As KAP goes, so does Montenegro’s economic fate

Kombinat Aluminijuma Podgorica (KAP), the huge aluminum factory on the edge of Podgorica whose output and related industries some analysts posit account for some 40% of Montenegro’s GDP, may be shutting down sooner rather than later.  The factory, which is controlled by Oleg Deripaska, a Russian tycoon, has been kept afloat for now thanks to copious amounts of subsidized electricity from the government in the wake of crashing commodity prices (aluminum prices alone dropped 36% last year, the most since at least 1988, on falling demand from automakers and construction).  KAP’s closure, writes The Economist, “would be a huge political blow to the government of Milo Djukanovic, the prime minister,” and would also likely discourage Arab investors, whom the government has been courting of late as Russian property speculators shy away from the plummeting property market.  For the economy as a whole, the numbers don’t lie:

In 2006, the year it declared independence, Montenegro’s economy grew by 8.6%. In 2007 it accelerated to 10.7%. Last year the government forecast 8%, but the correct figure will be lower. And in 2009 the government is planning for growth of only 5%—and the IMF is talking of a mere 2%.

As to KAP, Bloomberg notes that the firm accounts for 51% of Montenegro’s exports.  In late 2008, Montenegro lodged a formal application for the status of candidate to join the European Union, and officials speculate that formal candidacy is “realistic” by December 2009.  But given the battering the Euro is receiving and the reluctance by some EU members to add more Eastern flavor to its frenzied fray, you have to wonder if that’s indeed true.

Credit crisis? Russians continue to pour money into Montenegro, Serbia

An interesting piece from The New York Times last month touches upon a theme explored a few months ago. Namely, Montenegro, and specifically its Adriatic coastal towns (e.g., Tivat, Budva), is becoming the next Monaco. Montenegro receives more foreign investment per capita than any other country on the Continent, and it’s mostly thanks to wealthy Russians. Needless to say, the country’s tax base and development is also improving. The price of land in Budva, for example, where Russians are building a $310 million hotel and condominium complex on a rocky peninsula, is already more expensive than in the French-speaking tax haven. And huge investments have also been made in the country’s industrial sector.

Moreover, the Russian Bear also has its paws extended nearby:

In neighboring Serbia, Gazprom, the Russian state energy monopoly, recently bought a majority stake in the national energy company, Petroleum Industry of Serbia, for $520 million and agreed to invest another $650 million by 2012. The deal will give Gazprom a dominant position in Serbia’s energy market while transforming Serbia into a gateway for the transportation of Russian gas into western Europe.

Some pundits scoff at Russian presence as little more than cynical, geopolitical motivated maneuvering.  What better way to temper the two nations’ EU and NATO desires?  That said, aiding their economic development may only accelerate their readiness to join. Still, if the name of the game is energy dependence, then the Kremlin may already have the upper hand, at least in Serbia:

In a recently announced energy deal, Gazprom agreed to make Serbia a transit country for its South Stream pipeline, a $14 billion project that will stretch 560 miles undersea from Russia to Europe. The project — which Gazprom insists will forge ahead despite the global financial crisis — is a direct challenge to Nabucco, a pipeline championed by the United States and the European Union to bring natural gas to Europe via Central Asia, offsetting energy dependence on Russia.

That said, all is not so rosy. The Montenegro Times reported last month that Oleg Deripaska, “the politically connected Russian metals tycoon” and the country’s “richest man on paper” who bought majority control of the debt-ridden Kombinat Aluminijuma Podgorica (KAP) and its associated bauxite mines for €48.5m in late 2005, was frantically looking to secure more than $2b in financing to repay part of a $4.5b loan to western banks before the end of the month, or risk losing to creditors a 25% stake in the world’s biggest nickel miner. It is speculated that the income of almost one in 10 of Montenegro’s estimated 680,000 population is tied to the company and its subsidiaries. Alas, Deripaska found his honey pot at the last minute in the form of a $4.5b loan from Russia’s central bank funds. KAP describes itself as is the “industrial powerhouse of Montenegro, representing 51% of the country’s exports.” Owned by Deripaska’s CEAC (it has a has a 58.73% stake in the company), it says it has no plans to cease all aluminium production at the plant. However, in response to current metal prices and cost pressures, it is reported that CEAC will gradually reduce output by up to 10%. Moreover, most mining stocks have incredibly low P/E ratios and very high yields. However, if metal prices continue trending downwards, earnings will decline sharply and companies like KAP will be forced to slash its dividend payments. So far at least, and as The Guardian reported, [Deripaska’s] alumnium plant is “turning out to be a money pit.”

Mooring In Montenegro

Montenegro is third in Europe in terms of per capita foreign direct investment, and so far it has had wealthy Russians primarily to thank. Russian investments totals an estimated at $2 billion, owning among other strategic assets the aluminum factory in Podgorica. And Russians also account for the largest growth rate among international tourists. The increased exposure from their powerful norther neighbor has expectedly received some popular backlash. Most Montenegrins hope that NATO membership and a possible fast track to the EU will give them more leverage to attract Western capital and reduce Russian dependency. Because for now, a country with GDP per capita of less than $5,000 isn’t exactly in a position to be picky.

So when the now 80-year old Peter Munk concluded talks with the government on the purchase of a former shipbuilding and naval yard once controlled by the Yugoslav Army, located on Kotor Bay with easy access to a nearby airport–a deal that Munk hopes will lead to major development of a world-class, Monte Carlo-esque marina in the coastal town of Tivat, locals’ hopes soared. Munk is heralded by The Economist as “the jolly gold giant,” and is the chairman and once-again chief executive of Barrick Gold (which he acquired in 1983 for $40m), the world’s biggest gold-mining firm following the purchase of Canada’s Placer Dome for $10 billion in 2006. But he is also part-owner of the TriGranit Development Corporation in Budapest, a firm which is recognized as a leading developer in the region, with already completed or nearly finished projects in Bulgaria, Hungary, Poland, Slovenia, Romania and Russia. Next up: Montenegro. A long-time interest in sailing lead him to notice that not only have docks in Spain, France and Italy become overcrowded, but that Montenegro owned an old Warsaw Pact naval dockyard in an ideal location for a huge marina and the possibility of large, mooring luxury yachts and the even larger disposable income that often comes with said machines. “We are establishing a brand new industry which will enable Montenegro to be competitive with the most successful yacht harbors on the Mediterranean,” Munk said.

According to an article from 2006 in the Southeast European Times, the specifics of Munk’s vision include a complete overhaul and redevelopment of a 24-hectare site into “the largest luxury yacht marina on the eastern Mediterranean, with over 700 berths,” which is expected to “attract a high-end clientele and [which] is in line with some of the general trends in Montenegro’s tourism strategy. The investment will bring massive infrastructure improvements. In essence, a whole new Tivat will emerge over the next three years. The first stage of the investment is $150m, with a total cost of $500m once the project is complete.” However, the article noted, “the first big step is to get Tivat’s environmental house in order. Years of shipbuilding and military activity have left a deep imprint on Kotor Bay. In co-operation with the European Bank for Reconstruction and Development (EBRD) and the World Bank, an environmental cleanup was started before construction began. The finished product, “Porto Montenegro,” is slated to be completed by 2011 and will, apart from the marina, include all support facilities for mega-yachts, said Munk. Said facilities will include ship facilities, charter companies, engineers, mechanics, yacht designers, yacht architects, restaurants, bars, retail sale places, hotels–a whole new city,” exclaimed Munk.

Munk seems into Montenegro for the long haul. In February, the Montenegro Times reported that he planned to “spread his empire to the north of the country through his company, Adriatic Marinas,” through the purchase of land near the Jezerine ski resort at Bjelasica, near Kolašin, “where he intends to build another mountain resort and helicopter platform.” But is Montenegro just going to become a playground for the world’s uber-rich? A stark example of the divide between the have’s and have not’s in a region still learning to cope with both the blessings and the struggles that come with autonomy? Munk takes a pragmatic outlook. “The disparity in the world is unbelievable,” he says, shaking his head. “People making $250 million a year. That wouldn’t be the way I would set up the world.” But the important thing, he says, is that his project “will spew out prosperity for people.”