Doing Business Amid Ukraines Chaos


Editors Note: Staff writer Boris Kamchev visited Ukrainian grease maker Agrinol in late February and filed this report.

If there is a quintessence of bad roads, it would be Ukraines infrastructure. My host Dmitry Koverniy was unrelenting in his explanation of how the state system works and why it fails to function properly. Better revolution than corruption. Revolution is an expensive thing but [Ukraines] corruption is even more expensive, Koverniy, who is the head Agrinols import department, told me while maneuvering his car around the cratered roads. And while the world around us was collapsing, he tried hard to show me how his company succeeded in fighting corruption, unlawful police raids and a bad economy to become the countrys biggest grease producer.

At the company level, Agrinols mantra is what the Ukrainian economy should be at the macro level – keep working hard. Whether in Donetsk, Lviv, Kiev or Simferopol, Ukrainians should mirror the companys enthusiastic workers who all care about Agrinols health.

However, the reality is quite different. While local and central politicians squabble, ethnic tensions grow and the country slides into chaos, Agrinol has managed to hold its ground and maintain growth during the past few years to become one of the largest grease producers in Eastern Europe.

Dealing with Corruption

In Ukraine, the rule of law is weak, and institutional corruption is endemic. The eastern part of the country is dominated by Russian interests and is a heavily industrialized region. The main ports, refineries, machine building and metallurgical companies there were developed in the 1950s and 1960s. And the port city of Berdyansk on the Azov Sea became the main location for lubricant production.

The high administrative tower and sprawling buildings of Azmol, once known as the biggest grease plant in the Soviet Union, is across the street from Agrinols offices. We cannot go there now because the area is closed to visitors, Koverniy said. In a local business spat over who should control the state-owned Azmol, mafia-like management and shady political officials looted the companys coffers and left it to the banks and investors who proceeded to bankrupt it in December 2013.

Long before the bankruptcy, Agrinol effectively took over where Azmol left off. Our company roots are deeply intertwined with Azmols, and during the desperate 1990s, we were the companys main trading partner, Koverniy said. He recalled the barter economy that arose during the chaotic decade of the collapsing Soviet empire, when his company exchanged greases and lubricants for raw materials to cover its debts to Azmol and other partners.

The early 2000s were years of consolidation when many Azmol technical personnel left the company to join the stable and independent Agrinol. We were growing and developing, and they saw a chance to realize their business ideals and dreams, Koverniy noted.

The company was restructured into a holding company in 2000 and today resembles a cooperative. It controls a group of companies operating in real estate, tourism, media, agricultural machines and construction materials, as well as transportation and storage. It even runs its own kindergarten, a yacht wharf, beach hotel and cottages. All these sectors employ about 3,500 people.

The holding company does not have an official president. Rather, it is headed by a board of directors who answer to Alexandar Ponomarev, Berdyansks representative to Rada, the state parliament.

Ukraines Lube Market

In 2013, the Ukrainian lubricants market amounted to 350,000 tons, according to Fuchs Petrolub, a German lubricant maker. The largest portion of this demand, about 150,000 to 200,000 tons, is covered by imports, according to Agrinol. Fuchs found that Ukraine is the seventh largest lubricants market in Europe, accounting for 5 percent of the continents total lubricants demand in 2013.

Agrinols main line of business is the production of industrial greases and the manufacture of metal drums and barrels. Sprawling across two main halls, the 6,000 square meter lubricant production plant has the capacity to produce 30,000 tons of grease annually; 50,000 t/y of hydraulic oils, motor oils, transmission fluids and turbine oils; and 6,000 t/y of coolants.

The plant features a lab where the products are checked for compliance with the Gost standard. Last year, the companys total output reached 65,000 tons, of which 10,000 tons were exported to about 20 countries.

Industrial grease makes up the core of our business, said Maxim Tokin, the companys head of marketing. Agrinols main customers are large metallurgical complexes in Russia and Ukraine such as Evraz, Severstal, NLMK, as well as ArcelorMital and Metinvest. Also, we are a large grease supplier to the Ukrainian railways; the railways of several CIS countries; the energy division of System Capital Management, the biggest business group in the country; the defense ministry; and the countrys state nature reserves, he said. The company also toll blends for several lubricant companies in Ukraine, Poland and other countries.

Agrinol also supplies a line of motor oils, automotive greases and coolants to the Russian automotive giant AvtoVaz and to AvtoZaz, a car assembly plant in Zaporozhye, Ukraine. We look forward to expanding our reach in neighboring markets. So far, we export to many former Soviet republics such as Kazakhstan, Uzbekistan, Azerbaijan and Moldova, Tokin said.

The company has obtained approvals for its finished products from all producers and OEMs noted above. Also, it is a member of the European Lubricating Grease Institute and the NLGI International and has registered some of its products under the REACH chemicals regulation.

Agrinols main base oil supplies come from Russia, Azerbaijan and Uzbekistan. It also diversifies its supply from such oil majors as Chevron or Nynas. We have made fair and direct supply deals with many Russian base oil producers such as Lukoil, Rosneft or [Belarus] Naftan. However, such is not the case with Bashneft, which decided to close direct supply to Ukrainian producers. Instead, they use a trader here who increased the price of its base oil products, Koverniy said.

Expanding in Packaging

Another of Agrinols key ventures is the expansion of its packaging production. The company recently bought a sprawling plant formerly owned by Berdyanskie Zhatki, a reaping machine company. Agrinols strategic goal is to establish efficient plastic canister production along with its existing metal packaging manufacturing, according to Nikolay Rudnickiy, head of the Berdyanskie Zhatki facility.

The plant currently produces 20-, 50- and 60-liter metal buckets and 216-liter metal barrels. At the moment, we hold 85 percent of the countrys market for 216-liter metal barrels, and this year we plan to capture at least 60 percent of the market for 20-, 50- and 60-liter buckets, Rudnickiy said. He added one of its customers is Evva Oil, an Austrian grease manufacturer that supplies the European defense industry. Other metal packaging export destinations are Bulgaria, the Baltic countries, Russia and a few CIS countries.

Installation of 1- to 4-liter plastic canister production is underway. We are planning to build packaging distribution centers and storage in Bulgaria and in the Baltic countries, he said.

Uncertain Future

Looming war with Russia and the escalation of ethnic clashes between the western and eastern part of the country caused a steep devaluation in the local currency and economic slowdown. For Agrinol, these are the biggest challenges. We survived one revolution [the Orange Revolution in 2004], but it is uncertain how the latest turmoil in Kiev will end up, Tokin said.

The company found itself hard-pressed to deal with the countrys pervasive corruption and biased judicial system that became a hallmark of the government of now ousted President Victor Yanukovich. A few years ago, a police raid sent by tax authorities attempted to take over Agrinol. Masked and armed men shot and wounded the workers who gathered at the main gate to defend the company from seizure.

Now, everybody hopes for the best. We are fed up with revolutions and upheavals. The only thing we want is peace and prosperity for our company and our families, Koverniy said. However, there were no signs of peace coming any time soon.

During my visit, animosity and ethnic distrust spread in the Crimean peninsula, a few hundred miles south of Berdyansk. At the time of this writing, the country was on the brink of war with Russia, and Agrinol feared it would lose its principal export destination and base oil supplier, which would prove disastrous.

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