventually won the largest ever commercial arbitration award against the Russian government; and Hermitage Capital Management, owned by the entrepreneur Bill Browder, whose lawyer Sergei Magnitsky died in prison after months of mistreatment and who himself has been subject to bogus Russian court judgements.

In the case of ToAz, the spectre of reiderstvo first reared its head in 2005 when a minority stake in the company was acquired by oil and minerals magnate Viktor Vekselberg. He instigated charges of tax evasion, fraud and money laundering against senior ToAz executives, who were compelled to flee the country. In those days under the former President Dmitry Medvedev, the Russian courts retained some degree of independence and they did not sustain Vekselberg’s allegations; he switched his attention to other projects, and sold his ToAz shares to Belarusian born Russian businessman Dmitry Mazepin.

Mazepin came from the world of post-Soviet banking and trading, but from 2004, while still working in the Kremlin, he began to concentrate on acquiring shares in as many of the companies in Russia’s chemical industry as possible. His company, Uralchem, is the largest producer of ammonium nitrate in Russia. And Uralkali, another Mazepin owned entity, is one of the world's largest potash producers and exporters. In addition to ToAz, Mazepin has seized control of Transammiak, the company which owned the pipeline that historically delivered most of the ammonia manufactured by ToAz to the Odessa port, and Tomet, one of the largest methanol producers in Russia. With the completion of the raid on ToAz, Mazepin was able to achieve his goal of becoming a dominant power in the Russian chemical industry.

Mazepin himself is closely associated with President Putin, and was one of the small group of top Russian businessmen who Putin met with in the Kremlin in the immediate aftermath of the February 2022 invasion of Ukraine; and Mazepin has been sanctioned by the EU and the UK as leading economic facilitators of the war. It is rumoured that Mazepin is the Kremlin’s choice as the next leader of his native Belarus, once the rule of the incumbent Aleksandr Lukashenko comes to an end (one way or the other).

From 2008 onwards, Mazepin has been attempting to gain control of ToAz and its assets. He began by reviving the old debunked charges of tax evasion made by Vekselberg; when that did not work, he produced  a forged share purchase agreement and attempted to enforce it; when that also failed, he instigated a criminal investigation into unsubstantiated  allegations that ToAz had undersold ammonia to its distributor, who then sold it at full price, and that the ToAz executives pocketed the difference.

This time, Mazepin appears to have manipulated the increasingly more malleable Russian courts into freezing the shares and assets of the ToAz majority shareholders as part of a criminal investigation. Using those freezing orders, he began to move against the majority shareholders (four offshore companies generally known as the BKITs, from their initials - Bairiki Incorporated, Kamara Limited, Instantania Holdings Limited, and Trafalgar Developments Limited).

The BKITs started proceedings in the Irish courts against eleven defendants, including Mazepin individually and his longstanding associate, Dmitry Konyaev, Eurotoaz Limited, Uralchem and others in 2016, seeking damages and other orders, relating to the shares in ToAZ, which the BKITs said were valued at well in excess of $2 billion.

In 2019, a Russian court gave a judgement against the BKITs and other defendants, and in favour of Mazepin’s company Uralchem, for $1.2 billion in damages for the alleged consequences of underselling ToAz products. Thereafter Uralchem provided an undertaking to the Irish Court that it would not attempt to enforce the 2019 ruling or try to seize the BKITs’ shareholdings in ToAz, until the Irish court had ruled on the case which the BKITs had filed in Ireland in 2016. Mazepin and his lieutenants then orchestrated an Extraordinary General Meeting of ToAz in 2021 which replaced the entire ToAz Board of Directors with his own representatives. Notwithstanding the undertaking given to the Irish court, Mazepin and companies he controlled thereafter, through a series of allegedly improper or illegal actions executed with the assistance of a friendly forum in Russia, took the ToAz shares held by the BKITs through a series of sham auctions, selling them to a company controlled by Mazepin, with no compensation paid to the BKITs. Thus, by early 2022, with the invasion of Ukraine now further undermining the rule of law in the Russian courts in which this battle was playing out, the raid on the BKITs was effectively completed. Because the BKITs view this taking of their shares by Uralchem and other Mazepin controlled entities, without compensation, as a violation of the undertaking Uralchem had provided to the Irish Court, a contempt application is now pending against Uralchem, Mazepin and one of his lawyers, Andrei Ermizin, in the Irish Court. Mazepin and the other defendants deny their actions breached the undertaking given to the court.

The abuses on the part of Mazepin and his companies did not end with their taking control  of ToAz.  In 2019 two of Mazepin’s companies based in Cyprus provided undertakings to the court in Cyprus (in which litigation was pending in aid of the Irish proceedings) to (i) not reduce their assets below $1.75 billion, and (ii) periodically provide specified financial accounts and statements to the BKITs. Without any advance notice, in December 2021, two months before the Russian invasion of Ukraine, these companies announced that they had been redomiciled from Cyprus to Russia.  In actuality, not a single one of the legally mandated steps required in Cyprus to legally exit from Cyprus had been taken (nor have any of those mandatory steps been taken as of today) by these two Mazepin controlled entities. Ironically, both companies continued to pay the annual levy payable to the Cyprus Registrar of Companies in 2022 and 2023.  As a result, the BKITs also filed another contempt claim against these two Mazepin controlled companies in the Cyprus District Court of Limassol.

In the meantime, Russia’s illegal and brutal invasion of Ukraine in February 2022 has upended the geopolitical situation. Mazepin, has been personally sanctioned by the EU, the UK and Canada as an economic enabler of the Putin regime. Meanwhile the war immediately closed the pipeline from Togliatti to Odessa, which crosses the frontier between the two countries, and the pipeline itself suffered war damage in June 2023. Russia has insisted on it being reopened as part of any renewal of the deal to allow the export of Ukrainian grain, but as Ukraine has regained control of its Black Sea waters, that prospect has receded.

For the international community as a whole, the question is how to deter and punish such behaviour. Dmitry Mazepin is already sanctioned by the EU, UK and Canada – but not yet by the United States. Many of his business associates, and other enablers of the Putin regime’s assault on Ukraine and on its own people, remain untouched. And unfortunately sanctions evasion is becoming an ever more lucrative business for those who want to get around the barriers, including by Mazepin, who has tried repeatedly to evade the application of sanctions already imposed on him and the companies he controls by nominally transferring interests in Uralchem and other entities on a sham basis, aided by  redomiciling assets back to Russia, in violation of Cyprus law.  This absolutely precludes any ability to determine whether those assets are still owned by the same sanctioned parties. The international community as a whole needs to demonstrate that violation of the law  does not pay.

Even before the war, the ToAz case highlighted the risks to international investors associated with doing business in a jurisdiction which does not respect the rule of law. With the advent of the war and Russia’s growing reputation as a rogue state where the rule of law barely applies, a place where foreign investors can find their property expropriated on an oligarch’s whim, any post-war process to restart economic growth in Russia will hinge on re-establishing the centrality of the rule of law. The problem is that the misuse of the judicial system for kleptocratic financial gain is so ingrained into the DNA of the Putin regime, that it is difficult to imagine how one could survive without the other.

 

 

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