Prosecutor General's Office Lawsuit Against Kuchuksulphate -- “Blitzkrieg” Fails

Prosecutor General's Office Lawsuit Against Kuchuksulphate -- “Blitzkrieg” Fails


Is the Prosecutor General's Office of the Russian Federation starting the process of re-privatization of Kuchuksulphate, the largest producer of sodium sulfate in Russia? The PGO filed a claim with the Altai Territory Arbitration Court on October 20 for expropriation of the state property from illegal ownership.

The prosecutors allege that they are acting in the interests of the Federal Property Management Agency. Kuchuksulphate is referred to as the third party that does not dispute the subject of the claim. Several media outlets have already voiced the version that the General Prosecutor's Office will demand the seizure of Kuchuksulphate shares into state ownership as it happened in the case of Bashsoda. At the same time, the Prosecutor General's Office lodged a petition to apply interim measures under Article 91 of the Arbitration Commercial Procedural Code of the Russian Federation, which was granted by the court on 21 October. The measure in question is a prohibition for the defendant to dispose of its property or funds. The case is heard by Judge Victoria Zvereva.

Kuchuksulphate, located in the settlement of Stepnoe Ozero (Blagoveshchensky district of the Altai territory) is now the largest producer of sodium sulfate in Russia. The chemical company employs 1,251 people (for comparison, the entire population of Stepnoy Ozero is 6,163 inhabitants). The capacity of the enterprise is 800,000 tonnes of products per year.

The enterprise uses brine as a raw material, extracted in the nearby lake Kuchuk. Its waters contain large reserves of mineral salts. Brine is a high-concentration solution of salt in water. Today, Kuchuksulphate produces sodium sulfate and consumer goods.

At the same time, it is obvious that the PGO’s “blitzkrieg” is bound to come to a standstill from the start, as there are too many weak points in it. For one thing, the plaintiff admits that at the time of privatization, the company did not have a license to extract mineral resources.

The statement of claim said that Kuchuksulphate obtained the licenses for using subsoil resources only in 1994. Here they are:

- BAR 00234 PE for extraction of mineral salts from the brine of Kuchuk Lake dated November 2, 1994;

- BE 00117 PE for extraction of mineral salts from the brine of Lake Kuchuk on July 19, 2000.

At the same time, Kuchuksulphate’s industry affiliation is a very important point. It is a processing enterprise of the chemical industry and in Soviet times, Kuchuksulphate was under the jurisdiction of the Ministry of Chemical Industry. This means that the plaintiff's arguments are not valid because the General Prosecutor's Office claims in its lawsuit that Kuchuksulphate belonged to the extractive industry enterprises. In this connection, the references of the General Prosecutor's Office to a whole list of resolutions of the Supreme Soviet of the Russian Federation, laws of the Russian Federation, and the State Privatization Program are incorrect and do not apply to this case.

To put it simply, the General Prosecutor's Office refers to the Law ‘On Property in the RSFSR’, the Law on Privatization in the RSFSR, Decree № 3020-1 of Supreme Soviet of the RSFSR ‘On Partitioning State Property in the Russian Federation into Federal Property, State Property of the Republics within the Russian Federation, Territories, Regions, Autonomous Region, Autonomous Areas, the Cities of Moscow and Saint Petersburg and Municipal Property’ and Addendum 1 thereto, the State Privatization Program and presidential decrees.

However, all of these arguments are “out the window” because they regulate the order of privatization of extractive industry assets, while Kuchuksulphate is a processing enterprise of the chemical industry.

The allegations that Kuchuksulphate was the only supplier of sodium sulfate in the early 1990s and dominated the Russian market in terms of production volumes is not true either.

At that time, there were such enterprises producing sodium sulfate and its derivatives as Volzhsky Orgsintez (the town of Volzhsky in the Volgograd Region), L.Karpov Chemical Plant (Mendeleevsk, Republic of Tatarstan), Salafatnefteorgsintez (Salavat, Bashkortostan), and others.

About 20 enterprises (L. Karpov Chemical Plant was founded in 1868) produced and supplied sodium sulfate for the needs of the pulp and paper industry, glass factories, factories producing household chemicals, metallurgical plants, etc in the 1990s. There was no difference in the quality of sodium sulfate. Moreover, all of these enterprises produce sodium sulfate which is used in the production of synthetic detergents, glass, paper, etc. Consequently, this argument of the General Prosecutor's Office which refers to the letter of the deputy chairman of the Committee of the Russian Federation on Chemical and Petrochemical Industries of February 5, 1993, that Kuchuksulphate Plant was allegedly the only supplier of sodium sulfate, raw material for synthetic detergents, does not work either. The share of the Kuchuksulphate plant in the total share of sodium sulfate producers was 26 -27% at the beginning of the 1990s. At the same time, only an enterprise with a share of 35% or more in the commodity market could be recognized as dominant.

So, the Kuchuksulphate plant:

a) was privatized by the state authorities, empowered by the laws of the time;

b) was not an enterprise of the extractive industry as it belonged to the chemical industry;

c) no permission from the Russian Government was required for its privatization.

In this connection, the attempt to challenge the privatization of the Kuchuksulphate plant will likely fail. The Kuchuksulphate plant was privatized in strict compliance with the privatization legislation of the time, which was in force for the processing enterprises of the chemical industry. In 1992, the State Property Management Committee of the Altai territory which had the authority of the territorial agency of the State Property Committee of the Russian Federation decided to transform the leased enterprise Kuchuksulphate into an open joint-stock company. At the same time, the ownership shares were distributed in Kuchuksulphate as follows:

- the employees collective hold a 76.3% percent stake;

- the share of the state is 23.7%.

After that, the employees of Kuchuksulphate bought out the state's share (traded privately) as the legislation allowed this at the moment. All 1,693 members of the labor collective became co-owners of the enterprise.

The whole privatization procedure was controlled by the Prosecutor General's Office. No violations have been found since the privatization 30 years ago. It was repeatedly checked by various state bodies. Kuchuksulphate paid taxes on all kinds of activities, including dividends through the provision of information to the Federal Tax Service and state banks over the past three decades, i.e. the state had information about who the shareholders of the enterprise were. During various inspections, the lists of shareholders were provided to state bodies to the tax inspectorate, including the Altai Territory Prosecutor's Office. During these years media outlets released hundreds of reports about Kuchuksulphate’s activity. The enterprise, its management, and employees were repeatedly awarded various certificates and prizes, including federal-level awards on behalf of the president of the Russian Federation, the government of the Russian Federation and federal ministries and departments. In addition, the current shareholders were praised as effective owners. Prior to each award, government bodies were requested to present a significant set of documents concerning the company's activities, including information about shareholders owning more than 5% of its shares. The information on the shareholders was provided to the Central Bank of Russia. It was regularly sent to the federal statistical authorities, including the 1-CB form, state banks when obtaining loans (minutes of general meetings of shareholders, boards of directors), etc.

So the state has found out all of a sudden that the budget-forming enterprise was privatized in 1992 without its will.

It should be noted that the limitation period for such lawsuits is only 3 years. So, they try to justify this unprecedented claim for re-privatization by the state's ignorance for all these 30 years.

Unfortunately, terrible things do happen from time to time. If Kuchuksulphate loses the lawsuit, it will become not just a red flag but a wake-up call for the entire business community in Russia. The outcome will be decisive for the future all-Russian investment climate in many ways. Kulchuksulphate’s owners were known for social responsibility, charity, investments into the modernization of production, ensuring a high level of employment and decent wages and carrying out activities in strict compliance with the law. The mainstream media such as Rossiyskaya Gazeta, Argumenty i Fakty, and Komsomolskaya Pravda repeatedly wrote about it but, unfortunately, as it often happens in Russia, it is an immediate reason to lose a business, and people will have to decide for themselves which way to choose. Anyway, it is sometimes better to learn from other people’s “mistakes.”

* The Bashkort public association is recognized as an extremist organization banned in the Russian Federation by the ruling of the Supreme Court of the Republic of Bashkortostan dated 16.09.2020.

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