Outraged Oligarch RWE’s Russian Nightmare

Russian businessman Leonid Lebedev is suing German energy concern RWE and its former boss Jürgen Grossmann for €675 million in damages for allegedly reneging on an agreement to buy a Russian electricity producer.
TGK-2 in Russia, where Jürgen Grossmann's dreams go to die.

March 14, 2008 was a big day for Jürgen Grossmann, the ex-boss of German energy giant RWE.

“This is a milestone in our development,” he wrote in an email to his colleagues on the company’s board and a few leading managers. “I’m certain that, working together, we will turn this into a great success for RWE.”

He saved special praise for “project team Kurier” and giddy congratulations to everyone else on the email.

Mr. Grossmann had taken over the reins of Germany’s largest power producer just six months earlier. Now he was crowing about his first coup: a small team working under the codename “Kurier” had apparently quietly cracked the potentially lucrative Russian electricity market.

Mr. Grossmann had received word from Russia only minutes before that RWE, along with its Russian partner Sintez, had won the rights to a slice of the privatized power monopolist UES.

Known as TGK-2, the part consisted of 16 co-generation power plants servicing seven million customers northwest of Moscow. It was a small but tasty piece of the pie.

Half a year later, the takeover failed. And now, years later, Mr. Grossmann has ended up in court rather than the RWE history books.

I trust in the German justice system and am confident that I’ll get a legal hearing in Essen. Leonid Lebedev, Russian oligarch

Starting February 12, a regional court in Essen will determine whether the Russian oligarch Leonid Lebedev, who owns petrochemicals firm Sintez, deserves €675 million, or $769 million, in compensation plus around €200 million in interest for the botched TGK-2 deal.

Mr. Lebedev accuses Mr. Grossmann “unilaterally and arbitrarily” torpedoed the deal, causing serious financial harm to Sintez, which had fronted the hundreds of millions for the TGK-2 acquisition. He said he felt personally deceived by Mr. Grossmann, which was why the lawsuit was against him as well as RWE.

Mr. Grossmann said he did not want to talk about an “ongoing case.” An RWE spokesman said it wasn’t even yet clear if the case could go to court.

But Mr. Lebedev told Handelsblatt he had few doubts: “I put my trust in the German justice system and am confident that I’ll get a legal hearing in Essen.”

Should the court accept the complaint of Mr. Lebedev’s suing subsidiary, it will spark a time-consuming search for evidence on how binding the agreement was between Mr. Grossmann’s RWE and Sintez.

According to Sintez, Mr. Grossmann was spurred to action by Anatoly Chubais, the head of Russia’s power industry back in 2008, during a meeting at the World Economic Forum in Davos, Switzerland. With the privatization of electricity production utilities already far along, Mr. Grossmann approached Sintez for a bid for TGK-2, according to the Russian firm.

 

Mr. Grossmann apparently became less interested and eventually pulled the plug after the Lehman Brothers bankruptcy in September 2008.

Sintez was meant to acquire it on its own, enabling RWE to later take over 51 percent of a join venture. All written down in a declaration of intent, Sintez said RWE even set the price and sent representatives to the auction.

All that is fairly undisputed, as it is mirrored largely in a press release sent out by Mr. Grossmann on that fateful March 14, 2008.

Those events are also played out in an internal RWE briefing obtained by Handelsblatt. The project team “Kurier” gushed about increasing electricity demand of 4 percent annually and was already scouting “further growth options.” TGK-2 was to become the “entry platform” for business opportunities in Russia including electricity trading and natural gas production.

It is also undisputed that the partnership prematurely ended in September 2008. But why?

Sources close to RWE claim the Russians kept adding demands after the deal was made. Sintez accuses the Germans of “unexpectedly and without justification” retreating from its commitments.

Mr. Grossmann apparently became less interested and eventually pulled the plug after the investment bank Lehman Brothers went bankrupt on September 15, 2008. Just days later, the RWE boss made a short and unpleasant call to kill the deal, Mr. Lebedev remembered.

He said Mr. Grossmann’s change of heart was a disaster for Sintez, as the company had “already fully paid” for TGK-2 even though it would never have made the acquisition on its own. “We didn’t want to buy TGK-2 on our own, we weren’t prepared financially and technically to invest in TGK-2 alone,” said a Sintez statement.

RWE agreed with that assessment back at the time. “The indirect investment by RWE was decisive in the bid,” according to the internal briefing obtained by Handelsblatt. Mr. Grossmann even called Sintez in an email a “stepping stone” for RWE.

Mr. Lebedev’s hopes for compensation will rest on such emails, other documents and witness accounts. It won’t be easy to prove – an RWE spokesman pointed out that Sintez has already had its claim dismissed by a London arbitration court. Back then, the Russians wanted to force RWE to take a majority stake in the joint venture. But this time the legal case is all about damages – and the reputations of RWE and Mr. Grossmann.

 

Jürgen Flauger covers the energy sector for Handelsblatt. To contact him: [email protected]