21 December 2020

Answer to the request of the «Economichna Pravda» (Economic Truth) publication regarding the situation at ZTMK

Why were the funds paid for the partial privatization of the enterprise not used to upgrade it? Why did the investor not carry out the promised upgrade?

Roman Chishinsky, lawyer, Tolexis Trading limited

First of all, I want to clarify the main controversial issue about ZTMC.

The money allocated by Tolexis Trading Limited, an investor, to upgrade the enterprise in 2013 is still in ZTMC accounts, it has not been spent. ZTMC was not upgraded as the managerial decisions of the company CEO were blocked by the SPFU.

In compliance with the agreement with the State Property Fund on the establishment of ZTMC LLC, the investor paid two installments: UAH 159 million – for the upgrade and UAH 719 million – to replenish the working capital of the company.

UAH 159 million are still at ZTMC accounts.

Due to the armed hostilities of 2014 and the associated economic shocks in Ukraine, the declared modernization program could not be fully implemented and it became economically inviable. We have all the necessary expert reports from a number of state institutions that confirm this fact. All our attempts to approve the revised program that would reflect the new realities, as well as the rapid increase in tariffs for the main input, i.e. electricity, all this time were blocked by the SPFU, which owns 51% of ZTMC. These facts are reflected in the minutes of the general meetings and official correspondence. In the court proceedings initiated by SPF together with SAPO in an attempt to reprivatize 49% of ZTMC, we are trying to prove that changing the modernization program is a forced measure. Precisely due to deliberate sabotage by the SPF, the modernization of the plant was not completed.

At present, NABU within the frameworks of criminal proceedings is investigating the attempts of Sergei Lubennikov, acting ZTMC director appointed by SPFU, to gain access to money intended specifically for modernization, and use these funds for purposes other than intended.

Vladimir Sivak, former CEO of ZTMC (since 2013 through 2020):

Any investment program in business is a living and regular process that requires adjustments if external market conditions change. In 2014, the plant faced challenges that directly affected the ability to implement the announced modernization plan.

The modernization program included an increase in slag production capacity to 150,000 tons, the construction of a salt chlorination plant and a project to increase the production of spongy titanium to 20,000 tons per year. The modernization was to take place in this sequence. Specialists of the company developed the feasibility study for the project, carried out the groundwork, identified the area for construction, investor transferred all the money. Everything was ready to sign contracts with contractors and launch the construction of the new facilities according to the modernization plan.

But then the issue came up. The entire modernization program was calculated in 2012, taking into account the situation on the titanium market at that period. The events of 2014 completely changed the market situation. It became impossible to follow the previous strategy. Implementation of the program the way it was developed, would destroy the company and lead to bankruptcy. 

For example, the top priority of the program was to increase slag production, and we counted on that. The reason was pretty straightforward: in 2012, slag was a profitable product. Traditionally, the main market for ZTMC was Russia and Kazakhstan, to a lesser extent. In 2014, the largest market for us was closed due to sanctions.  Why would the company increase the production of the product that we would be unable to sell? That product would settle down in warehouses, accumulating losses for the company. It is quite logical that I, together with the company’s specialists, proposed to divert efforts to increase the production of titanium sponge, which would increase the company’s profitability many times over; both shareholders – the Government and the private investor – would benefit from this. All these proposals and calculations were included in a new modernization plan blocked by the SPFU.

I believe that without a careful analysis of my proposals to change the investment program, developed in 2014, it is pointless to analyze the situation around ZTMC at all. We gave the Government, as represented by the State Property Fund of Ukraine, a very clear diagnosis of changes in the global titanium market, changed conditions inside Ukraine, described all the risks, and proposed a clear plan of actions in these changed conditions. But the State Property Fund of Ukraine chose to ignore these proposals, effectively blocking any of my decisions as a director.   

Another thing that is also important for understanding the reasons why the modernization plan needed to be changed. The 2013 modernization plan is not the construction of a facility in an open field. ZTMC is a large facility that has its own operating infrastructure. To upgrade it, one should use technologies similar to those that are already in use at the company. During the implementation of the modernization plan, we could purchase only those fixed assets, units, blocks that could be integrated into the existing infrastructure. We reviewed many suppliers, searched for alternatives, but this kind of equipment could only be manufactured at Sibelectroterm, a Russian company. After the events of 2014, purchases from this company became impossible due to sanctions. We once again worked out all possible alternatives and came to the conclusion that there were no alternatives. In addition, part of the equipment for the modernization was to be purchased at the Novokramatorsk Machine-Building Plant, which in 2014 was within the combat zone.

We had a clear vision of how to upgrade ZTMC taking into account the new circumstances. The company’s specialists suggested focusing primarily on the second part of the program, i.e. to increase the production of spongy titanium. This is the product of deeper processing, with markets around the world. You have to understand, we couldn’t just start implementing a new upgrade program. We needed the approval by SPFU, the owner of 51% of the company. Since 2014, we have been trying to approve a new modernization program, we have put it on the agenda of the general shareholders’ meeting several times, we have been writing letters. First, the SPFU requested the forensic appraisal of the new modernization program. We did that forensic appraisal at the Institute of Titanium, KSRIF (Kiev Scientific Research Institute of Forensics) under the Ministry of Justice and Kharkiv Scientific Research Institute of Forensics  named after Bokarius. Both institutions concluded that the old program was irrelevant and the proposed program was more efficient. We presented these documents to the SPFU. Unfortunately, even with these conclusions at hand, we were not able to change anything. SPFU representatives blocked all our proposals, ignored all our letters, did not appear at the meetings of the shareholders. 

The amount of USD 20 million at the exchange rate as of 2013 (or UAH159 million) that were credited to ZTMC accounts from the investor are still at ZTMC accounts.  Now the new management appointed by the SPFU is trying to get access to this money and spend it on purposes other than modernization. In this regard, NABU has already opened and is investigating a criminal case. But that’s another story. 

Why didn’t the company pay for electricity for years?

Vladimir Sivak:

ZTMC is an energy-intensive production, electricity accounts for 40% of the cost of final products. Excessive electricity prices have always been the main pressure point of the company. At the time when I took charge of ZTMC in 2013, the company had a debt of more than half a billion for electricity.

Nevertheless, we managed to reach the profitable level of production and the company remained profitable until 2018.

However, in 2018 a free market for electricity was introduced, then the Rotterdam + formula appeared. Since 2013 through 2018, the electricity price for the company has more than doubled.

Following the introduction of a free electricity market, the price of electricity has risen by almost 30% in six months. Electricity prices for ZTMC turned out to be the highest among all titanium producers operating in global markets. For instance, in Kazakhstan which is an immediate competitor for Ukraine, the cost of electricity for titanium industry is cheaper by 60%, in Russia – by 50%, in Japan, China and the USA – by 20-30%.

ZTMC repeatedly turned to the SPFU, as the majority shareholder, to the Government, wrote letters, we repeatedly raised the question that such a policy could lead to the bankruptcy of ZTMC. According to our calculations, given the current situation in the global titanium markets, only direct access to cheap nuclear power could solve the ZTMC problem. However, all our inquiries remained unattended. The then Prime Minister Goncharuk was well informed about the issue, I personally spoke with him in Zaporizhzhya. However, not a single step was taken to help ZTMC.

For more than a year, we warned all participants of the process, and, first of all, SPFU, the majority shareholder, that the situation with electricity would end in debt for ZTMC, and offered a clear, understandable recipe for how to avoid this.

In 2018, Zaporizhzhyaoblenergo demanded an immediate one-time repayment of all ZTMC’s debt, including the one that had been accumulated long before my appointment as a CEO, i.e. since 2008. We tried to negotiate, but, apparently, they took a hard-line position – to take back the money paid by investor from ZTMC’s accounts. They managed to write off part of the money (about UAH200 million) from the company’s accounts, but this did not solve the problem of the company’s debts. 

That’s not the end of the story. The Government, the owner of 51% of the company, not only withdrew itself from managing the company, but also blocked very important decisions that could have solved the issue of energy debts.

There was the period when we practically solved the issue of energy debts, but then the Government again blocked everything for us. It was with great difficulty that I negotiated a draft settlement agreement with electricity suppliers. We agreed to restructure debts for 10 years. On very reasonable conditions for ZTMC. But the Government again blocked everything; SPFU representatives did not show up at the shareholders’ meeting, and the decision to restructure the debts was not approved by the founders’ meeting.

As a follow-up, the energy supplier reduced the power supply to the minimum technologically acceptable level (the nature of titanium production at ZTMC is that it is not safe to simply stop the production) and we were forced to turn off part of the equipment. The decrease in production from 700,000 t down to 500,000 t per month led to the fact that the company could no longer maintain profitability due to constant costs, we began to work at a loss.

At present, our interlocutors at the company say that most products are sold directly to consumers at market prices. Why was the company associated with Group DF engaged in sales in the past, and sold the products at the lower prices?

Vladimir Sivak:

ZTMC sold all products exclusively at market prices. We can prove it, if we take and review absolutely any contract.

Part of the export really went through professional traders. Around 90% of the world’s titanium trade goes through traders. The manufacturer needs operating assets. The trader takes on some of the risks, makes a full prepayment for the products, negotiates with buyers and ensures sales. Traders bear the risks of complaints, take on the risks of non-payment for products, etc.  The company cannot wait for six months until, for example, the Chinese pay for the shipped products. The company needs money today. Moreover, in six months the supplier may still not square the accounts with the company, or, for example, put forward the quality claim.  In this case, the company not only bears financial risks, but also risks violating currency laws. The products were shipped for export, and the currency receipts were not credited to the company accounts on time. Therefore, traders working with ZTMC, inter alia, eliminated the risks associated with currency legislation.

Roman Chyshynskii:


For each period, for each type of product, we have the appropriate Government forensics confirming that the products were sold at market prices, and ZMTC received the profit in full.

NABU initiated criminal proceedings implying that Serhii Lubennikov, acting CEO of ZTMC, appointed by the SPFU, entered into indirect contracts and sold products at about USD3,000 per ton, while the prices prevailing at the market at that time were twice as high, i.e. about USD6,000 per ton, which caused losses to both the company and its participants.

In addition, the current management implemented a financial scheme in which the finished products were sold by the company, but the money for these products were credited to the accounts of the law firm associated with the company, which used the money of the company, receiving a commission as a percentage. Commercial representation of this kind is not the objective to be pursued by the law firm.

The cynicism of this situation is that the workers of the company did not receive the salary, because no funds were actually credited to the company’s accounts.

Following our statements on these facts, NABU initiated criminal proceedings, which are currently being investigated, with good prospects of ending it with a guilty verdict.

Under the leadership of Group DF, the company was on the verge of bankruptcy. How would you explain such an unsatisfactory state of the company?

Roman Chyshynskii:


We categorically refute this statement.

At present, the media spread the SPFU position that all the blame for the inefficient management of the company by their protege S. Lubennikov lies with the previous management, but this is not true. The fact remains that despite all the difficulties faced by the previous management, the company made a profit and paid dividends to the state. At the same time, the private investor has not been receiving dividends since 2016, as these payments have been blocked by the SPFU.

The company became unprofitable since 2018, due to the issues with electricity, which has already been described above. At the same time, no bankruptcy applications were filed against the company, it worked smoothly, the shops did not stop, the workers were not laid off en masse, the situation was completely under control, there were no delays in salary payments, settlements or budget payments. The state budget received more than UAH1 billion of net deductions.

Now, ZTMC is on the verge of bankruptcy. The real reason for this is the inefficient management by the newly appointed SPFU management for the last 7 months. His actions are the subject of NABU investigation in a multi-episode criminal case. It is hard to explain from the point of view of the law and economic efficiency for the company the sale of finished goods at a price that is twice below the market, delegation of the right to receive all working capital to the accounts of the law firm and payment of a percentage of the receipts, payment of non-existent services of UAH1.5 million … These are just the violations we were able to identify. We did not receive any response to inquiries from the private investor about the state of affairs at the company, and the report about the state of affairs at the company during the general shareholders’ meeting was blocked by the SPFU. It should also be noted that the bankruptcy petitions filed to the court, were initiated by the company with which the current ZTMC management signed the contract; at the same time SPFU representative voted to increase the salary of S. Lubennikov, acting CEO, to the level of salaries of the top officials.

Vladimir Sivak:


ZTMC had two owners. Any decision important to the company must be approved at the meeting of the shareholders and cannot be made without the votes of the SPFU.

The current state of affairs at the company is a direct result of the SPFU’s inaction, which did not vote on issues important to the company, ignored letters, reports, operational analytics and appeals. If necessary, I can built a time line of appeals to the State Property Fund of Ukraine on critical issues for the company that remained unanswered.

This is what led to the fact that the company found itself in a situation like this. For my part, I did my best to bring the company to the level of profitability that would be acceptable to the company and its owners.

What benefits do you think the company received when it came under the actual control of Group DF?

Vladimir Sivak:


It is not correct to talk about the actual control by Group DF over the company, because without the consent of the SPFU, important decisions for the company could not be made. Group DF participated in the company with cash as an investor, and the actual control remains with the SPFU, which owns a controlling interest of 51%.

If Group DF had not invested in ZTMC back in 2013, the company would no longer exist.

In 2013, the company had no funding, it was in debt. Salaries payable were about 6 months, there were debts to the Pension Fund.

For me, it is an axiom that public administration in Ukraine is always inefficient. Mouthpieces from different political clans were simply extorting the company, theft flourished.

When the investor came to ZTMC, it began to swiftly recover, the company’s got a strategy. Group DF have specialists, because it has a history in the titanium business. A strong team was built at the company, many processes were tuned up, production facilities were reconstructed, and a salt chlorinator was built.

Titanium is a high-tech metal used in aircraft and rocket engineering; quality of titanium and certification in compliance with international standards are the most important pre-requisites for entering into contracts. Group DF helped implement a number of standards that ensured high quality of products, the company certified its products in accordance with international standards, received Bureau Veritas quality certificates, which opened up global sales markets.  

Thanks to a private investor, ZTMC began to receive certification from large buyers, went into a deeper processing, i.e. ingots and alloys. At the same time, the company retained its personnel, wages were regularly paid, the company was one of the local economic mainstays.

Group DF was interested in ZTMC development as a part of its titanium business and invested heavily in the company.

What’s your take on the potential of the current plan to turnaround the company, developed by the new management?

Roman Chyshynskii:


We have not seen the new financial recovery program for the company that the SPFU is talking about. According to the company’s charter, this program must be agreed at the general shareholders’ meeting, as was the case with the 2013 program, and the amended program for the company modernization. Today we know from the news that on 26 November SPFU approved some ZTMC recovery plan. This plan was not agreed with us; it was not submitted to the general shareholders’ meeting and we have no information about the measures provided for in this plan.

We requested the SPFU to provide information about this document; so far we have not received any response.

Vladimir Sivak:

We know nothing about the plan of the new management and the State Property Fund. From the public statements of the SPFU, we have only heard declarations to reach the growth of production and profitability by the spring of 2021, i.e. in two months.

The reasons for my skeptical attitude towards these statements about production growth in the spring include the collapse of human resources, which is already irreversible, the lack of real financial resources, competencies and the narrowing of sales markets.

First of all, over the past six months, there has been an outflow of highly qualified specialists from ZTMC: in June – December, about one third of ZTMC personnel (more than 900 people) were either dismissed or left on their own.

Second, like I said, now ZTMC production capacity is limited due to electricity debts; as a result, ZTMC cannot produce more than 500 tons per month. The company is hooked up to 2 power supply lines, and an increase even up to 500 tons is fraught with an emergency shutdown of one of the lines. This, in turn, can lead to an emergency shutdown of the entire plant and result in negative consequences up to an environmental disaster.

Then, there are also limitations due to the current market conditions. Space and aircraft industries are the main consumers of titanium. We are all aware of the current situation in these industries.

I am very closely following the processes that are taking place now at ZTMC. The quality assurance program in the production has been completely destroyed over the past six months; this directly affects access to sales markets and the desire of large buyers to purchase from ZTMC. In production, technological and basic safety requirements are ignored, people are dying. Since the new year, ZTMC terminated the contract with the Ministry of Emergency Situations for the protection of ZTMC facilities because of the debts amounting to more than UAH6 million. This means that in case of emergencies, there will be no one at the company to respond and liquidate them …

It is obvious that the enterprise is in dire need of a well-designed recovery plan; however, unfortunately, there is simply no one at the company to draw up and implement such a plan at the moment.

The managers that the State Property Fund sent to manage ZTMC do not have the necessary competencies and expertise to implement the strategy, even if we imagine that the SPFU has it somewhere in a classified form.

We do not know who Mr. Lubennikov is and his professional experience as a manager and business executive. The journalists don’t know who he is. No one knows this, neither the head of the State Property Fund of Ukraine, and he has already admitted this in his interview to one of the Ukrainian media outlets. Therefore, it is hard to believe in the ability of this acting CEO and his team to effectively implement any strategy.