27 May 2014
Boris Krasnyansky’s interview to ‘Interfax-Ukraine’ Agency: “Our strategy is unchanged”
First of all, I’d like to ask how large businesses manage to survive under the current difficult circumstances. For Group DF the situation is even more complicated by the arrest of its owner in Vienna: does it impose any limitations on your work?
Indeed, Dmitry Firtash is forced to stay in Austria without being able to leave the country. It has certain impact over management of the Group because he is Chairman of the Group Supervisory Council – the main strategic management organ of Group DF. But, while in Austria, Mr Firtash spends enough time dealing with the Group’s business matters. For example, recently there were video-conferences with all factories of Ostchem chemicals holding. The issues discussed were those which Mr Firtash used to solve during his visits to the companies. He knows each business of Group DF to the last detail, and he used to visit the companies on a regular basis. The only thing that we are really missing is the presence of the Group’s owner in Ukraine. As far as everything else is concerned, the business is going as usual.
Have any financial restrictions been imposed on the Group?
As of today, there are no judicial decisions anywhere. Respectively, no restrictions have been applied in the international legal field with respect to the Group or any of its companies. The only exception is that the procedure of potential consideration of his extradition from Austria is in preparation now. But the Group’s accounts have not been frozen anywhere and the Group is operating in a normal mode.
In other words, as far as changes in Group DF plans are concerned, they are implied mostly by the situation in the country.
Of course. I think this is way higher priority from the point of view of potential threats for our business, as well as for other businesses. If we look, for instance, at the banking sector statistics, we see that all banks are suffering from continuing withdrawals of deposits. Of course, the extent of it varies but I would not say that, for example, Nadra Bank owned by Group DF is suffering more than other banks.
There have been some market fluctuations linked with the specific events with Group DF but they are not significant against the background of the other events in the country.
Let’s talk more about Nadra Bank. Stress-tests are under way now at the major banks as part of the IMF program. Is it possible that the situation would require any additional investments in this bank?
Yes, it is. We have been supporting the banks’ liquidity from the very moment when the banking sector problems started. It dates back to the beginning of Maidan in November. The bank is one of our strategic assets and we continue supporting the liquidity of Nadra up to now.
If you look at the National Bank of Ukraine statistics, the overall withdrawal of deposits from the banking system has yet to stabilize. Although the trends are, of course, positive – April was much better than March, and March was better than February.
Are you going to reconsider your investment decisions? In particular, related to Pravex Bank?
No, our full strategy will remain the same, including Pravex Bank. We are not dismissing any of major investment projects. On the other hand, we are considering our priorities. The country’s economy is undergoing a huge crisis, and crisis conditions always entail revision of priorities. You start thinking about projects with quick return, and considering more conservative control of your cost. It is possible to reconsider and cancel certain longer-term projects. Dmitry Firtash and I spent much time analyzing this issue. But those projects which have been postponed were not known outside of the Group anyway. Those are project abroad.
Is the devaluation of Ukrainian currency a positive development for the Group?
I will not deny that – certain devaluation is always positive for any exporters. This is true if you look at the fact that most of our businesses are export oriented. We had large sales during the sowing campaign, but in general the chemicals business is a major exporter. Our titanium business is focused on exports. Gas distribution is a domestic business, so devaluation plays no role there. But in general, our exports prevail.
What has been the impact of the situation in the country on the value of business, in particular, for Group DF?
The value of any business in Ukraine has now decreased. No doubt about it. Any business. I cannot see a single business in the country which has not lost some value.
You know, the theory is that a fair price is the price paid by the buyer. Do you see buyers queuing up to acquire any asset in Ukraine? No.
Unfortunately there is not a single business in the country which increased its value with the background of the latest events. It applies to real estate, in particular. We see it on the example of our real estate projects, and the cost of lease all around the country. Also, don’t forget a lot of real estate projects are being launched at the moment.
For example, we planned to launch a major project and foreign companies were going to participate in it, but have now decided to wait. Not all of them, but some. Foreign investors are alerted to the situation on the market.
Of course, in this light, all the major work being done by the government with the IMF and with other potential creditors is important. I do hope it will produce positive results.
So, perhaps this is the right time to buy?
You are absolutely right! But the good time for buying is when you have extra money or good opportunities to attract financial resources. But you can hardly see Ukrainian businesses making any acquisitions at the moment. This is because all businesses are suffering from the banking crisis to a bigger or smaller extent.
Let’s talk about your companies in Crimea and elsewhere which have found themselves in the “turbulence” area.
It takes a lot of time to manage the situation with those assets located in the occupied territories or in the areas of instability in the east of Ukraine. Talking about Crimea, politicians may dwell whether this is a Ukrainian territory or not, they may recognize the annexation or not. But from the business point of view, you have no choice – you have to think about how to make these companies work. When you have 6,000 people employed at one company, and 3,500 people employed at another company in Crimea, then over 9,000 people depend on whether you make the right decision. So you need to make those decisions, you have to adapt to the situation.
You also know what happened with two more companies – one is in Lugansk, and the other one is in Donetsk oblast (Severodonetsk Azot and Stirol from Gorlovka, Interfax Note). We were forced to stop them while they were on the peak of production. We had to do that because of the situation in the region simply for the safety reasons, although it caused direct losses. By stopping such companies you lose income, but you still incur costs because you continue paying salaries and have other fixed costs.
A part of raw materials for the Crimean companies remains on the mainland of Ukraine, and there are also difficulties with water supply in Crimea. Tell us in more detail, how do you manage to work under such conditions?
The raw material base for Crimea Titan is on the mainland of Ukraine, while raw materials for Crimean Soda Plant are from Crimea. That is why we have slightly different approaches and look at different scenarios. As you know, Crimean Titan has been registered as a Ukrainian legal entity. But we cannot do the same with Crimean Soda Plant. If we had registered the latter as a Ukrainian legal entity, under one of the scenarios, we would not have been allowed to extract raw materials in Crimea.
Therefore the only criterion is how do we make sure that the business continues to operate?
I should also note that we bring ilmenite from continental Ukraine, process it at Crimea Titan, and then the product goes back to Ukraine. Currently, customs posts are under construction, but they are not fully operational from the Russian side just yet. When they become fully operational and we are charged with customs duties with the products going back and forth, and when we are taxed in both countries – it may become economically not feasible to continue operations. So, there are many uncertainties still.
Do you consider selling Crimean assets?
We consider all options. The politically correct answer would be “No!”, but we have to think about ensuring that these companies continue to operate. So we are looking at all possibilities. Of course, the Group and its owner are not used to selling assets. Nothing has changed in that respect. For our owner, even considering selling his assets as one of his options is a very painful exercise. But this option sill is on the list along with other options.
Look at the present situation with Crimea. On the one side there is Russia, and on the other side there are restrictions introduced by the rest of the world (EU, USA, etc.). And on the third side, Ukraine has not yet passed the economic part of the Law on occupied territories. What will this Law be like? If it is too political and ‘emotional’ – the businesses won’t have much of a choice. Dmitry Firtash has always said that he is a Ukrainian businessman, and that we will work according to Ukraine’s legislation. And if we are forced out of Crimea completely, we will have to do that. But I don’t see anybody benefiting from that.
You had big strategic plans for titanium business. Has that changed now?
It makes no sense changing major strategic decisions because the current events are rather of a short-term nature. You can put certain things on hold and wait for a while without revising your strategy.
The point is that our titanium strategy was designed for many years ahead, until 2022, and involved major investments. It was a big plan, well-thought through and well detailed. Should we change this whole plan now? And two weeks later, should we change it again? It makes no sense! We want to wait until a certain stabilization of the situation.
We have postponed some things and we are waiting for further developments. We need to understand how things will develop. For now, we have some short-term solutions. We have to see what the Law on the occupied territories (its economic part) will be like, and we have to see what additional sanctions from the rest of the world will look like. Will it be possible to trade any goods produced in Crimea at all and under what conditions?
If the government decides to sell Odessa Port Plant and Sumykhimprom, are you going to participate?
Absolutely. Our priorities have not changed in that respect at all. We expect to participate in all those tenders where we intended to participate earlier.
Even the worst case scenario with respect to Crimea Titan would not change our strategy concerning the titanium sector. Titanium producers will remain on the continental territory of Ukraine in any case – Sumykhimprom, Zaporozhye Titanium and Magnesium Combine, the mines… Titanium business is one of our core businesses, and we have no intention to leave this segment.
Talking about your fertilizer business, Russia has significantly increased gas prices. How will this affect your business?
Of course, it will have an impact. If you look at this in simple terms – if you get the gas, then you can produce fertilizers – the math is quite straightforward. There is a certain limit to a gas price when fertilizer production simply becomes unprofitable. You would have to subsidize the production, but things just don’t work like that in real life. We would have to consider other options like importing ammonia instead of natural gas, or finding different gas suppliers, or, in the worst case scenario, shutting down the production.
How much gas do you have in the underground gas storages? The Prime Minister recently mentioned some shortages of gas volumes in the UGS. What portion of that volume is yours? Do you consider selling your gas to anybody?
The Group owner has already stated that last autumn we pumped in 5 billion cubic meters. This volume, as the raw material, would be sufficient for our production units to operate until the end of this year. We obviously did not buy this gas to resell it. It was purchased for our own production.
Looking into the future, are you considering other options such as reverse supplies from Europe, or an LNG terminal?
We are looking at all possible options, including those you mentioned. As I said, we consider importing ammonia from Russia. This is because different pricing policies apply for ammonia and natural gas, and these are two completely different markets. Ammonia has never been the subject for political struggles between Russia and Ukraine.
You have effectively already stopped two producers, but you continue to pay salaries to your employees. How long will you last under such conditions?
It is a very abstract question, because it is clear that we expect that it will not last long. You cannot do that infinitely. You can try and find sources, but these sources are limited, too. We are expecting that the situation will stabilize within a few months, and we will be able to resume normal operation.
You have been in the process of forming a holding structure for your regional gas companies in Ukraine for quite some time. When can we expect for this process to be completed?
This is true, and our plans have not changed in that respect as well. Even more than that, we want to finalize the consolidation as soon as possible. We simply have had some delays because of some changes to our approaches in relation to jurisdictions that we involve in this process. Now we are assessing what would be the right way to build this structure. But consolidation of the gas distribution business is high on our agenda. I think we will announce it within the next few months.
Besides the problems in Ukraine, your Group has certain complications in Tajikistan as well. There were some statements about possible nationalization of Tajik Azot, which is a part of Group DF. What is the situation there?
There are some court cases concerning property rights. In my view, this is an extraordinary situation. This producer has not been operational since 2008 because of one simple reason – there is only one pipeline to supply natural gas from Uzbekistan, but Tajikistan does not buy gas using that pipeline for political reasons. And you cannot produce mineral fertilizers without natural gas. That is all there is. In the meantime, Group DF has been acting extremely responsible and generous there. We still maintain certain personnel at Tajik Azot, just as here in Ukraine. Those people receive their salaries, social benefits and other things. Of course, we are talking about a small group of people necessary to re-launch the production if the gas supplies are resumed.
As I understand, certain internal political struggles have come into play in Tajikistan. There were different people with their political agendas, and the company found itself in such predicament.
There was another company mentioned in Tajikistan called Gulistion, which was allegedly seized from you.
We have never owned that company.
It was reported that you intended to develop your own mineral fertilizer distribution structure in Turkey. Is that the case?
I do not like discussing work-in-progress projects, so I will not comment on that. Turkey is a very big market for mineral fertilizers. It has been actively growing, and we have been looking at it for quite some time. There are big opportunities there, and we are exploring the ways of entering that market.
Let’s talk about the agricultural market. If everything becomes cheaper, perhaps it makes sense to develop in this direction?
You are absolutely right. The agricultural market is the subject of serious discussions on the strategic level with our Group. We started looking at it quite late, and we have agreed internally that it was our mistake – we should have done it earlier. All in all, working in Ukraine without being represented in agribusiness is not right. We are in fact represented in this segment, but not sufficiently enough yet.
Agribusiness is a major standalone segment. In 2013, it was the leading segment in bringing foreign currency to the country. It is quite promising and may bring good profits. Another point is that not everybody understands how to work on this market, but there are successful operators on this market. Yes, we are looking at this segment very closely.
What is your assessment of the media market at the moment?
Of course, the media market is in quite a bad state now. Can this market become profitable in principle? Today, this is a difficult question for all players, I believe.
How do you work in this segment? In my opinion, there can only be one approach, which is to increase your efficiency and your share of viewing through innovative programs and through the right assessment of the competition field. This is just another competitive market. There are some specifics to it, but those specifics are generally exaggerated by the market players. There are buyers and there are sellers. These sellers have products of various quality levels, and this quality has influence over how many viewers you have.
Now we have launched some new programs in the news block which showed very promising results. Last Friday (16 May, IF Note), our share of viewers was three times larger compared than that of our direct competitors.
You have to compete on the media market. There is still huge room for improvement in quality and increase of your share. Another point is that it has certain natural limits. When the overall volume of advertising goes down, and there is a certain natural limit to the maximum share you may achieve, you can put some numbers together and ask yourself a question: can you be profitable in principle or not? As of today, this picture does not seem to be ideal.