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Political Economy Falkon Debt Deal Smells Like A Rat, But Government Likes Rats

by Jan Machacek
PRAGUE BUSINESS JOURNAL

The Czech government celebrated last week the transfer of a major chunk of Russian debt to the company Falkon Capital (see story page 5). The deal was signed during a visit of Russian Prime Minister Mikhail Kasyanov. Hooray! Fresh new money (Kc 23 billion) for next year’s budget that can be spent to give voters some pre-election goodies. The government ought to hold off on celebrations until after the money is in the fiscal account. And voters ought to take note: What has been signed is just a deal between governments about transferring the debt to Falkon.

The Russian prime minister said an interesting thing during his visit: He said that the Russian side knows Falkon very well. It’s interesting (or symptomatic) because Falkon could win the prize for business secretiveness and non-transparency. But let’s look at what is known about the company:

Falkon Capital was established by two Georgians and an Armenian in 1996. No one knows for sure to what extent these three people are still involved in the company. One of them, Paapa Mamaladze, is said to still be “involved” in the company, according to the legal representative of Falkon, Josef Cimbora, listed in the Czech business registry. Cimbora was director of the Slovak oil company Slovnaft under the communists and studied in Russia. He was also a member of the board of the Slovak company OIL-SL until 1999. Another member of the board of OIL-SL Miroslav Kovarik was blown up with his BMW in Zlin in 1996. Two Falkon business partners were slain in 1996 in Prague and Vienna, but investigations led nowhere.

Meanwhile, Falkon keeps changing addresses and telephone numbers, which no one notices until the company makes news (like recently). The company doesn’t have a web site, and it doesn’t use e-mail. Its business activities are unknown, with the exception of its unsuccessful bid for Libyan debt in 1998. The official owner of the company is currently listed as a Swiss by the name of Hans Peter Moser (his telephone number is unlisted), but its stock is registered as bearer shares, so at this moment they could be owned by anyone.

The ‘few’ Russian interests

Is it true that Falkon Capital represents no danger, even if it represents some groups close to Russia’s secret services or financial underworld as Czech secret services have suspected? Some say that if Falkon transfers the agreed-upon sum to the government account before the government signs the contract selling the debt, then there is absolutely no danger of a dirty deal. After they’ve paid up, what happens is no concern of ours, the Czech government has said.

The experts say that getting 23 percent of the debt is something of a success. Other Russian debt deals in other countries have not been as successful, usually bringing no more than 15 percent. So are Czech politicians so much more skillful as negotiators than officials in countries like Finland or the Netherlands, for instance? It seems highly improbable. So that raises the dangerous question of whether side deals and promises have been made to the people and interest groups behind Falkon Capital.

So let’s review: Falkon Capital stands very close to the Russian government and its secret services. Kasyanov says that his government knows Falkon “very well,” and we know Russian President Vladimir Putin comes from KGB circles.

Just for fun, let’s look at other possible Russian interests in this country:

1. Transgas (gas importer and trader) is going to be privatized soon. The Russian company Gazprom (very close to the Russian government) is interested in buying it both directly (if it has the chance, and until now that chance has been politically very small) and indirectly: Gazprom is closely connected to the German consortium RWE/Wintershall, which is widely expected to win a tender for Transgas. Unlike another German company Ruhrgas, which is also in the tender, Wintershall and Gazprom have established together two daughter companies Wingas and Wintershall Erdgashandelshaus.

2. The Russian oil companies are interested in privatization of Czech holding company Unipetrol. Oil company Sibur is in the tender for Unipetrol.

3. The Russians have business interests in selling all kinds of equipment to the Czech army (including all kinds of spare parts, and the job of refurbishing helicopters).

4. The Russians desperately long for a banking license in this country (chances here are small, but in Western Europe they have no chance at all).

5. A giant freight terminal is supposed to be constructed in northern Moravia (in the town of Bohumin), a crossing point for the trans-Siberian railway north and south into Europe.

6. A lot of major Czech companies are still owned by untransparent off-shore (or Dutch) groups. So you can’t rule out the Russians in any of them. These companies range from dominant insurer here Ceska Pojist’ovna to Trinecke Zelezarny (which are expected to play a key role in state subsidized restructuring of local steel industry).

7. Certain Israeli companies might also represent Russian interests. Israel citizen Barak Alon of BCL, who tunneled Kc 8 billion from Komercni Banka, was also interested in buying Russian debt and was negotiating with Czech politicians (his trade activities have focused on Russia). The Israeli company Housing & Construction Holding will construct a highway in Northern Moravia. They won the contract without a tender.

Bad habits and addictions

The next chapter is the use of money, once it’s delivered, and it will surely be used, although it shouldn’t be. Spending Kc 20 billion in the government’s 2002 budget is a systematically wrong approach by the Czech government. This has been emphasized many times by most of the economists, experts (and in textbooks) and institutions like the OECD, World Bank, IMF and others. At this moment, that money is similar to privatization income. Since privatization of the economy has been concentrated in relatively few years and in response to the nationalization of the economy, its income must be considered exceptional and unique.

Repayment of Kc 20 billion of Russian debt is a perfect example of unique income. But this unique fiscal income creates immediate fiscal demands on the side of spending. And the thing about spending demands is that they are instantly addictive. Next year (which will have no exceptional income), the open mouth on the other side of the budget will want filling again, and government will be forced to go even deeper into debt, keeping its election promises.

Economists like to compare the effect of privatization income to that of natural resources income in countries rich in them. Too often being rich in natural resources seems to be a curse in the long term. Democratic governments and dictators buy public support by giving away rich social benefits and spending wild sums on outlandish construction works.

But income from natural resources is volatile because the price of natural resources tends to be volatile (there are good times, and there are bad times). Plus, natural resources are limited. But the people living in these economic environments get used to these fiscal incomes and countries, which sold off their resources (and countries, which face lower demand for their resources), face macroeconomic social instability, among other troubles. Not every country is as self-disciplined as Norway, which has put most of its oil income into a special fund whose assets cannot be touched for decades.

So privatization income is like natural resources income. And special income from Russian debt is like privatization income. It is a one-time deal and should not be instantly spent.

This government is likely to hear this criticism of its fiscal policy in all kinds of evaluation reports from the aforementioned institution
s. It can also expect criticism from the EU. Fiscal income doesn’t have a stable structure. And things might get much worse if this country’s economic growth slows down, which looks likely, and if unemployment rises.

So much for celebrations.

Jan Machacek is a weekly columnist for the Prague Business Journal on politics and the economy. He is an award-winning journalist and former writer for the investigative weekly Respekt.

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