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How Is the Government Doing?

A year after the new government was sworn in, problems seem to mount at an alarming rate. Although the main macroeconomic indicators show progress, underlying problems seem unable to go away no matter how hard the Plenković team tries.

The biggest of those being, of course, Agrokor. Six months ago, the government pushed through a law that provides basic Chapter 11 protection to “companies of systemic importance”, but with direct government involvement. After months of various revelations of how badly the company was mismanaged by its owner, Mr Todorić, the State Prosecutor finally started prosecuting former management. And the beans started spilling.

First, the Agrokor administrator, Mr Ramljak, accused the former management of misrepresenting the liabilities of the concern by 22 billion Kuna (close to 3 billion Euro), which meant that the total company debt amounted to Kn 56 billion, around 7.5 billion Euro. This is about Kn 16 billion more than the company is worth according to new estimates. But since the Interim Administration recognized only 41 billion in claims, it might be that the company is technically not bankrupt or is only barely so.

In order to understand the magnitude of this loss in local terms, it might be worth remembering that the Kn 22 billion equals the entire Croatian health spending in one year. For comparison, in Germany this would be close to EUR 210 billion. The Kn 16 billion loss over assets is an equivalent of two annual budgets of the capital city Zagreb. And the provisionally estimated Kn 56-58 billion total debt is close to half of the entire annual budget revenue. Agrokor’s revenue was estimated at 16% of the GDP (and this we do not want to compare to Germany). So however this crash is estimated, it is certainly a big one in Croatian terms and seems bound to have macroeconomic consequences even if none are showing for now.

Latest statistics do not show any significant impact of the Agrokor crisis, but some major companies started filing for bankruptcy because of their exposure to Agrokor and inability to service their debt because they cannot collect from the fallen conglomerate.

The real bombshells started dropping when the Attorney General attempted to arrest Todorić, still nominally the owner of Agrokor, his sons who worked at the company, and his various top level managers. The early morning raids, in spite of abundant TV coverage, failed to find any Todorićs at home, revealing some embarrassing details in the process (such as the fact that one of the sons reported to authorities over a month ago that he moved to London, leaving his address on file). Then the local court declined detention for all persons arrested except Todorić himself, but he was still not “available to authorities”. Two sons and other Agrokor managers, in the meantime, answered the summons, got interviewed by the prosecution, and went back to their lives.

Then Todorić started publishing his blog in which he attacked primarily Administrator Ramljak and Deputy Prime Minister Dalić, claiming among others that Dalić blackmailed him and other members of his team, and that the Government coerced him into signing the papers activating the Lex Agrokor. In parallel, a major Croatian daily paper Jutarnji List published the contract on roll-up loan arranged by Ramljak with some 20 creditors, led by the Knighthead Capital Management who became the lead creditor almost overnight when Sberbank refused to participate in the roll-up and Knighthead managed to buy a hefty chunk of Agrokor bonds. The roll-up agreement is on a syndicated EUR 480 million new loan to Agrokor, provided by about 20 lenders. Biggest of them being Knighthead with EUR 200 million. But here’s the catch: Allegedly around 100 million was used to buy back the bonds held by Knighthead at nominal value, although they were trading at around 30%, and some EUR 128 million remain unused. This seems to match the original estimate of the Government Administrator Ramljak that Agrokor will need some EUR 200-250 million in new money to finance current operations. It also seems that a hefty chunk of Agrokor’s property that was previously not mortgaged was now used as security for EUR 1.08 billion, covering the entire new loan, the roll-up amount, and a few bobs in reserve. Sberbank and a Croatian bank already filed complaints against Jamnica for issuing what they consider illegal guarantees for Agrokor loans, but public statements do not indicate whether this includes the latest Eur 1.08 billion block of guarantees.

Two things remain unclear – why were Knighthead’s bonds bought back at nominal, thus possibly putting other bond holders at a disadvantage, and why did the new Administration sign up almost EUR 130 million more than needed thus giving that money priority over other creditors? In parallel, the Sberbank, looking for EUR 1.1 billion, decided to ask for protection in front of the Commercial Court in Zagreb, which denied its request, and then announced it filed against Agrokor and Todorić both in Croatia and in some other jurisdictions with mixed success. Also, this week Agrokor finally published the list of verified claims, and Sberbank claim, the largest individual claim, was not among them. Mr Ramljak’s explanation was that Sberbank should not be attempting to collect both through the Lex Agrokor process (as it participates in the Creditors’ Council) and through an outside court.

Finally, Todorić himself showed up in London, reported to a court, protested that the process against him will not be fair, and got released by the court. Since the hearing is scheduled for April 10, 2018, it is hard to guestimate results but for now Mr Todorić will not be delivered to Croatian authorities. Of course, this does not protect Mr Todorić from Sberbank and other angry creditors.

It seems that the main question in the Agrokor saga is whether the Government, through Administrator Ramljak, favored some creditors over others, and if that is the case, will the budget ultimately have to bear the cost of satisfying creditor demands? The Government says no, the opposition claims yes, and so far there is no ruling from any judicial authority. A point for the Government might be the recent London court ruling recognizing Lex Agrokor as providing adequate protection for creditors, in turn denying Sberbank an opportunity to claim damages in the UK. On the other hand, another London court denied extradition for Mr Todorić, and the next hearing is scheduled for April 2018. By that time, whatever reasons the Croatian court had to place him under arrest, will have largely disappeared. For now there is no way of guessing which way will the proceedings turn. Finally, Lex Agrokor is also being debated in courts in Slovenia, Bosnia and Serbia, where a court in Serbia already denied Lex Agrokor jurisdiction over Agrokor property in Serbia. In Bosnia so far it seems that the company is still able to manage its affairs under the current regime in Zagreb and Administrator Ramljak stated several times he expects the authorities in BiH to be satisfied with solutions offered by Agrokor Zagreb. There also seem to be some large investors ready to get into the company, as both local companies such as Atlantic, and international conglomerates such as Jiangxiong Hu of Zhongya Real Estate, have expressed their interest in parts of Agrokor.

Agrokor was among topics discussed between Croatian President Grabar Kitarović and Russian President Putin. Although she has no competencies over Agrokor, economy or anything else related to the debt, Putin chose to have the Sberbank president join for a meal to stress the topic and the Russian desire to have it resolved (i.e. paid back). Since Mr Putin clearly knows and understands well what the Croatian President can or cannot do, this was clearly intended as political pressure at the highest level Mr Putin can lay hands on. The question here is why did Ms Grabar Kitarović choose to put herself in that position where there was nothing she could get in return for whatever little she was able to do? The answer to that might be the deal to finally resolve the issue of the Bosanski Brod refinery, which will apparently start using Croatian natural gas thus significantly reducing air pollution over Bosanski Brod and Slavonski Brod in Croatia.

On top of that, local media started speculating that Rosneft is negotiating with MOL on purchase of MOL’s share of INA. If that turns out to be true, it would be the second major entry of Russian capital into the Croatian economy. Although estimates vary, between Agrokor and INA, Russia would have direct influence over almost a third of total economy of a NATO and an EU member state, and at a relatively acceptable price.

More on INA, local media finally got a hold of the UNCITRAL arbitration ruling where Croatia lost the case against MOL. The ruling includes some embarrassing detail, such as doubt in Croatia’s star witness Mr Ježić, in DORH’s recording of Mr Sanader and MOL’s Hunyadi, and impartiality of the judge. This is a scathing rebuke of a weak system of administration of justice, which might be further embarrassed by a proposed Italian parliamentary initiative to review the Horvatinčić case which raised quite some concerns domestically but as Italian citizens were involved the Italian parliament rose the issue and it seems the case is far from over in political terms. Coupled with several domestic high profile cases, in which prominent businessmen or politicians were unexpectedly released, where statutory limits were allowed to expire, or where same type of offense apparently got treated differently depending on whether a politician was involved, the Croatian administration of justice is getting more and more widely criticized. Although the backlog of cases is now at around half a million nation-wide (a significant improvement over a decade ago), cases still tend to take much too long and the system leaves a public impression of cronyism and partiality.

In more general terms, Agrokor scandal revolves mainly around misrepresentation of financial data. But these data were certified by auditors, the tax police never filed anything against Agrokor, and state banks continued lending to it until the very last moment. The INA case was built on corruption proven by witnesses and technical evidence that a UN tribunal found doctored. The Horvatinčić case involves court interpretation of evidence which leaves most independent observers wondering how that is possible. Other prominent cases over the past two or three years also leave a similar impression of procedural and factual fabrications which, in the end, leave the cases either unresolved until they expire, or resolved in manners that strain credulity. And this might turn out to be an even bigger problem for Croatia in the long run, as potential investors, both domestic and international, might lose confidence in institutions and seek their fortunes in jurisdictions where they feel better protected.

Croatia already dropped 12 places on the World Bank’s “Doing Business” list, losing 3 places in 2015, and another 9 in 2016.

It also finds itself unable to resolve ongoing conflicts with its neighbors, and it seems it is beginning to provoke a “bad child” response in most European capitals where it lately tends to complain against the neighbors but apparently tends to recognize no mistakes of its own. So when all of this is put together (weak and seemingly corrupt institutions, problems with the neighbors, and weakening international position), Croatia seems to be getting weaker since it joined the EU four years ago.

In spite of that, PM Plenković seems as safe as possible for now, because the opposition does not seem to be able to get their act together and join in overthrowing the Government in the parliament. The latest attempt this Friday failed again, just as the one several months ago, and with less votes against the government (last time the Government barely scraped through, this time it had about 20 votes to spare).

In addition, the main opposition party SDP seems more than ever riddled by internal strife and lack of initiative.  The attempt several weeks ago to depose Mr Bernardić failed on all levels, and there have been no similar attempts since. So for now it is not likely that the SDP, or any other opposition party, will muster strength or initiative to seriously endanger the HDZ government. This should ease Mr Plenković’s mind, as he seems reluctant to go for early elections apparently for the fear of his own right wing.

This right wing of the HDZ in the meantime seems to be consolidating both within the party and without. Party favorites, whether HDZ itself or from supporting parties, seem to be successful in their business endeavors, or in their political attempts to win elections or positions. It seems they also view Mr Plenković and his more moderate appointments as a necessary, but temporary evil.

Will the government be able to govern in the near future? It seems there are no domestic reasons for it not to be able to do so. Unless some external event comes along, it seems that this Government will remain resistant to pressures for the foreseeable time. Whether it would be able to achieve much is a different matter altogether.

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