ale of Georgia’s Rusting Rustavi Spurs Privatization Debate

Georgia's Rustavi Steel Works, a rusting monument to Soviet industrial might, has changed hands in a $27 million transaction that promises to fuel further controversy about President Mikheil Saakashvili's campaign to turn state property into cash for government coffers.

The sprawling, 5-million-square-meter complex was sold at a bankruptcy auction on October 12 to two Georgian companies. According to local media reports, Energy and Industrial Complex received the bulk of the complex for $20,500,000, as well as Rustavi's limestone mines for $500,000. TedOil received limestone workshops, territory and some machinery for $6,000,000.

But despite these sales, one Italian company, Metal Geo, claims that it is, in fact, the true owner of Rustavi. In 2004, Metal Geo assumed ownership of Ares International, which acquired 98 percent of Rustavi by presidential decree in 2003.

Ares' claims to Rustavi have long been the subject of much legal wrangling with the Georgian government; in 2004, the Georgian Supreme Court ruled against the Italian company, forcing it out of Rustavi, Alexander Seriogin, Metal Geo's representative in Georgia, however, maintains that after negotiations with the government in November 2004, Metal Geo paid $1 million in return for a pledge that the steel mill would be returned to their ownership.

As such, Seriogin argues, Metal Geo already owns the Rustavi complex. Seriogin claims that the firm has invested 14 million euros ($16.8 million) in Rustavi.

At the same time, he claims, Metal Geo was also the uncontested winner of the first privatization competition for the steel complex, held in June 2005.

"Then [the government] told us they would not fulfill the memorandum [for the sale of Rustavi], but would hold a tender competition instead," Seriogin told EurasiaNet. The tender was later reformatted as an auction.

"We decided not to participate in the auction," Seriogin said. "The Italians don't want to work in Georgia. There are no conditions here [for business] and investors are completely unprotected."

Metal Geo has since taken their claims to international courts in both Strasburg and Washington, and expects to see the case settled within the next three years, Seriogin said. The Italian firm is demanding $40 million in compensation from the Georgian government for lost investment and moral damages.

Representatives of the Georgian ministry of economic development could not be reached for comment about Metal Geo's claims.

The company's case, however, promise to complicate the Georgian government's already complex – and highly controversial -- campaign to dispose of unwanted state property.

Rustavi's sale was originally promoted not as a bankruptcy auction, but as a likely crowning achievement of Georgia's aggressive privatization process: a state conglomerate with $130 million in estimated debts would be sold for a hefty price, officials claimed.

But a mere week after the official announcement of Rustavi's privatization sale in June 2005, the steel mill and all of its possessions were declared "unfit for rehabilitation" and ownership reverted to bankruptcy court. The complex, however, is still listed on Georgia's [ privatization website].

Nonetheless, Minister of Economic Development Irakli Chogovadze maintains the property disposal is all about bankruptcy, and bankruptcy alone. "It [Rustavi] is not a privatization," Chogovadze said during a September interview with EurasiaNet. "The bankruptcy manager is selling it."

Despite repeated attempts, Rustavi's current bankruptcy manager (and former rehabilitation manager), Malkhaz Alborashvili, could not be reached for comment.

Other property disbursements, featured as part of the official privatization campaign, have also, in fact, been bankruptcy sales, the government says. According to Chogovadze, the combined $132 million sale of the Chiatura manganese factory and the Vartshikhe hydro power plant, widely celebrated as a resounding success of privatization before the deal went bust in June 2005, also did not fall under privatization.

"It [the sale of Chiatura and Vartshikhe] was not [privatization]. It was also an agreement between the bankruptcy manager, the state, and the buyers to create a joint company to maximize the value worth of the debt holders and the state holders because we were also selling a company in this transaction," Chogovadze said. "It was kind of a triad type of
agreement