Key Findings

  • Croatia’s government, opposition and media commentators are slamming Hungarian oil company Mol after uncovering what they consider irregularities in MOL’s October 2008 purchase of a 22% stake in Croatia’s biggest energy company, INA. (The transaction raised Mol’s ownership to 47.2%, making it the Croatian company’s biggest shareholder.) The government also accuses INA of failing to pay taxes.
  • Croatian President Stjepan Mesic, who was always critical of the Mol-INA deal, called the sale suspicious recently. Former Prime Minister Ivo Sanader, who was in office at the time of the transaction, and former Economy Minister Damir Polančec will have to take responsibility, the president added.
  • Sanader resigned unexpectedly in June and announced his retirement from politics. After he quit, a number of government officials were arrested in connection with reports of corruption at places such as the Podravka food company or in highway construction deals. (Some observers have speculated Sanader’s departure was connected to Mol-INA).
  • The new prime minister, Jadranka Kosor, has become increasingly critical of her predecessor and has reversed several of his decisions. She managed to pin the blame for the corruption scandals on Sanader and Polancec, so her HDZ party suffered only slightly in opinion polls. Kosor even managed to raise her personal popularity, portraying herself as a law-and-order leader who does not tolerate malfeasance.
  • The allegations against Mol must be seen in the context of domestic politics. Croatia will hold the first round of its presidential election on December 27, and politicians know that stories of crooked business deals, especially at state companies, can sway voters.
  • If proven, the accusations of malfeasance at INA will have serious consequences for Mol, even if the Hungarian company was not involved. Mol faces a potential loss of profit and a tarnished brand. In addition, the accusations could hurt the regional reputation of all Hungarian companies and the country itself. (Memories of Hungarian telecommunications company Magyar Telekom’s under-the-table deals in Macedonia and Montenegro are still fresh.) The Balkans represents a huge expansion market for Hungarian business.
  • According to sources close to the Croatian government, Mol and the Kosor administration are drawing up a revised contract. If this is the case, two scenarios are likely: (1) Mol’s power in INA’s management structure will be decreased (2) Critics will cite the revisions as proof that there were indeed questionable points in the original contract.
  • Russia may want to prevent Mol from “meddling” in its plans in Croatia by promoting political attacks against the Hungarian company.

 

Conflicts around Mol

  • Mol is being attacked on two fronts. On one side, Croatia’s government is complaining that INA has failed to pay approximately HRK 1.9 billion in taxes, even though Mol has been turning out big profits. The other attacks are related to the Hungarian company’s acquisition of shares in INA: Mrs. Kosor herself implied the INA-Mol deal could come under scrutiny.
  • Suspicions are fueled by the fact that Mol received a much bigger role in INA’s management than its stake would warrant. The deal granted Mol a majority on INA’s supervisory board and the right to nominate the chairman, even though it does not own an outright majority of shares. The media suggests that the only way this could have happened is if Mol had persuaded Sanader and Polancec to grant it “special consideration.”
  • INA and Croatia’s government have been at odds over natural gas prices, which the government sets at artificially low rates (approximately 40% below international prices). INA argues it should not be forced to “swallow” the inevitable financial loss. Withholding taxes may be a strategy aimed at strong-arming the government into paying compensation.
  • INA’s failure to pay taxes was undoubtedly a deliberate decision, and it is impossible that government delegates on INA’s management board did not know about it. It cannot be ruled out that the government’s board members turned a blind eye to the decision: INA needed cash to modernize its facilities, and when credit sources dried up in the financial crisis, it had no choice but to save money in other areas. The upcoming elections may have brought this “gentlemen’s agreement” to an end.
  • Cooler heads may prevail. The government’s most recent press release says the Sanader administration did not sell any state INA shares to Mol; rather, the Hungarian company purchased the 22% stake in public offer from individual investors and the Fond Hrvatskih Branitelja (Croatian Patriots’ Fund), a fund to benefit war veterans. (Mol had already acquired 25% + 1 shares in INA in 2003.) The president of the Patriots’ Fund at the time of the transaction was none other than present-day PM Kosor.
  • The Croatian government and MOL have already ironed out the details of a new agreement on INA, according to sources close to the government.

 

Reasons why the attacks have intensified in the last few months

  • Croatia is gearing up for presidential elections in December 2009 and January 2010 and parties may be trying to make political hay from corruption scandals. Incumbent President Mesic, who is in his second and final term, was supported by the Croatian left, and opinion polls give left-wing candidate Ivo Josipovic a good chance of succeeding him. Prime Minister Kosor’s HDZ party is working overtime to ensure a right-wing victory, even though the chances are slim.
  • Until Mol became the biggest shareholder, INA was thought to be a company that provided a “safety net” for politicians and their associates, with profits siphoned off to party sponsors. When Mol came in, it imposed stricter oversight rules that altered this well-oiled system. This change ran against the interests of Croatia’s political establishment. Prime Minister Kosor has made statements such as “I have not seen the contract [between INA and Mol] yet” and “I am waiting to get familiar with [the contract].” As prime minister and a former member of Sanader’s cabinet, it is hard to imagine she did not have ex-officio access to the deal. This would imply that Mrs. Kosor has an interest in keeping an air of mystery around Mol-INA.
  • Russian interests may also be at work:
    • Through INA, Mol could gain access to non-Russian sources of natural gas, which would displease the Russian energy lobby. Moreover, plans for a Croatian LNG (liquefied natural gas) terminal are in advanced stages. This could serve as a new regional source of gas.
    • Another thread of the “Russian connection” theory is related to the planned South Stream gas pipeline. Croatia is currently in talks with Russia to allow the pipeline to traverse its territory, meaning it would no longer have to pass through Hungary on its way to its terminus in northern Italy. (The shortest route through the Balkans would be Bulgaria à Serbia à Croatia à Slovenia à Italy.) Although Russia is traditional ally of Croatia’s arch-enemy Serbia, Mrs. Kosor may set aside political fears for the sake of energy security and transit fees.
    • Should this come to pass, the only way Mol could remain key player in the South Stream project is by holding on to its interests in Croatia. Russia may want to prevent Mol from “meddling” in its plans by promoting political attacks against the Hungarian company.