There appeared to be some hope for TogliattiAzot (ToAz), which is currently engaged in numerous legal proceedings. The Supreme Arbitration Court has responded to an appeal lodged by ToAz against the decision of the Samara Region Arbitration Court that had ruled that the exchange of the 51% Transammiak shares for 6.1% of TogliattiAzot shares had been invalid. This event has been followed by the Togliatti District Court decision, in which the criminal proceeding against Vladimir Makhlai, the TogliattiAzot Chairman was quashed.

ToAz, the largest world producer of ammonia, has been operating under the weight of endless trials for more than two years. For example, this year the head of the leading Samara Region Company has been indicted for tax evasion for the year 2005. The case was investigated by the Togliatti Department of Internal Affairs, which had been alleging that the tax evasion came to the amount of 346 million rubles – such a figure was defined in the formal note made by the Samara Region Department of Federal Tax Authority. Earlier the Investigating Committee of the Russian Federation Ministry of Internal Affairs instigated criminal proceedings against Vladimir Makhlai and Alexander Makarov, ToAz CEO, for tax evasion offences in the period from 2002 to 2004. The claimed that the tax amounted to 280 million rubles.

The Expert Examination Has Been Spun Out of Thin Air

The tax authorities have investigated ToAz many times within the last several years. In 2006 the tax authorities had carried out 4 on site checks(three of them were conducted simultaneously) and 118 separate examinations of tax documents and records of ToAz. The investigations led to further tax claims against the managers of ToAz’s for tax evasion conducted in 2003 and 2004. The tax authorities counted an additional 883000 rubles and 13 million rubles of the so-called “saved” taxes respectively. These events were carried over onto August 2007, in which the Samara Region Department of Federal Tax Authority focused their resources on ToAz once again and claimed an additional 2.6 billion rubles, which they claimed had been due from the year 2004.

Although the Samara Region Department of Federal Tax Authorityhad not disclosed their methods for calculating the tax figures used as a basis for claims against ToAz’s management, these results were passed to the Ministry of Internal Affairs and afterwards transferred to the Togliatti Department of Internal Affairs. A local investigator failed to find any elements of an offence in the case of tax evasion for the year 2005; as a consequence he terminated a formal criminal investigation just before the hearing. On hearing ToAz’s appeal , the Avtozavodsky District Court of Togliatti, confirmed a lack of elements of an offence in the actions of ToAz’s management.

The absence of grounds did not dispel other allegations from surfacing against ToAz’s management during the legal proceedings. For example, the company was indicted for facilitating the sale of export produce through a western company at 20% below market prices. ToAz was also accused of the sale of its products in the London Stock Exchange. Even though it is a well-known fact that ammonia is not traded there at all. A ToAz representatives stated that given the present circumstances ToAz would be unable to operate tax or business efficiency.

Ammonia production is aimed at the export sector so the existence of a strategic western partner would enhance profitability. By making such a sweeping comparative analysis of prices, fiscal auditors were guided by the wrong indicators and they did not take into consideration such important factors such as storage and transportation of liquid ammonia nor equipment repair and other capital investments, which are not financed through profits.

Omnipresent raiders

ToAz’s representatives are convinced that the fiscal authorities’ interest in the company is closely connected to the new attack of raiders who have at their disposal “practically all conventional raiderresources such as the initiation of criminal suits, endless litigation and suspect court rulings in addition to , supplementary allegations made by numerous supervisory organisations”. ToAz’s lawyer claimed that “In each occasion the fiscal authorities determine variable amounts; the only fixed factor is the market price, which was taken as a basis of their calculations. Nonetheless they have determined this market price themselves without an industry experts input , in other words, they have simply spun the market price out of thin air”.

The Togliatti District Court decision, which found no elements of an offence in Vladimir Makhlai’s actions, has been called as a “long-awaited victory” and “triumph of justice” at TogliattiAzot. ToAz’s attorneys expect that the judges will also free ToAz’s senior managers from all previous charges of tax evasion and they harbour the hope that a criminal prosecution of TogliattiAzot managers will be dismissed in the near future. According to ToAz’s attorneys, the Investigating Committee’s officers have not conducted an investigation into the alleged tax violations for the years 2002 to2004, nonetheless ToAz’s defence counsel have prepared and submitted all necessary documents as confirmation of the innocence of Makhlai and Makarov to the court.

The Supreme Arbitration Court of the Russian Federation recently ruled in favour of ToAz. This came after a number of refusals to admit complaints regarding illegality of the privatisation of 51% of OAO Transammiak shares (this company controls Togliatti-Odessa ammonia pipeline), ToAz’s defense had to file an appeal to the Supreme Arbitration Court. The attorneys made one final attempt to contest the Samara Region Arbitration Court decision, which had declared the exchange of 51% Transammiak shares to 6.1% of TogliattiAzot shares void. The Samara Region Arbitration Court ordered the return of the Transammiak control stock to the government and at the same time ToAz was permitted to receive only the nominal value of its shares. According to the defence attorneys, such exchange cannot be considered as the equal one.

Sustainable positions

The Supreme Arbitration Court of the Russian Federation has agreed with the defendants arguments and passed the case for review in the Appellate Arbitration Court. This decision was appreciated by ToAz as one more small victory in the fight against raiders. In spite of the fact that the raiders’ attacks are still in progress and ToAz’s attorneys have acknowledged that legal proceedings will persist in the near future. Nonetheless, ToAz has projected strong production and financial results. In 2006 ToAz’s output of ammonia grew by more than 10% up to 2 635 000 tons in comparison with 2005. The output of methanol was increased by 6% up to 407 000 tons, the production capacity of carbamide-formaldehyde concentrate (CFC) increased by nearly 20% up to 36 700 tons per year. Vladimir Makhlai’s business reputation (he is one of the most famous and successful businessmen in Russia) confirms the fact that the legal suits against ToAz are falling to pieces like a pack of cards. Makhlai has not been struck off by the serious image blow, which was struck while his company was proving its innocence. Moreover, ToAz’s successful production results have been enhanced by Vladimir Makhlai’s personal achievements. In September of 2007 he was recognised as one of the best Russian managers and took his place among the top three leaders of 1000 Best Russian Professional Managers Rating of the Russian Association of Managers.

TOAZ Profile

TOGLIATTIAZOT is supplying approximately 12% of the world ammonia market. In 2006, ToAz’s output of ammonia grew by more than 10% up to 2635000 tons in comparison to 2005. The output of methanol was increased by 6% up to 407000 tons, the production capacity of carbamide-formaldehyde concentrate (CFC) increased by nearly 20% up to 36700 tons per year.

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