End nears for indebted industrial giants of former Yugoslavia

Reuters News
Posted: Sep 26, 2013 8:26 AM
End nears for indebted industrial giants of former Yugoslavia

By Ivana Sekularac

PODGORICA (Reuters) - There was once a time when a job at Podgorica's sprawling aluminum plant meant a free apartment, a discount on holiday rentals and a large dose of prestige in socialist Yugoslavia.

In its heyday in the late 1970s, Kombinat Aluminijuma Podgorica (KAP) supported the families of 5,000 workers. Now, with its workforce cut to a fifth, huge parts of the complex resemble a ghost town, blanketed in dust and suffocated by debts of more than 380 million euros ($513 million).

That's 10 percent of the economic output of Montenegro, the tiny Adriatic republic that inherited KAP when Yugoslavia fell apart in war in the 1990s.

Montenegro is now torn between a pressing need for economic stability and the political and social cost of closing down KAP.

It's a choice faced by others in the Balkans: giving up a cherished, but ultimately unprofitable business model, spurred by financial necessity and hope of renewed prosperity within the European Union.

"This is not the 1980s anymore," said Andrew Roberts, head of the Belgrade-based Eastern Europe Economics research consultancy. "These companies have debts, they're inefficient. In some cases you might be able to reduce size, in some cases you have to close it and some jobs will have to be lost - the question is when?"

The former Yugoslavia is littered with such industrial dinosaurs, deprived of the largesse of the late socialist leader Josip Broz Tito but kept on life-support by governments too scared to pull the plug.

KAP stands out for its sheer size relative to a country of 680,000 people. Last year, the plant accounted for more than 30 percent of Montenegrin exports, 40 percent the year before. It now faces bankruptcy proceedings.

Political wrangling over KAP's debt has weakened the hand of Montenegro's dominant political figure for the past two decades, Prime Minister Milo Djukanovic.

He sold KAP in 2005 to Russian billionaire Oleg Deripaska for 48.5 million euros, a year before Montenegro split from its state union with Serbia and became independent.


Yugoslavia's disintegration had already taken its toll, with KAP's workforce cut to 3,500. Rising electricity costs and plummeting commodity prices with the onset of the global financial crisis imposed further losses.

Fearing the plant's possible closure, the Montenegrin government covered part of KAP's electricity bills and provided loan guarantees. When KAP failed to pay back its debts, the government was landed with a 120 million euro bill.

Converting debt to equity, the state took back half of Deripaska's stake in 2009. Then in July this year, a court launched bankruptcy proceedings.

Montenegro's government is still unsure what to do with the plant, and a rift in the coalition over whether to repay part of the debts to the power utility has stalled adoption of a revised 2013 budget and opened an unprecedented challenge to Djukanovic.

Now a representative of Deripaska has said he intends to sue the government for 1 billion euros.

"Moving KAP toward liquidation appears to be the least costly option, and the one option that would also improve resource allocation," a World Bank official, who asked not to be named, told Reuters.

But that means layoffs, a drop in exports and a loss of face for Djukanovic. The EU, which Montenegro is now negotiating to join, bans subsidies to loss-making firms.

The pressure has grown alongside rising public debt levels and budget deficits in the ex-Yugoslav republics.


But even now, it's hard to say goodbye.

In Bosnia, 1.5 percent of the country's economic output this year will be spent on subsidies, some to keep aluminum plant Aluminij Mostar, a major exporter, up and running.

In Serbia, the state pays out some 750 million euros, or 2.6 percent of GDP, in subsidies per year. In 2011, the government bought back Serbia's sole steel plant from U.S. Steel to avert its closure and the loss of 5,500 jobs, taking on the burden of salary payments and a minimum level of loss-making production.

The government, battling to keep its budget shortfall below five percent of output, has pledged to rein in subsidies and restructure state companies. But it will take time.

"The economy is not like a bicycle," Economy Minister Sasa Radulovic told a news conference. "You cannot turn the wheel in a different direction easily."

The transition to a market economy has been painful for nations used to the cozy embrace of socialism. Unemployment in Serbia is 24 percent, in Bosnia, 27.5 percent.

"They will realize changes are inevitable and some industries will disappear," said Hrvoje Stojic, an economist at Hypo Alpe Adria bank in Zagreb.

Setting out on talks towards EU entry, Montenegro and Serbia need only look to ex-Yugoslav Croatia, the EU's newest member, to see what awaits them. There the government has given up extensive control over the economy, most symbolically over its prized ship-building industry.

The government spent five billion euros on the shipyards over 15 years, and then gave them up before joining the EU in July. One closed, and three were sold into private hands. Unemployment has risen from 17.7 percent a year ago to 18.4 percent today, and there is little sign of new job creation.

In Podgorica, 32-year KAP veteran Dragan Drobnjak recalls teeming canteens when the plant spanned the production chain, from raw alumina to power cables to tin foil for chocolate bars.

Workers have watched salaries shrink from 600 euros a month when Deripaska bought the plant, to 275 euros today. "It was promising in the beginning, right after privatization," Drobnjak said. "Now, this is the worst moment in the history of KAP."

(Additional reporting by Petar Komnenic in Podgorica, Zoran Radosavljevic in Zagreb, Aleksandar Vasovic in Belgrade and Maja Zuvela in Sarajevo; Editing by Matt Robinson/Ruth Pitchford)