HomeGAA in the MediaNewsThe dangers of doing business abroad (ver2)

The Miami Herald
September 13, 2017
By Ken Stier

The dangers of doing business abroad

When Miami businessmen Mordechai ‘Motti’ Korf and Uriel Tzvi Laber bought into a mining operation in the former Soviet republic of Georgia in 2013, they were adding their names to a distinguished line of foreign, and domestic, businessmen trying to make a fortune from a world-class source of manganese, a critical additive for modern iron and steel.

But as all previous owners — Germany’s Krupp family, the South African Oppenheimer family, and even American financier Averell Harriman (who was lured in by V.I. Lenin himself soon after leading the Russian Revolution) — have discovered, there is nothing easy about this business.

While the U.S. share of global foreign investment has retreated in recent years, manufacturing and other U.S. business remains closely integrated with the international supply chain. That’s true especially in Miami, often dubbed the business capital of Latin America.

And even for those with long experience, doing business abroad — where cultures, banking and legal standards can be far different from the U.S. — often comes with complications. In one high-profile 2013 case, for instance, a Broward businessman was trapped in his Beijing manufacturing plant office by workers demanding increased pay and benefits. Even multinational giants can get scarred; Pepsi, Coca Cola and McDonald’s are among the companies that have lost millions in Venezuela as the political situation there has deteriorated.

But running a business in a former Soviet country can come with particular intricacies. Transparency International, a not-for-profit watchdog group, ranks Russia at a poor 131 out of 176 in its 2016 Corruption Perceptions Index, and most of the former Soviet satellites as bad or worse. Ironically, Georgia ranks far better, at 44.

For Korf and Laber, the sticky combination of far-flung geography, diplomatic interests, behind-the-scenes politics and the inscrutable influence of wealth has resulted in an imbroglio worthy of an espionage novel, complete with government stonewalling, powerful oligarchs, toxic waste and a holiday-weekend corporate grab.

Regardless of location, mining operations are complex, often involving sizable upfront investments, seemingly always restive workers and the vagaries of world markets for commodities. What makes this particular situation even more complex is geography, both physical and political.

The mine complex is located in Chiatura, western Georgia. For more than a century, it has been one of the country’s natural-resource crown jewels; when functioning properly, it can produce close to 10 percent of the country’s total current exports. In U.S. terms, that’s about the proportional equivalent of exports created by the aerospace and defense industries combined.

But that was far from the situation in 2006, when Korf and Laber’s long-standing Ukranian partners, the owners of Private Bank, bought the bankrupt state-owned mining company, JSC Chiaturmanganum, and a processing plant in nearby Zestafoni from Stemcor, a British steel-trading giant. Korf and Laber would get involved years later, first helping to manage the investment and later becoming shareholders during legal reincoroporation in 2013. The acquisition cost was not disclosed.

So it’s no surprise that in a country that economically is scraping by, the mining operation is coveted by foreign and domestic businessmen.

“These are world-class deposits so rich that local miners with just picks and spades made a decent living before mechanization — which boosted production to half the world’s supply,” says Nino Gujariadze, executive director of Green Alternative, a nonprofit that has conducted extensive research on this sector. “These mines have been fought over, commercially, by the British and French, the Germans, then the Russians, and of course the Soviets. Unfortunately, Georgians have never made a very good go of it.”

Still, for the new buyers, it seemed a stable enough investment. Georgia’s 2003 revolution overthrew a Soviet-style state and brought to power a Columbia University-trained lawyer, Mikheil Saakashvili, who was hell-bent on the reform required to become a functional part of Europe. The rule of law seemed to be taking root.

In addition, the Ukranians had considerable experience in mining and steel. The partners, Igor Kolomoisky and Gennadiy Boholyubov, were also two of the country’s richest, if controversial, businessmen. Korf met them in the early 1990s when the oligarchs-in-the-making were fast accumulating their wealth in the chaotic aftermath of Soviet empire collapse by means both legal and sometimes questionable, according to reports published in The New Yorker and elsewhere.

As an American company, Korf and Laber’s Miami-based Georgian American Alloys believed it could also count on a strong umbrella from Uncle Sam, which had itself made a huge investment in this strategically important country. On a per capita basis, Georgia (with a population of less than 4 million) is one of the highest recipients of U.S. aid in the world, with U.S. aid for fiscal year 2012 budgeted at $85.5 million, according to the Congressional Research Service. Washington and Tbilisi also have close military ties, and the country is considered a key U.S. partner in the region.

This context makes what happened next seem all the more baffling. In May, GAA’s local subsidiary, known as Georgian Manganese, was effectively expropriated through a legal maneuver that utterly blindsided the company. This, after Korf and his partners had also purchased a nearby hydro-electric plant to run the energy-intensive business for an undisclosed amount and then invested an additional $150 million, according to the company.

Acting on behalf of a petition from the Ministry of Environment and Natural Resources Protection, a Tbilisi City Court ordered the appointment of a special administrator to deal with long-outstanding environmental damages in the Chiatura area. According to a court order handed down by Judge Nino Buachidze, the processing plant used to cleanse the ore of impurities was spewing untreated industrial wastewater and sludge into a nearby river, causing “gross contamination,” and thus was in “violation of the environmental as well as technical safety standards in force for several decades.” 

The mid-May order gave the administrator access to the company’s bank accounts and the authority to run every aspect of the business — a move that went far beyond what could conceivably be needed to address the environmental issues, the company argues.

“This whole thing is just an excuse to take over our operations — the claims they are making are trying to support a plan that is to take away the Georgian assets from this U.S. company,” says Robert Powell, the company’s in-house lawyer in Miami. “There are other Georgian companies in mining and ferroalloy production [in the same area] that are not being treated the same way. Georgia Manganese is being singled out because it is foreign owned, that is very clear to me.” The operation began turning a profit in 2012, and had its best year in 2016, when it generated more than $250 million in revenue. 

But Georgia’s deputy environment minister, Maia Bitadze, insists the company brought this on itself. Government inspectors first notified the company of the compliance issues in 2012 — giving Georgian American plenty of time to address the backlog of issues, the minister said. But the company dragged its feet and eventually lost the benefit of the doubt, according to Bitadze.

In the end, “there were just too, too, too, many violations by this company; if they had only invested [about $,4000] a month dealing with these problems, they would not be in this situation now,” Bitadze said in an interview. Her ministry wanted to seek a court order a year ago, she said, but was persuaded by other governmental agencies to hold off.

For its part, GGA says it had been seeking a global settlement from the Georgian government that would have wiped away liabilities inherited from previous owners. And, it maintains, its plans to invest $20 million in a new processing plant were stymied by the government itself, which was slow to issue permits.

On the ground in Georgia, company officials are even more explicit in calling the court order part of a larger, well-orchestrated scheme to “take down the company.” They point to the judge’s overnight response to the environment ministry’s 1,200-page petition, which allowed the special administrator the opportunity to register the order just before a long holiday weekend. That’s when the administrator showed up at the processing plant, declared himself in charge and fired the security chief — all before the company even knew that an order to take company control was under consideration, executives say.

The local chapter of global anti-corruption watchdog Transparency International, a respected non-governmental organization, has studied the case and concluded in July that due process was denied. This was just one in a series of highly questionable recent court decisions in Georgia against foreign investors, it added in its report. Transparency International concluded that the court-appointed “special manager is granted unjustifiably broad authority,” noting that “without any substantiation, the Court has granted to the special manager the authority of all the three branches of the company’s management — the Director, the Supervisory Board and the General Meeting of Shareholders, while according to the law, the special manager should be appointed only for the purpose of carrying out license/permit activities.”

That created the impression, the July statement continued, that the “Court acted against the interests of Georgian Manganese LLC and the aim of the decision was to remove the company management and the holder of the majority of the shares from the management.”

Company executives say their phones have been tapped. Tensions between company executives and the court-appointed administrator were particularly tense in the initial takeover, they say, and included some skirmishes over staff, computers and getting access to the IT system.

In hindsight, company officials say they should have seen this coming. The first shot over the bow was suddenly getting slapped in 2015 with an $89.7 million tax assessment based on a range of claims that the company considers arbitrary and groundless. Almost half the bill, say company executives, was based on counting mining waste as inventory because it contains some unsellable ore residue.

After GAA complained about the tax assessment, four separate criminal investigations were opened against the company and its executives in Georgia. Inquiries also were launched in Switzerland and Luxembourg — probes the company insists were a “fishing expedition” and a “transparent attempt to intimidate ” the company, according to a company submission to the U.S. Treasury made by global law firm Baker McKenzie, which also claims those inquiries came at the behest of the Georgian government. The investigation includes allegations that GGA committed tax fraud and money laundering.

To company officials, the timing of the May 2017 order is also suspicious. It came just days after GAA informed both Georgian officials and the U.S. Treasury that it was considering seeking international arbitration on the 2015 tax matter under a bilateral investment treaty. “Given the timing of this egregious and alarming development, there can be little doubt about its retaliatory nature,” said an updated company submission to Treasury. “This action in itself constitutes an expropriation of GAA’s investment.”

Officially, the U.S. Embassy has no comment, according to Kristin Roberts, the Tbilisi embassy spokesperson. Off the record, U.S. officials admit they are at least somewhat stymied by the response they get from Georgian officials when they bring up the case: “But the judiciary is independent; and isn’t that one of the cardinal principles you have been trying to inculcate here?” Still, sources say U.S. officials have raised the issue with the highest levels of the Georgian government. In late June, a local Georgian court agreed to ask Tbilisi’s revenue department to take another look at the tax assessment. But company officials fear the reprieve could be temporary.

Western officials, with the reverence for the rule of law, tend to have trouble recognizing power plays disguised as legal actions, say experts in post-Soviet legal culture. Yet the practice of “legal” corporate raiding — called Reiderstvo — has been fairly common for at least a decade, they say. As Thomas Firestone wrote in a 2008 article for The International Lawyer, “Russian ‘reideri’ rely on court orders, resolutions of shareholders and boards of directors, lawsuits, bankruptcy proceedings, and other ostensibly ‘legal’ means as a cover for their ... activity.”

The Georgian provision for a special administrator — validated by the local Supreme Court — is one such example.

Korf perhaps, should have known the dangers. At age 19, after growing up in Miami Beach and graduating from rabbinical school in Brooklyn, he went to Ukraine on a humanitarian mission organized by the Chabad-Lubavitch branch served by his rabbi father, Abraham Korf. Korf soon found himself trading everything “ranging from light bulbs to hammers,” Korf said — learned Russian, and somewhere along the way, met this future partners. He stayed for three years.

The irony is that Korf’s principal business partners are two of Ukraine’s most notorious oligarch-raiders: Kolomoisky, who lives in Geneva, and London-based Boholyubov, co-founded the Dnipropetrovsk-based Privat Group. Digesting a massive stretch of corporate raids through the first decade of the 2000s, Privat Group came to control significant stakes in virtually every industry in Ukraine, including metals, chemicals, energy, banking, and media. Its bank controlled some 20 percent of all the country’s deposits.

And in one instance of a literal raid, as late as 2006, “hundreds of hired rowdies armed with baseball bats, iron bars, gas and rubber bullet pistols and chainsaws forcibly took over” the Kremenchuk steel plant, Forbes reported. “Give me a 1 percent stake and I will take over the entire company,” the more flamboyant Kolomoisky once boasted to a Forbes reporter in Kiev.

The association is one Korf hasn’t always been quick to acknowledge. “I think he [Kolomoisky] is a shareholder,” Korf, the company’s CEO, said during an interview when first asked about the ownership of the GAA. But public documents show the relationship goes back at least 15 years and involves mineral production in West Virginia, a manganese trading firm serving North and South America, and steel industry assets in Ohio, Indiana, Illinois, Michigan and Kentucky. Kolomoisky has also reportedly purchased about $250 million in U.S. real estate, mostly in Cleveland, through a company called Optima Ventures with ties to Korf’s brother-in-law.

As for the Georgia operation, Korf said in an interview that while “everything is difficult... I think we are moving in the right direction. We’re actively trying to negotiate a final way forward and we are making progress towards that.”

But until the company is freed from the administrator’s control, the future remains in limbo. 

A previous case in which a special administrator was attached to a foreign company in Georgia occurred in 2009. The initial mandate was one year; it has been renewed each year since.