Central Europe Review: politics, society and culture in Central and Eastern Europe
Vol 2, No 1
10 January 2000

C O R R U P T I O N:
Stealing the Eastern Slovak Steelworks

Michael J Kopanic Jr

During the decade of the 1990s, no one in independent Slovakia grew wealthy as quickly as Alexander Rezeš. Purchasing a controlling share of the Eastern Slovak Ironworks Holding Company (VSŽ - Východné slovenské železiarne) at bargain prices, he soon became one of the richest men in post-Communist Slovakia. Protected by his friends in former Prime Minister Vladimír Mečiar's government and bankrolled by financial concerns closely tied to the state, in a very short time Rezeš built a personal fortune unmatched in Slovak history. His case is a prime example of the kind of brazen corruption which has occurred in the post-Communist transition.

Interest in this topic first arose when I was traveling across Slovakia as a tour-group leader during August 1998. Our native Slovak tour leader and the bus driver both expressed a cynicism about politics and the "new order" that was emerging since the fall of Communism. Instead of equal opportunity for all, they said, a small group of influential people was milking Slovakia and its people for all they wrench out of country. The new found fortunes of Rezeš were offered as a prime example of how those with political muscle and connections could openly flaunt the ideals which the democratic revolution of 1989 had sought to realize. Such examples had led to a certain skepticism about democracy itself. After citing a long list of newfound hardships – including the rising prices of necessities and skyrocketing unemployment - one man commented, "To je vaša demokracia!" (This is your democracy!).

Political power had degenerated into a game of "get rich quick" for the chosen few, that is, those who cuddled close to the regime in exchange for favors which redistributed the wealth of the country into their own pockets. This was the perception. Since Vladimir Mečiar's government was believed to be aiding and abetting such legal parasites, the September 1998 elections "threw the bums out," and a new government under Mikuláš Dzurinda and his coalition has set out to right the wrongs of the past. So far, it has had limited success and has found that some of its own members are subject to the same shady behind-the-scenes deal-making and favoritism of relatives and friends which they had accused Mečiar's merry men of committing when they held the reins of power. A skepticism about politicians in general remains widespread among much of the population.

Fairy tale of prosperity

But let us now turn to the origins and causes of the situation which allowed people such as Rezeš to accumulate a fortune at such a rapid rate that we might compare him to the robber barons of late nineteenth-century America. Confronted with a newfound situation and inadequate laws to deal with the rapid industrialization of America, a few powerful individuals - such as Rockefeller, Carnegie, and Morgan - came to dominate the business of a growing country. Only the powerful influence of the Progressive movement and reform politics enabled the country to arrest the monopolistic practices of corporate America. One might surmise that a similar reform movement with grassroots support must take place in Slovakia. Prime Minister Dzurinda would like people to see him as the man leading the charge to clean up corruption.

It is easy to see why Rezeš became so rich. He acquired a controlling share of VSŽ at a fraction of its real worth. VSŽ became an economic powerhouse which vaulted to the top of profitable Slovak companies. In 1997, VSŽ recorded a profit of Sk (Slovenské koruny or Slovak crowns) 600 million, which at the time was worth about USD 20 million. As the largest company in Slovakia, VSŽ alone accounted for as much as 8% of the gross national product (GNP) of all of Slovakia. It was the 14th largest Central European company, the second largest employer and the biggest Slovak exporter (14%). According to one source, at one point it produced as much as 16% of Slovakia's industrial production and 26% of its total exports (Roman Frydman et al, Capitalism with a Comrade's Face: Studies in the Postcommunist Transition, Budapest: Central European University Press, 1998, p 60).

During its halcyon days when it appeared to be a paragon of profitability, many praised it as a prime example of the wonders of Mečiar's brand of privatization and capitalist enterprise. Little did everyone know that the steel behemoth rested on a shaky foundation of questionable loans and shady deals. As an article in The Economist pointed out: "Slovakia has not had much to boast of in recent years, but it may have produced the biggest corporate default in Central Europe since the collapse of Communism" (2 January 1999).

The fairy tale of prosperity began to unravel with the onset of the world economic slowdown in 1998. As world commodity prices for steel fell, the company found it ever harder to service its huge debt. The troubles first reached the public eye when it defaulted on its loan payments. It was revealed that on 9 November 1998, VSŽ could not repay a USD 35 million syndicated loan from the American investment banking firm Merrill Lynch.

Slovak newspaper and magazines revealed how Rezeš had squandered the resources of the company, venturing into businesses that had nothing to do with the steel industry. The most outlandish was his purchase of a Prague soccer team. Rezeš also used the company to grant generous favors to relatives and friends, including the political treasure chest of Mečiar's Movement for a Democratic Slovakia (HZDS). He also purchased an expensive villa on the Mediterranean and made frequent trips around the world in his own personal jet.

Since the default became public, VSŽ has struggled to pay off its debts and divest itself of unrelated businesses. It plans to return to profitability with more responsible management. The new Slovak government under Prime Minister Dzurinda has taken control of a sizeable portion of the company's assets through its ownership of Slovak state banks - to which VSŽ was indebted. Rezeš himself is under investigation, as the full extent of the corruption is unraveled.

The Velvet Revolution unwinds

Every revolution starts out in a wave of euphoria. The Velvet Revolution which engulfed Czechoslovakia in November 1989 was no exception. As the country shed the vestiges of Soviet-style Communism, democracy and Western standards of living were seen to be just around the corner. Little did the people know that Communist culture would continue to infect the way in which business was carried out well into the future.

Privatization of state-owned businesses started out as an honest attempt to divest the resources of enterprises to its citizens. First administered as coupon distributions to all, it soon degenerated into a vehicle for rewarding friends, political partners, and relatives.

The Czech-Slovak divorce enabled the controversial Slovak Prime Minister Vladimír Mečiar to delay the second wave of coupon privatization and tailor it to fit his own plan for rewarding his political allies. He personally played a more direct role in the way properties were sold and even served as minister of privatization and head of the National Property Fund (NPF) in early 1994. His Deputy Prime Minister, Július Toth, also held posts as both minister of finance and chair of the NPF. The two used their positions to push through a flurry of last minute privatizations before Mečiar was forced out of office in March 1994. These "midnight privatizations" rewarded Mečiar 's friends, including his chauffeur - who acquired a meatpacking plant for 5% of its real value. Although the new Moravčík government disallowed more than a dozen of these deals, many remained valid, and Rezeš had already started building his empire at VSŽ. The pattern was clear. Mečiar and his allies used privatization "as a way to concentrate political power instead of a means of economic transformation" (Carol Skalnik Leff, The Czech and Slovak Republics, Boulder, 1997, 196-97).

The Eastern Slovak Ironworks  Touted as one of the greatest success stories of privatization in Slovakia, VSŽ got off to what appeared to be a stellar start. During its first year as a private company in 1995, VSŽ had annual sales of Sk 49.8 billion (USD 1.66 billion). The Slovak business newspaper Trend ranked it as number one among Slovakia's top 100 companies. In 1995 alone, VSŽ accounted for 11.6% of Slovakia's total exports and appeared to be an economic behemoth.

Its history went back to the Communist era. The company was intended to serve as a neo-Stalinist paragon of the kind of job-producing heavy industrial giants that the Communists brought to Slovakia. First established in 1960, the enterprise quickly grew into one of the largest employers in Slovakia. By 1964, it was producing its first metal plates. The next year, it was producing iron and by 1966, steel. It incorporated machine production with new technologies such as oxygen converters and continuous casting and in time became one of the largest and most modern metallurgical complexes in Communist Czechoslovakia. (Slovakia and the Slovaks, 161).

When VSŽ was first privatized, investment funds and those with investment vouchers held 72% of its stock. VSŽ directly managed seven companies and invested in both domestic and foreign companies. In 1992, as a privatized company, VSŽ employed 22,963 people and had revenues of over Sk 42 billion, earning a profit of Sk 1.33 billion. By 1995, VSŽ boasted annual sales of Sk 49.9 billion (USD 1.66 billion) and sizeable profits of Sk 5.26 billion (USD 175.3 billion).

Privatization of VSŽ

However, although VSŽ was privatized, politics continued to interfere with its main business - steel. The company already had too many employees and a sloppy management when Mečiar sold off a controlling share of the enterprise for one-fifth its real value.

Control of the company lay in the hands of its top managers, most of whom were holdovers from the Communist era. These same managers fostered intensely close ties with Mečiar's party and government. The leading personalities were Alexander Rezeš and Ján Smerek, who served as the company president when Rezeš held a position in Mečiar's cabinet.

After the Velvet Revolution, Rezeš quickly moved up to become vice-president of VSŽ and later chairman of its board of directors. Rezeš acquired a large share of VSŽ stock while he worked for VSŽ. He fostered close ties with then Prime Minister Vladimír Mečiar and became a candidate for elections in Mečiar's party, the Movement for a Democratic Slovakia (HZDS). Using his position at VSŽ to help raise funds which bankrolled Mečiar's election campaign in the fall of 1994, Rezeš was rewarded with the post of Minister of Transport, Communications and Public Works (Slovakia and the Slovaks: A Concise Encyclopedia, Bratislava, 1994, 431, 726). Rezeš also worked as Mečiar's campaign manager during the 1998 parliamentary elections.

Ján Smerek was chairman of VSŽ 's supervisory board until March 1998, when he was moved to the company's executive board. In the fall of 1998, he was a HZDS candidate during the parliamentary elections.

Both men acquired a huge share of the company's stock on account of the National Property Fund's preferential treatment. They were able to purchase shares of VSŽ stock at prices which amounted to less than half of their market price at the time of purchase. The shares were purchased on credit that was generously doled out by state-sponsored banks (Miklos, Ivan, "Economic Transition and the Emergence of Clientalist Structures in Slovakia," in Slovakia: Problems of Democratic Consolidation and the Struggle for the Rules of the Game, Bratislava, 1997, p 71).

VSŽ also secured easy credit by buying controlling interest in a number of leading Slovak banks. These banks included Priemyslná banka Košice, Dopravná banka and Postová banka. The company obtained its controlling share of the last two banks from state-owned businesses operated by the cabinet ministry which Rezeš headed. VSŽ also owned a significant chunk of mid-sized banks such as Istrobanka and Poľnobanka. Its financial acquisitions continued into 1996, as it bought a 40% share of Investičná rozvojová banka (IRB), which ranked among Slovakia's top three banks. VSŽ acquired a huge financial empire in a very short period of time.

In addition to claiming a stake in banking, VSŽ also acquired a dominant share of Slovenská poistovňa (Slovak Insurance), which controlled 78% of all insurance sold in Slovakia in 1995.

One of the biggest mistakes that Rezeš and company made was to become overly ambitious in their attempt to diversify in areas that had nothing to do with steel. Rather than investing in updating VSŽ's aging plant, Rezeš had the company buying soccer clubs, newspapers, banks and holiday homes in Spain (Financial Times, 26 January 1999). The purchase of the well-regarded newspaper Národná Obroda was seen as an attempt to gain more influence in the media. The acquisition proved to be not only a financial loss but also led to an offer of resignation from the editor, Tatiana Repková, one of Slovakia's most respected journalists. In order to keep her on board, VSŽ had to reshuffle the publishing company's board and offer her a new contract with guarantees of editorial independence.

After Rezeš gained control, VSŽ continued to acquire other companies at a rapid pace. This included non-Slovak companies. For instance, VSŽ purchased a 20% share of the Czech steel company Třinecké železiarne. It also bought out the debt-ridden Czech soccer club, Sparta Praha, for Sk 1 billion (USD 33 billion).

Leapfrogging legalities

 When VSŽ could not get its way, its management resorted to leapfrogging legal hurdles. For example, in October 1996, the National Bank of Slovakia (NBS) objected to VSŽ's acquisition of a large share of Investičná a rozvojová banka (The Investment and Development Bank) without preliminary approval. According to the Slovak Banking Act, control of more than 15% of any bank required NBS consent. Even though the International Monetary Fund praised the NBS decision, VSŽ president Ján Smerek was determined to go ahead with the deal.

VSŽ had decided that IRB would help finance its ambitious expansion plans. IRB was reluctant to grant extensive loans, because it already had many outstanding loans in the energy sector, which would require a government bail out if they went sour. When he encountered resistance, Smerek secured control of the bank through manipulation. In January 1997, IRB's Supervisory Board, which VSŽ controlled, removed all but one of IRB's Board of Directors. Of course, persons with ties to VSŽ dominated the new board, even though many of them had little experience with banking. Vojtech Vranay, one of Rezeš' relatives, became the new IRB president, and VSŽ got its way (Miklos, 72).

The banking sector had not been fully privatized and was lacking capital. It was one of the sectors Mečiar had labeled as strategic and thus not subject to full privatization. Very little foreign capital was allowed into Slovakia, and there was potential for a banking crisis. This led Moody's financial service to lower Slovakia's credit rating in the summer of 1998. It termed the level of irregular loans in Slovakia as "among the highest among Central European countries, with the trend showing little improvement" (Financial Times, 29 April 1999).

As Rezeš and his associates heaped company upon company in their hands, they amassed more and more political and economic clout. Rezeš used his political muscle as cabinet minister to obtain a 13.5 to 20% reduction in transport costs paid to Slovak State Railways. This would annually save VSŽ between Sk 850 million and Sk 1.5 billion (USD 28.3 to 50 million). Since the railways had already been losing money, this amounted to government subsidy in order to increase VSŽ profits.

By 1998, VSŽ under Rezeš had become a huge holding company with controlling interests in companies and banks across Slovakia and in foreign countries such as the Czech Republic, Hungary, and the Netherlands. Rezeš maintained control of most decision-making by fostering personal ties with leading loyal managers, whom he generously rewarded with limousines and other perks. He had become one of the most powerful men in Slovakia. 

Michael J Kopanic Jr, PhD, 7 January 2000

Editor's Note: Part two of this article will be in next week's issue of CER

The full version of this article was delivered at the Joint Conference on Corruption in Budapest.



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