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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.