Looting 2.0 Supporting State Capture at the Krk Gas Terminal Written by Re:Common Introduction

Looting 2.0 supporting state capture at the Krk gas terminal Written by Re:Common Introduction

It is a crisp morning in Zagreb. Streets, coffee places and restaurants are busy and people’s buzz accompanies morning activities. Behind a window, at a corner table of a restaurant, sit two men. Ivo Sanader, the at the time Croatian Prime Minister, is laying back on his chair, looking around and talking to his interlocutor with an annoyed and circumspect look.

An envelope slips over the table Omisalj view on bay and Dioki industrial site. Photo ©Re:Common into his hands, he looks inside, then puts it into the inside pocket of At the core of Sanader’s story is company’s most strategic assets. This his jacket. The conversation goes an alleged EUR 10 million bribe deal has been under the scrutiny on, even if the two interlocutors that Ivo Sanader took from the of the Croatian anti-corruption are hardly looking at each other. Hungarian energy company MOL to authority (USKOK), and almost ten Sanader is tapping on the table facilitate a favourable deal for the years later the corruption trial has while saying something along the purchase of the majority stake in the been re-opened and is ongoing. lines of “yes, good, this will be Croatian energy company INA, as a enough for the coffee, you can’t part of its privatisation process. The re-opened trial against expect it to be enough at all”. Sanader refreshes the memory of Why is this relevant today? Because a system where the abuse of power This scene was filmed by a hidden the Croatian government is taking camera. It became viral after Sabor, determined the outcome of the steps to fast-track a major energy country’s strategic choices, ending the Croatian parliament, agreed to investment – a two-phase LNG plant remove Sanader’s parliamentary up fostering the benefit of a few, – on the island of Krk. The project rather than the actual needs of the immunity in December 2010 –criticised for its environmental 1 Croatian people. A story that is and authorities arrested him . A impact – is located at the Dioki corruption trial that shook Croatian repeating today with the proposed petrochemical complex in Omišalj, a construction of a Liquefied Natural politics started shortly after, and property at the core of the Sanader at the time of writing this is still Gas (LNG) and regasification corruption scandal. Indeed, plant on the property of the Dioki ongoing. Several other ministers of according to the accusation, half of Sanader’s government have been petrochemical complex in Omišalj: the Sanader bribe allegedly transited a project that has been on the table arrested and sentenced for money through the bank account of a laundering, abuse of power, illicit for over ten years, and that may be Swiss-Croat entrepreneur named responding to the private interest financing of the HDZ political Robert Ježić, who - during INA’s party2. of a few, rather than to the “energy privatization process - became the security” of the country. And its main shareholder of the Dioki construction can still be stopped, for 1 http://www.editfiume.info/archivio/la- petrochemical complex, one of the the benefit of the Croatian people voce/2010/101210/politica.htm and the people of Europe. 2 https://www.ilpost.it/2010/12/10/ex-premier-ivo-sanader/

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What is the Krk LNG project

The Krk LNG terminal is an industrial energy project aimed to regasify and re-export liquefied gas arriving on the island of Krk via ships towards Hungary and other countries in Europe. LNG Carrier Fuji Lng, Photo Ken Hodge, CC BY 2.0, Wikimedia Commons The project, advertised by the Croatian government as a flagship initiative, also enjoys a strong support of the European Union The proponent of the project is The recently approved “LNG and is featured among the so- the Croatian government through law” - aimed at fast-tracking the called EU “projects of common a publicly controlled company construction – is being challenged interest” (PCI). The latter are large set up for the purpose, LNG as unconstitutional5. infrastructure projects that should Hrvatska / LNG Croatia d.o.o.4. serve the interests of the European The proposal is presented as a Union, and that can benefit from two-phase project, consisting of the political and financial support an offshore (floating) terminal of the European Commission and an on-shore terminal which through the Connecting Europe would be completed in the second Facility (CEF), the European phase of the construction. The Fund for Strategic Investments terminal is expected to deliver 2,6 (EFSI) and European financial billion cubic meters of natural gas institutions like the European in the first stage of the project. Investment Bank (EIB). For Critical voices among media, civil example, the EIB is considering society and experts claim that the project for financing, as the the two phases are rather two project status appears to be “under incompatible, separated projects. 3 appraisal” at the Bank . The Both projects are being challenged proposed financing is significant: from an environmental, economic EUR 339 million. and administrative point of view. 5 https://dnevnik.hr/vijesti/hrvatska/ zlatko-komadina-i-mirela-ahmetovic-pro- 3 http://www.eib.org/en/projects/pipe- jekt-plutajucega-lng-terminala-neodrziv-i- lines/pipeline/20140627 4 https://www.lng.hr/en/about-us nezakonit---543798.html

Looting 2.0: supporting state capture at the Krk gas terminal 3

of the International Consortium But the restructuring of INA 1.The tortuous of Investigative Journalism7, had continued, and in October 2004 plans to develop a gas regasification Dioki was privatised. DIOKI plant in Omišalj, precisely in the Holding AG, headquartered in history of a industrial site owned by INA, named Switzerland, became the majority DINA. Later, when the project owner of Dioki d.d. In parallel, the controversial started to shape up in 2008-2009, project of a regasification plant in the French oil major Total and the Omišalj – designed to be an onshore project German energy company RWE8 also plant and within the property of joined the offshore company9. Dioki - started to get traction among decision-makers in Zagreb. The LNG project on Krk In 1993 INA became a joint stock island has been discussed company10 and in July 1995, it But who was the beneficiary owner for almost 20 years now. started an internal re-organisation. of Dioki Holding AG? A still at Subsequently, the DINA the time unknown Swiss-Croat Since the deep crisis petrochemical plant of Omišalj entrepreneur named Robert Ježić. of the petrochemical was merged with two other plants Media reported about him that he 11 industry in the 1980s in from Zagreb into a new company: had been the president of the Rijeka Dioki d.d. . The company’s basic football club since 2000 and that he the former Yugoslavia, activity stated in the public registry had made his fortune in oil trading there have been several is the production of polymers and in Milan, moved to Switzerland 12 plans to relaunch the petrochemicals . and then come back to Croatia to assist the economic recovery of the petrochemical facility From Malta to Switzerland country. The project that he was of Omišalj – facing presenting to investors aimed to relaunch the petrochemical plant Why did INA, still a public company, unemployment – in in Omišalj, including import and need to set up an offshore vehicle order to contribute to the export of gas to foreign clients. to build a regasification plant in a recovery of the local and facility of its property? national economy. Corrupt roots come to This question remains unanswered. surface An offshore vehicle to build The public registry in Malta does not say much about Adria LNG, neither Along the perfect storyline of the so local gas infrastructure about the identity of its board called “crony capitalism” eventually members, nor about the beneficial something went badly wrong. Before In April 1995, while the dramatic owners of the company. construction started, the LNG Yugoslavian war was still ongoing in project was hit by the collapse of its many places and the Dayton Treaty financial and political pillars. hadn’t been signed yet, a number 7 https://offshoreleaks.icij.org/ of oil and gas majors including the nodes/55009251 Robert Ježić and the Croatian Prime Yugoslavian State company INA, 8 Adria LNG Study Company Limited record Minister Ivo Sanader were hit by a the Austrian energy company OMV on Malta company registry massive corruption scandal in 2010, and the Ljubljana-based group 9 At a session of the Croatian government after the publication of internal Geoplin Doo6 came together to set held on September 30th 2008, Prime Minister intelligence reports on Wikileaks13. up an offshore company in Malta: Ivo Sanader explained why Dina Petrokemija The scandal is connected to a the “Adria LNG Study Company industrial site was the best location for the construction of this “strategically important bribe that Prime Minister Sanader Limited”. The company, whose facility”. allegedly took to favour the existence was revealed only recently 10 Orbis database, INA acquisition of the majority share through the offshore leaks database 11 INA-OKI d.d. and INA-Naftaplin’s Ethyl- of INA by the Hungarian energy ene Production Unit 6 Adria LNG Study Company Limited record 12 Dioki d.d. record on Croatian company 13 https://www.ilpost.it/2010/12/10/ex- on Malta company registry registry. premier-ivo-sanader/

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company MOL, that allegedly transited through a bank account on the name of Ježić. This story ended up also involving the Austrian bank Hypo Alpe Adria, the main creditor of Robert Ježić for Dioki and other investments. The scandal contributed to the financial collapse of the bank, that eventually caused the bankruptcy of the Carinthia region in Austria and a loss (still to be partially recovered) for the Austrian public coffers of estimated EUR 13,7 billion14.

In short, the acquisition of the industrial site where the LNG project should be located is drenched in alleged corruption linked to the privatisation of INA, the acquisition Zelena Akcija action in Zagreb calling on the Croatian parliament to reject the LNG Law. Photo © Zelena Akcija of Dioki and the investment of the Hypo Alpe Adria bank. explored multiple options to the bankrupt Hypo Alpe Adria. realise the project. In 2013, the Since Robert Ježić did not pay Strategic or corrupt? plan presented to the European back a significant part of the loans Commission was for a Liquid natural obtained from the Austrian bank, Ten years after the scandal, the gas regasification vessel (LNGRV) - Dioki assets were part of the debt Croatian government is still sitting a temporary unit with separate gas recovery procedure of Heta. in court in Zagreb, due to private deposits that could be used until arbitration against MOL15, as part the onshore regasification plant Going onshore or offshore? of the government’s effort to bring would be completed. Both options justice and get back the stolen for an onshore and offshore plant This was not seen as an obstacle wealth involved in allegedly corrupt were on the table. In 2016, Zagreb by decision makers in Zagreb and deals and systemic corruption. In officials seemed to favour a Floating Brussels. parallel, with a realpolitik approach, Storage Regasification Unit (FSRU) Indeed, the Croatian government other ministries of the same - an offshore project similar to provided a clearer description of the government took steps to ensure the one realised in neighbouring project in June 2016 when issuing that the LNG plant proposed by Italy in Livorno16 - which had to a communication on “accelerating Ježić would see the light in any case. be somehow combined to another the implementation of the project So until 2016, the government larger onshore LNG unit. through a two phases plan”17.

14 http://diblas-udine.blogautore.repubblica. The foreseen location of the The Croatian government presented it/2018/02/07/hypo-bank-costera-agli-austri- industrial site remained the Dioki the offshore facility – a floating aci-77-miliardi-poteva-andare-assai-peggio/ industrial plant. The plant was storage and regasification unit 15 PCA Case No. 2014-15 in the matter of an part of the assets incorporated (FSRU) – as the first phase of a arbitration under the UNCITRAL Arbitra- by Heta Asset, the “bad bank” of tion Rules 1976 (“UNCITRAL rules”) and larger industrial project, while the shareholders agreement relating to INA- Industrija Nafte D.D dated 17 July 2003 as “second phase” would include the amended on 30 January 2009 (“Shareholders 16 http://www.themeditelegraph.it/it/ship- construction of a bigger onshore agreement” or “SHA”) between The republic ping/2016/04/15/croazia-terminal-lng-nel- regasification plant. of Croatia (The “Claimant” or “Croatia” or Haop7GAha1qqDAhcz13nXP/index.html; GoC”) and MOL Hungarian Oil and Gas PLC. http://www.saipem.com/SAIPEM_en_IT/ (the “Respondent”, “MOL”, and together with con-side dx/Press+releases/Saipem+and+the 17 https://vijesti.hrt.hr/428000/vlada-lng- the Claimant, the “Parties”). Final Award, 23 +University+of+Rijeka+sign+a+cooperation izmjene-zakona-o-pos-u-i-obveznim-mirovin- December 2016. +agreement.page. skim-fondovima-2

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The final project foresees a terminal capacity of up to 6 billion cubic metres of gas, while the cost of Who is the terminal is set at 600 million euro. The phase one of the current Robert Ježić? project, a FSRU with the capacity of 2.6 billion cubic meters, should cost Robert Ježić is a Swiss- stopped in 2007. Ježić developed around 250 million euro according close relations with the successor to the Croatian government. The Croat entrepreneur of Gregurić as Prime Minister, total cost goes over 1 billion euro, active in the oil business Hrvoje Šarinić22, who was also including the accompanying since the 1980s. in the board of INA. This is infrastructure. when he became president of In the early days, he started to the Croatian football team HNK On November 8th 2018, the 23 collaborate with Vojko Santrić, Rjieka , which he managed procurement procedure for the until 2008. In 2000, he got a new offshore part closed and Golar Yugoslavian businessman based in Milan, where he was also General political sponsor: Slavko Linić, Power Limited was selected by former major of Rijeka, deputy LNG Hrvatska for the conversion Consul. Santrić introduced him to Branko Srenger, an important Minister of Economy and INA of an existing LNG carrier to a Supervisory Board member. FSRU. A final investment decision oil businessman who ran Petraco Oil, founded in Milan in 1972. In In 2004 he acquired Dioki d.d was announced to be made thanks to a loan granted by Hypo afterDecember 20th 2018.18 the 1990s Ježić set up Starchem Ltd for Srenger, an offshore Alpe Adria Bank (see box The Hypo Alpe Adria connection). In A publicly-controlled company oil trading company, and other companies in Panama. In that the retrial against Ivo Sanader, named LNG Hrvatska/ Croatia on October 22nd 2018, he was LNG19 concluded the authorization period, he started working with national oil companies as agent acquitted - at first instance - from process for the plant in less than the accusation of having bribed two years. The “LNG law”20 that of Petraco. That is when he met 21 Ivo Sanader in order to facilitate was passed in 2018 strengthened Fanjo Gregurić , Croatian Prime Minister between 1991 a deal for Dioki to access cheap the government’s direction to electricity. A deal that allegedly move ahead quickly thanks to a and 1992, when Croatia became independent. In 1993 the business damaged the company HEP special procedure designed for this for several million euro24. He is industrial plant only. relationship with Branko Srenger broke and he started working also accused of having taken a The LNG law also includes an bribe for Ivo Sanader from the explicit right for the government for foreign companies such as Landmark Chemicals SA Hungarian energy company MOL. to expropriate private property According to public authorities, necessary to build the onshore (Switzerland) and Laussane BMS (Belgium). These companies the bribe was transferred through infrastructure linked to the offshore one of his Swiss bank accounts. facility. won several public tenders by INA Oil company, where Fanjo Gregurić was a board member Research by IRPI (Investigative between 1995 and 1999. In the Research Project Italy) for same years, Ježić set up Forus Re:Common in Switzerland, a company that then formed a joint venture with 22 https://it.wikipedia.org/wiki/ INA in the Rijeka refinery, called Hrvoje_%C5%A0arini%C4%87 18 https://www.lng.hr/en/news-details/ ITT. His contracts with INA 23 https://en.wikipedia.org/wiki/HNK_Ri- procurement-procedure-for-floating-storage- jeka regasification-unit-the-fsru-is-closed-95 24 https://www.index.hr/vijesti/clanak/ 19 https://www.lng.hr/en/about-us 21 https://en.wikipedia.org/wiki/Franjo_ robert-jezic-kupio-hdzu-blindirani-bmw- Greguri%C4%87 od-42-milijuna-kuna/531680.aspx 20 https://www.total-croatia-news.com/ business/29093-parliament-adopts-lng- terminal-law

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A still controversial project Gas Storage of the European a source of substantial economic Commission in 201626. income for the residents and the supported by the European A position that could be challenged local authorities. As an outcome of Commission by the outcome of the second round the consultation,the residents and of the Open Season Procedure local authorities agreed upon an for contracting the terminal’s onshore facility that should respect Experts and decision makers have regasification capacity, where only certain standards and conditions. different takes onthe two-phase the Croatian companies Hep and LNG project. INA have shown some limited However, when Ježić fell into 27 disgrace and the industrial plan for It is worth noting that the LNG interest in the purchase of gas . Dioki collapsed under the massive terminal in Krk was already An outcome that is putting the debt accumulated towards creditors included in the EU PCI list back in economic viability of the project at 28 (including the workers and the 2013 and 2015, but at the time there stake . municipality of Omišalj), residents were no details in public documents fell into dismay. on the nature of the project – On the island of Krk, for many years onshore or offshore. the only foreseen project discussed to some extent with the residents This is when the government in Zagreb tried to push a different An oil and gas expert, that asked was onshore. The local authority of version of the project: an offshore to remain anonymous, openly said Omišalj has been on the front line project that would be smaller, that every expert who could see to make sure that the project would cheaper and faster to build through the background documents of the fit the needs of the residents. The LNG Hrvatska29. current two-phase project would crisis of the DINA petrochemical plant brought a job loss crisis on agree that “it doesn’t make any sense, Still, this proposal, championed the island, so local authorities took either from an economic, financial or by the new HDZ government the side of workers and residents, a technical point of view”. His take and by the former director of asking loudly for over two decades is that the offshore and onshore the government’s Agency for for a plan to relaunch the nearly projects are even conflicting. “Only hydrocarbons (currently director abandoned industrial plant. After politicians could believe that they of LNG Hrvatska), Barbara Dorić, its privatization and acquisition are truly part of the same project”. has been fiercely opposed not only from Ježić’s Dioki Holding, people by the Krk residents, but also by The European Commission, who regained hope that production the local authorities, and even by provided a grant for the project25 would restart soon. The construction the county/regional government and considers it as a “Project of of the regasification plant was part (Primorsko-goranska županija). In Common Interest”, apparently of the then-proposed investment March 2018, thousands of people believes in the current two-phase package. demonstrated in Rijeka against narrative. However, the rumours in the offshore plant, including the Brussels corridors are that everybody In response to initial concerns of headof Omišalj Municipality, the knows that the second phase is quite residents over the impact of the mayor of Rijeka and the mayor of unlikely to happen. plant on the marine environment and on tourism,a consultation Krk, together with environmental organisations like Zelena akcija/ The Croatian government defends process was conducted by a private Friends of the Earth Croatia, it as a Strategic Investment project, consultancy firm employed by the local environmental groups and important in the diversification of government. Tourism is indeed citizen’s platforms30. Just recently, supply of natural gas for Croatia. commenting on the fiasco of the It also describes it as a project that 26 https://vlada.gov.hr/UserDocsIm- Open Season Procedure, the head will increase the energy security of ages//Sjednice/2016/27%20sjednica%20 of Omišalj Municipality, Mirela South-East Europe, as confirmed Vlade//27%20-%208.pdf by the inclusion of the project in 27 https://www.lng.hr/en/news-details/the- the Strategy for Liquefied Natural second-round-of-open-season-procedure-is- 29 https://vlada.gov.hr/UserDocsIm- closed-96 ages//Sjednice/2016/27%20sjednica%20 Vlade//27%20-%208.pdf 28 http://www.novilist.hr/Vijesti/Gosp- 25 https://vlada.gov.hr/news/eu-approves- odarstvo/FIJASKO-LNG-a-Za-zakup-miz- 30 https://www.balcanicaucaso.org/aree/ eur-102m-grant-for-lng-terminal-in-croa- ernih-kolicina-plina-javili-se-samo-HEP-i- Croazia/Croazia-proteste-contro-il-rigassifi- tia/20182 Ina?meta_refresh=true catore-offshore-186510

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The Hypo Alpe Hypo Alpe Adria is a Supporting Ježić was an entry point Carinthian bank that was for the Hypo group to conclude Adria connection nationalised in 2009 by the other investments in Croatia. For this Austrian government to avoid “service” Ježić was allegedly employed its bankruptcy - and the under a 5 million-euro consultancy bankruptcy of the Carinthian contract with Hypo managing Ahmetović, statedthat the LNG region who was guaranteeing Director Kulterer. Even when Kulterer terminal is not in the interest of left his position as director in 2007, its business. Croatian people, but rather serves he introduced Ježić as a key figure to foreign interests, including the US. Renamed by the Austrian public as the new Director of the Hypo group. Together with the representative “Katastrophenbank”, most of the “bad Ježić remained in that privileged of the County, Zlatko Komadina, loans” that generated its financial position until 2009. Between 2003 Ahmetović announced that they crash were targeted towards the and 2009, the Hypo Alpe Adria signed would challenge the LNG law in the Balkans. credits for him worth 63 million euro - Constitutional Court31. while 14 million euro were ultimately Robert Ježić was one of its main not repaid by Ježić35. Robert Ježić was debtors, and the Hypo Adria Bank was But the residents’ opposition never investigated for any criminal one of the key players in Robert Ježić’s didn’t scare away the investors. activity in Austria. In 2018 a private investor showed investments in Dioki d.d. and his other up with an offer to liquidate the businesses. An international chapter of the debts of Dioki, acquire the DINA The allegedly corrupt system of criminal case against Ivo Sanader is petrochemical plant, and take relationships between the bank and closely interlinked with the corrupt up and adapt the old project for the tycoon was rooted in Ježić’s close system around Hypo Alpe Adria an onshore plant in Omišalj. The relationship with Prime Minister and its investments in Croatia. On Luxemburg-based group Gasfin Sanader and his political party HDZ. October 22nd 2018, a court in Zagreb completed the acquisition in August It was the managing director of convicted the former Prime Minister 2018, purchasing the asset from the group Wolfgang Kulterer who to two and half years in prisonfor the Heta Asset - the “bad bank” owned supported the initial 20 million crime of “war profitering”. The first by the Republic of Austria that euro loan for Robert Ježić, which he instance conviction refers to events tried to recover the loss generated needed to purchase Dioki d.d. The that happened during the war in 32 by Hypo Alpe Adria – and paying deal included the payment of 1 million 1994-95, when he was employed by off all the creditors (including euro on the bank account of HDZ, the Croatian government to negotiate the Municipality of Omišalj and Sanader’s political party. Apparently, a loan with the bank for purchasing workers of DINA). The LNG law the request came from Sanader in several buildings in order to open new and the announced procedure person33. The German newspaper Die embassies abroad. According to the of expropriation of land in the Zeit published in 2011 documents court, he did not act in the interest of property of DINA were met with from the Croatian Intelligence Agency the State, but in the interest of the concern by the investor and by the about the corrupt deals involving Hypo Hypo group, facilitating its entry into residents, adding further complexity and Sanader, revealing that “a certain Croatia in exchange for a bribe paid to the relations behind the scenes. amount of money” for Ivo Sanader was in cash for the equivalent of 5% of 36 delivered on May 1, 2004. The money the loan’s value . was supposedly picked up by then Croatian Minister of Foreign Affairs miomir-zuzul-u-trstu-pokupio-proviziju-za- 31 https://dnevnik.hr/vijesti/hrvatska/ 34 Miomir Žužul in Trieste, Italy . sanadera-211881 zlatko-komadina-i-mirela-ahmetovic-projekt- plutajucega-lng-terminala-neodrziv-i-neza- 35 Akte Hypo Alpe Adria (2015), a jour- konit---543798.html 33 Akte Hypo Alpe Adria (2015), a jour- nalistic investigation by Renate Graber and Andread Schnauder. Linde Verlag. https:// 32 “ HETA ASSET RESOLUTION AG is a nalistic investigation by Renate Graber and www.lindeverlag.at/buch/akte-hypo-alpe- wind-down company owned by the Republic Andread Schnauder. Linde Verlag. https:// adria-6274 of Austria. Its statutory task is to dispose of www.lindeverlag.at/buch/akte-hypo-alpe- the non-performing portion of Hypo Alpe adria-6274 36 http://www.lavoce.hr/politica/2540-ivo- Adria, nationalised in 2009, as effectively as 34 https://www.24sata.hr/news/die-zeit- sanader-condannato-per-l-affare-hypo-bank possible whilst preserving value”. https:// www.heta-asset-resolution.com/en

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2. What the story of the Croatian energy sector tells about state capture and privatisation in Croatia

Under the monitoring Oil refinery in Sisak, Croatia /INA, photo @ Donatus, wikimedia, CC BY-SA 3.0 and guidance of the - were among the “companies of World Bank and the time maximise the benefits of private investors. The debt which strategic relevance” nationalised by International Monetary increased over the years was left in the Croatian government with the Fund (IMF), Croatia the public coffers. A questionable Law on Transformation of Socially Owned Enterprises (1991) just significantly reshaped its approach from the point of view of the public benefit: is it fair that after independence. INA was fully economy during the 90s. citizens have to bear the costs of nationalised in 1993. a privatisation process that is just Shortly after, when the adoption of The focus of international financial investor-oriented? Is it acceptable the Privatisation Law (1996) made it institutions was to make sure that that the process is mainly driven by clear that public ownership would the public wealth of Croatia was private interests to the point that it not last forever, INA and HEP were fully privatised - favouring the so- overtakes collective interests? put on the list of companies to be called transition to a market-based privatised37. The privatisation law economy – with little attention This chapter will delve into a for both companies was passed in to who would actually benefit from specific sector of the Croatian 2002, allowing the sale of the first such privatisation. In other words: economy – the energy sector – and 25% of public shares. would it help the transformation of analyse how such privatisation the country, away from the “crony process took place, and what lessons The Hungarian company MOL was capitalism” of the precedent era? can be learnt from it. the privileged buyer for the initial Would privatisation be accompanied 25% of INA. How and why MOL by increased public scrutiny and a A captured privatization of could conclude the purchase and more transparent and participatory secure dominant management rights decision-making process? the energy sector

Evidence showed that the The dismantling and privatisation 37 https://www.researchgate.net/profile/ Nevenka_Cuckovic/publication/259591655_ privatisation process was steered of INA – the national oil and gas Privatisation_of_the_Oil_and_Gas_Indus- by hidden interests of individuals company - happened through a long try_in_Croatia_and_SEE_Assessment_of_Im- and political parties that wanted and laborious process that lasted pacts/links/576280e708ae0c8c2553aa36/ Privatisation-of-the-Oil-and-Gas-Industry- to strengthen their power, get for over a decade. INA and HEP - in-Croatia-and-SEE-Assessment-of-Impacts. personal benefit and at the same the national electricity company pdf?origin=publication_detail

Looting 2.0: supporting state capture at the Krk gas terminal 9

is still being discussed in court. So MOL’s role in Krk LNG far, the Hungarian government denied any wrongdoing by the terminal publicly-controlled MOL. However, Croatia launched a commercial MOL also plays a significant role in arbitration against MOL in 201638. the Krk LNG story. First of all, INA The Croatian anti-corruption unit is the main client of Dioki d.d., so USKOK is still trying to prosecute INA’s last ten years of business were the CEO of MOL, Zsolt Hernádi, for undoubtedly affected by the legacy international corruption: Hernádi of Robert Ježić’s bankruptcy, as well is accused of bribing Sanader as the outstanding debts (also with Archaeological site near the Dioki industrial in late 2008 to secure dominant INA) and the liquidation of Dioki. site in Omisalj. Photo ©Re:Common management rights for MOL in INA39. Two requests for extradition Secondly, the business plan for the On this occasion, Peter Szijjarto were issued in 2013 and again in LNG plant in Krk involved Hungary stated to media that the Croatian July 2018 - after Sanader’s new trial as a major beneficiary from the very LNG terminal was an important opened and the European Court of beginning. opportunity for Hungary to diversify Justice in Luxembourg expressed its energy supply after 2020, when itself in favour of Hernádi’s Country Gas demand, its long-term gas supply contract extradition to Croatia40. bcm/year with Russia expires44. Primary markets In the meantime, the sale of the Croatia 2.7 In other words, MOL and Hungary majority of shares of INA was Hungary 9.5 would benefit more from the concluded. Today, the Hungarian regasification plant in Krk than Other potential markets company MOL is the majority Croatia itself, given that the latter is Austria 8.6 shareholder of INA, with 49,1%41 not foreseen as a final user – or only and since 2009 it took over the Czech Republic 8.2 marginally - of the imported gas. management of INA. Thanks to this Slovakia 4.7 move, facilitated by an allegedly Serbia 2.0 Moreover, MOL is a shareholder of corrupt deal, Hungary became the Slovenia 0.7 Plinacro, the company which is the fourth largest investor in Croatia, Bosnia & Herzegovina 0.2 co-ownerof LNG Hrvatska. Plinacro 42 according to the media . Still, this Total 36.7 and MOL are both part of the joint may not last long though, since venture to build the gas pipeline in January 2018 the Croatian Source: LNG terminal Krk presentation Open Zlobin-Bosiljevo-Sisak-Kozarac- government declared its intention to Season. LNG Hrvatska. https://www.lng.hr/ Slobodnica, which according to the buy MOL’s stake in INA43. upload_data/editor/files/LNG%20terminal%20 European Commission “represents Krk_presentation_Open%20Season.pdf the main evacuation route for the Krk LNG terminal to a number of The project was designed as countries in Central-Eastern and 38 https://www.tportal.hr/vijesti/clanak/ 45 vrdoljak-proziva-sanadera-i-mol-hrvatska-je- an export-oriented project South-Eastern Europe” . bila-isprovocirana-20160420 to contribute to the energy 39 https://www.reuters.com/article/us-croa- diversification in Central and The legacy of an allegedly corrupt tia-mol-hernadi-idUSKCN0S91O320151015 Eastern Europe, where Russia is deal is very much alive in the 40 https://bbj.hu/news/court-refuses-to- the main gas supplier. On various present decision-making process execute-european-arrest-warrant-for-mol- occasions Hungary declared its around the Krk LNG terminal. ceo_153953 interest in the purchase of gas from 41 https://www.ina.hr/investors-9847/own- the expected Krk facility. In early 44 http://www.balkaninsight.com/en/article/ ership-structure-9901/9901 October 2018, Hungary’s Foreign croatia-and-hungary-on-delivering-gas-from- 42 http://www.balkaninsight.com/en/article/ and Trade Minister, Peter Szijjarto, lng-terminals-10-03-2018 croatia-and-hungary-on-delivering-gas-from- met Tomislav Coric, Croatia’s 45 This project is maximum 50% funded lng-terminals-10-03-2018 Minister of Environment and through the EU. The total cost is € 4.5 43 https://vlada.gov.hr/news/pm-says-lng- million. The cross-border costs allocation terminal-would-enhance-croatia-s-role-in- Energy, in Budapest to discuss joint (CBCA) has been decided with a deal signed eu-energy-strategy/23273 energy projects and gas supplies. by Hungary and Croatia (10 April 2017)

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Through its publicly-controlled company MOL, Hungary is exerting a huge influence on strategic energy Croatia’s total bank assets became decisions in Croatia today, together A corrupt part of foreign banks’ equity with businessmen and political portfolios, mostly in Italy and leaders who allegedly belong to the privatisation Austria50. same political structure that was in power a decade ago. process Still in 2010 the portfolio of the Croatian Privatisation Fund However, the unexpected outcome included shares and stakes in a of the second round of the Open The Croatian total of 1,112 companies. The total Season Procedure for contracting equity base of these companies the terminal’s regasification Privatisation Fund/ was HRK 177.6 billion, while the capacity tells a different story: Hrvatski fond za equity of the State’s portfolio MOL hasn’t tabled the expected privatizaciju was the amounted to HRK 21.8 billion51. expression of interest in the The privatisation process purchase of gas from LNG Hrvatska. institution in charge of turned into a huge selling off of An outcome that is putting the ensuring that the sale of productive and financial assets of economic viability of the project at public assets would be the country, with foreign capital stake. In order to make the project entering Croatia and shaping economically viable, there needed conducted transparently the so-called transition to the to be an expression of interest for at and according to the law. capitalist economy. least 1,5 billion cubic metres of gas per year46. Sanader’s verdict in late October But in early 2000s, the 2018, which is the first conviction management of the Fund was for “war profiteering” in the tainted with alleged corruption47. history of the country, gives a This was a signal that the so called sense of the looting that took “crony capitalism” – that anyone place in those years, with a would recognise as “typical” of handful of individuals taking the Tuđman regime48 and that personal advantage of the entire resulted in the frequent selling national economy. off of assets to associates of the President49 - may have actually outlast his death in 1999.

Linking back to the story of Hypo Bank, it should be noted that in the late 1990s the privatisation of banks in Croatia began, with banks being sold to the leading banks in Central and Eastern Europe. As a result, 90% of

47 https://www.find-croatia.com/senior- officials-of-croatian-privatisation-fund- 50 https://www.hnb.hr/ arrested-on-corruption-charges/ documents/20182/121519/e-analiza- 48 Franjo Tudjman was the first President inozemne-zaduzenosti-rh.pdf/4ddf54e1- of Croatia and served as president from 70a0-46b8-9f9c-642c739127f0 1990 until his death in 1999 51 ftp://ftp.repec.org/opt/ReDIF/RePEc/ 46 http://www.novilist.hr/Vijesti/Gosp- 49 https://www.ucis.pitt.edu/nceeer/2003- osi/journl/PDF/InterdisciplinaryManage- odarstvo/FIJASKO-LNG-a-Za-zakup-miz- 817-01f-Ballinger.pdf mentResearchVI/IMR6a44.pdf ernih-kolicina-plina-javili-se-samo-HEP-i- Ina?meta_refresh=true

Looting 2.0: supporting state capture at the Krk gas terminal 11

3. The two LNG projects: who is who? And why would the European Union grant its support?

“Golar Frost,” Photo ©Lens Envy. Flickr, CC BY-NC-ND 2.0

According to the different versions of the project to the European Commission included the European Commission, with an FSRU project that would be the Croatian government, changes in the offshore and onshore “phase one” of a larger LNG project the proposal for a “two- facilities between 2013 and 2018. onshore, on the Dioki industrial site. phase” project is an For instance, the plan presented to The “good news” of a foreign answer to the difficulties investors by ex- Managing director investor being interested in the to find investors for the of LNG Hrvatska, Goran Frančić, onshore project that finally arrived onshore project over the a few years ago only mentions in 2018 suddenly looked more like the offshore plant53. However the a problem than a solution to the last years. In 2016, the description of the project presented Croatian government. current formula gained to the European Commission - that The approval of the LNG law in traction in Zagreb and was included in the first list of summer 2018 de facto confirmed “Projects of Common Interest” in it: the expropriation of the land of was officially presented. 2013 - and the following version the Dioki property may apparently included in the EU Ten Year include not only the cadastral In the meantime, a foreign investor Network Development Plan in 2015 parcels needed for the construction (Gasfin) showed up to acquire the indicate that the plan was to build of the pipes connecting to the debts of Dioki, pay off the creditors, offshore facilities. facilities, but a much larger area. relaunch the petrochemical In parallel, the onshore LNG project production and invest in the – authorised, but yet to be built - According to the Croatian magazine construction of an onshore LNG remained part of the Dioki assets Nacional54, since the change of plans plant. that Heta Asset was trying to sell to in 2016 by the government of ex- recover the massive loss generated Prime Minister Tihomir Orešković, In 2010, after Sanader’s arrest, the by Hypo Alpe Adria. appetites for large amounts of Croatian government set up an ad gas declined in Zagreb, and the 52 hoc company, LNG Hrvatska , that Uncertainty lasted until 2017, when government pushed for a cheaper would take care of the construction the Croatian government became project of a floating terminal that of the LNG project. The company more outspoken about its plans. could be built faster. and its shareholders presented The proposal that was accepted by

52 https://www.lng.hr/en/about-us ; http:// 53 https://lng.hr/upload_data/editor/files/ 54 http://www.presscut.hr/Web%20Shar- www.energetika-net.com/vijesti/plin/osno- LNG%20terminal%20Krk_presentation_ ing%20ZON/10-2018/23-10-2018/Nacional/ vana-lng-hrvatska-8559 Open%20Season.pdf Presscut_18273233.pdf

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company MOL and received EU funds. “The pipeline represents the main evacuation route for the regasified LNG to a number of countries in central-eastern and south-eastern Europe”, as stated by the EU Connecting Europe Facility programme which financed the project. A deal was signed by Hungary and Croatia on April 10th 2017 in relation to the allocation of costs for the project. Clearly, the gas transport infrastructure supported by Plinacro totally relies on the construction of the Krk LNG terminal for the supply of gas. Who is Gasfin?

Kontra LNG action in Zagreb in March 2018. Photo© Kontra LNG Gasfin Sa is an energy company part of the Gasfin Group registered in At that point, the land on the transportation company Plinacro Luxembourg. The head of Gasfin Dioki property became completely Do.o55 with 50% of shares and the Sa is Davor Grgevic, also chariman redundant for the project: only a electricity company HEP56 with of the Eastwell Group, a holding small piece of land was needed, for 3,56%. Since 2018 the company company that provides investment the necessary ancillary facilities has a new CEO: Barbara Dorić. capital and new technologies to of the offshore FSRU and a gas Dorić is the former director of the businesses in Former Soviet Union pipeline to transport gas to the Croatian Hydrocarbon agency. In countries (CIS) and Central Asia. junction with the international that capacity she was among the Gasfin is pushing to build an interconnector heading to Hungary. key experts writing the LNG law onshore LNG project smaller than But Nacional highlights that the approved in 2018 to fast track the the one originally planned by the adoption of the LNG Law de facto construction of the LNG project in Croatian government. allows LNG Croatia to request Krk. More than one voice claimed land for the construction of the that there is a clear conflict of The managing director and main first and second phase of the interest between her current shareholder of Gasfin group is the project. Apparently, the company position and the role she played Slovenian businessman and wine has taken steps to proceed with previously to move the project producer Vladimir Puklavec. the expropriation, a move that forward. Puklavec became an important generated tensions with Gasfin businessman trough TGE Gas Sa, the foreign investor that just Plinacro is involved in building the Engeneering, a company based acquired Dioki (see box: Who is Croatian pipeline Zlobin-Bosiljevo- in Germany that is currently Gasfin). Sisak-Kozarac-Slobodnica. This part of Gasfin Group. Already pipeline will connect to another in 2009, Puklavec tried to invest Who are the shareholders of existing pipeline bringing gas through TGE in building an LNG to Hungary57. The project is a terminal in Koper (Slovenia), but LNG Hrvatska/ LNG Croatia? joint venture with the Hungarian the project failed to be approved by the Slovenian government58. LNG Hrvatska/ LNG Croatia is a In 2017, the terminal in Koper publicly owned company, controlled 55 http://www.plinacro.hr/ was considered again as a possible by the government of Croatia. 56 https://www.hep.hr/en Its main shareholders are the energy 57 The Slobodnica Donnji Miholjac Dravaz- 58 http://ricerca.gelocal.it/ilpiccolo/archivio/ erdahely Varosfold pipeline ilpiccolo/2009/05/29/NZ_06_APRE.html

Looting 2.0: supporting state capture at the Krk gas terminal 13

investment, but the competitor in The demand articulated by Šefčovič Krk already got financing through to the country is to produce Maroš Šefčovič (TTE). Energy Ministers press conference. Photo: Arno Mikkor (EU2017EE). the Connecting European Facility renewable energy for export, Flickr (CC BY 2.0) and was selected as an EU Project of including specific private users as Common Interest59. far as Ukraine, and to host a gas regasification unit - again for selling When Gasfin managed to acquire the fossil fuel in the European gas Dioki, paying off all the debts left market61. by Ježić, the LNG law was approved Šefčovič was pleased to acknowledge allowing LNG Croatia to start the that Croatia had undertaken the expropriation of its property. required steps, and was on the right Vice-President Šefčovič path to respond to the Energy Gasfin Development SA, another Union’s needs. But is this the only said: company part of the Gasfin group, is possible vision of Croatia’s role in “I am pleased to see that Croatia involved in Ghana in a consortium the EU? One could wonder whether is already achieving its 2020 with the Russian gas giant the EU should rather meet the targets for renewable energy and Gazprom. Voices around Puklavec actual needs of ordinary people in the reduction of greenhouse gas and Gasfin report that they are Croatia, whose interests the EU emissions, thanks not least to representing Russian interests. should be serving instead. Is hosting its strong hydropower sector. I However, the Luxembourg registry export-oriented mega projects and encourage it to further develop its does not allow to see who the bearing the costs and impacts in renewables industry, and also to beneficial owners of the group are. terms of land use and environmental make additional efforts to meet its The Eastwell Group, controlled by degradation locally, as well as shady energy efficiency target. The EU’s Grgevic, was involved in an allegedly decision-making processes actually new Smart Finance for Smart corrupt case with some companies the “terrific” role that Croatia wants Buildings initiative, announced owned by Uzbekistan’s president to play? as part of the ‘Clean Energy for Karimov (see OCCRP investigation All Europeans’ package, will be “Corruptistan”60). So far, quite a few contradictions able to help finance the energy have emerged in the Croatian energy efficient renovation of buildings in choices. As pointed out by the Croatia. The EU is also financing “At the gate of the Energy environmental group Zelena akcija, the construction of a liquefied not decommissioning coal power natural gas terminal at Krk. This Union” plants like Plomin 162 - considered will help to diversify sources of “strategic” for internal consumption energy supply in Croatia and the In January 2018, the EU - is in sharp contradiction with its wider region and make its energy Commissioner Maroš Šefčovič efforts to match the EU renewable markets more competitive. Croatia’s story is a testimony to the Energy visited Zagreb to attend a energy targets. But at the same Union’s impact on the ground. It conference on the new Croatian time, the current energy path has already fulfilled its 2020 targets energy strategy. In his speech, he promoted by the EU for the country, for CO2 emissions, renewables explained several aspects of the including environmentally-harming and energy efficiency, although hydropower plants and climate- Energy Union, and what specific the latter’s potential should be wrecking regasification and deposit role Croatia could play in this tapped further. Moreover, Croatia’s framework. A speech that was all projects like the one planned on the energy security is being gradually about “what the EU expects from island of Krk, is just as questionable. strengthened, in particular thanks Croatia”. In a sentence, a service role. to the regional cooperation under CESEC as well as a prospective Krk LNG terminal.”63 61 https://ec.europa.eu/commission/com- 59 https://www.total-croatia-news.com/ missioners/2014-2019/sefcovic/announce- business/20319-slovenia-planning-rival-lng- ments/speech-conference-new-croatian- 63 https://ec.europa.eu/info/news/focus- terminal energy-strategy-zagreb_en croatia-energy-union-tour-2018-jan-26_ 60 https://www.occrp.org/en/corruptistan/ 62 http://zelena-akcija.hr/en/programmes/ en uzbekistan/gulnarakarimova/presidents- energy_and_climate_change/hep_must_shut_ daughter-controlled-telecom-industry down_plomin_1_and_focus_on_renewables

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Debunking climate and energy myths around the Krk LNG terminal

On 12 December 2018, Friends of the Earth Europe and Zelena akcija/Friends of the Earth Croatia released a publication64 deconstructing the Krk LNG terminal. The report’s conclusions are the following:

1. A new LNG terminal is at odds with the Paris Agreement and the newest IPCC scientific report

2. Gas is a carbon intensive fossil fuel that does not deserve its climate-friendly reputation, nor its transition fuel designation

3. Gas infrastructure, such as the Krk LNG terminal, creates significant environmental and health impacts in and outside Europe, and does not merit its clean and safe reputation

4. Taking into account existing gas infrastructure, and projects currently under construction in the region, Croatia and its 6. The Krk LNG terminal is an unnecessary but neighboring countries are already energy expensive project, with questionable market secure, and sufficiently resilient. This means demand, and so it will largely be paid for with the Krk LNG terminal is unnecessary, and taxpayers’ or consumers money doubly so given the planned decline of gas demand all over Europe in the coming decades 7. The Krk LNG terminal is being pushed forward against the interests of the local population 5. Building new gas infrastructure to counter and consumers, with little transparency or Russian gas dominance is not just the consideration given to public opinion wrong strategy, it is a failed one: many existing infrastructure are largely underused and several new projects under construction will in fact bring even more Russian gas to Europe

64 http://www.foeeurope.org/sites/default/files/extrac- tive_industries/2018/pipedream-debunking-myths-croatias- krk-gas-terminal.pdf

Looting 2.0: supporting state capture at the Krk gas terminal 15

and financial ones, securing them There are other questions that we Concluding through interlinked contracts and tried to address to support a broader commitments to the point that understanding of this project. For even European institutions are instance, what is the political and remarks - embedded, through financial and economic context in which this political support, in a structure project sits? What are the related Understanding of interests that ends up being economic and financial interests? systemic. What is the role that international State Capture financial institutions – and the In this context, first the World European Union - are playing today, Bank and the IMF, and then the by using once again the leverage of There are cases where European Union, have pushed public debt? And who is eventually it is hard to see where severe restructuring programmes benefiting from such mechanism? the personal interests of in Croatia. None of them may have realised who really benefitted Croatia could go 100% renewable, the so-called “politically from the subsequent privatisation but with a decentralised model, exposed persons” begin processes. None of the international community-owned and oriented to serve the internal needs first, and and where they end. institutions were interested in questioning if the democratic space not driven primarily by export goals. for engagement in the economic and But in order for this to happen, This is the case for post-independent political life of the country would Croatian people and communities Croatia, and the financial and benefit from the restructuring should have the democratic space energy deals that we explored in this programmes or rather shrink as a to discuss their energy model briefing. consequence. Oddly enough, the first, instead of being forced into so-called transition to Western decisions based on private interests, While trying to analyse the multi- “democracy” turned out to be also a seeing they will have to bear the layered implications of the Krk LNG space for regeneration of the same, economic, environmental and project, we could see the complexity old relations of power. climate costs for decades to come. of state capture unfolding before The European Commission has a our eyes. The legacy of the turbulent The questions around the Krk clear responsibility in pushing its 1990s means that hundreds of regasification plant and whether agenda forward, without pursuing politically exposed persons part it is needed or not for Croatia are an adequate due diligence on the of the bureaucratic structure legitimate. It’s worth understanding Krk LNG terminal that would have of former Yugoslavia started to whether the project is strategic or revealed the critical aspects of the reposition themselves in the new not for the energy security of the project. Understanding the private state structure or supported new country and the EU. The story of interests and offshore companies private entrepreneurs that could the Krk LNG terminal, including involved, as well as the failed history benefit from the sale of publicly the interlinkages with one of the of the project, should have been part controlled companies, including largest corruption scandal after of such due diligence. strategic sectors such as energy. It independence, tells us that a capture is not surprising that this legacy of of the state structure allowed the The EUR 107 million given by the corrupt relationships still influences same, old private interest to drive EC to the Croatian government to the decision making in the country the decision making processes in carry studies and construct the Krk today. strategic sectors, such as energy, LNG plant, along with additional excluding the majority from the EUR 2,2 million to run studies for We could understand how rotten political and economic life of the the Zlobin-Bosiljevo-Sisak-Kozarac- relationships between finance country. Ten years later, the risk Slobodnica pipeline, have now put and politically exposed persons is that the Croatian people will be the institution in a position to push had provided protection for the left – again - with the bill to pay for for the completion of both projects, looting of a country. And how a mega infrastructure that may turn as a matter of credibility for how EU the same structure could serve out useless and even corruptive at “projects of common interest” are multiple interests, from personal the end. scrutinised and selected. to externally-driven economic

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If any serious scrutiny and due diligence had taken place in the About us Credits European Commission, then the EC would have kept both grants on hold, avoiding the risk to invest Re:Common Written By EC money in projects potentially Re: Common is an independent and Re:Common harmful to the environment, not-for-profit “association of social economically unviable and rooted in promotion” under the Italian law Graphic Design allegedly corrupt deals. that conducts investigations and Carlo Dojmi di Delupis promotes campaigns against the dodgy economy and the devastation Produced by of the territories in the North and Re:Common in the South of the World caused by c/o Binariouno coworking the indiscriminate exploitation of via di Porta San Lorenzo 5 natural resources and major public 00185 – Roma, Italia and private infrastructure projects. https://www.recommon.org/

Counter Balance – Challenging public investment banks Supported by a grant from is a European coalition of Open Society Foundations development and environmental non-governmental organisations The content of this publication is (NGOs) with extensive experience the sole responsibility of working on development finance Re:Common and can under no and the international financial circumstances be regarded as institutions (IFIs) as well as reflecting the position of the Open campaigning to prevent negative Society Foundations. impacts resulting from major infrastructure projects. http://www.counter-balance.org/

Zelena akcija (ZA)/Friends of the Earth Croatia Zelena akcija (ZA)/Friends of the Earth Croatia is a non- governmental, non-profit, non- partisan and voluntary association of citizens for environmental protection. It was founded in 1990 and is based in Zagreb. https://zelena-akcija.hr/hr

Friends of the Earth Europe Friends of the Earth Europe is the largest grassroots environmental network in Europe, uniting more than 30 national organisations with thousands of local groups. It is the European arm of Friends of the Earth International. http://www.foeeurope.org/

Looting 2.0: supporting state capture at the Krk gas terminal