26 սեպտեմբեր, 2014 17:37

Teghout: A Contentious Danish Investment in Armenia

The ancient Teghut forest was cut down for the mining project. © Cole, 2012

Scandinavia is known as a prolific international advocate against corruption, inequality and environmental degradation around the world. As such, Armenians expect high standards from Denmark, Sweden and Norway. Yet, a multi-million dollar loan from Denmark is supporting the Armenian Vallex Group, whose Teghout copper mine project in northern Armenia was licensed based on dubious political decisions. The Danish involvement and investment reinforces the social and environmental imbalances in the country and gives Armenian politicians the message that it’s business as usual. How could this happen?

A Danish Triangle

PensionDanmark is a private Danish pension fund, whose assets under management exceed Armenia’s GDP almost threefold. It holds a widely spread portfolio, including tobacco and petroleum companies, which are usually shunned by Western pension funds. Danish NGO Ansvarlig Fremtid says that the fund has a “non-democratic” management. Pension funds amounting to $62 million US from PensionDanmark have ended up as capital in the Lori province in the Republic of Armenia.

A US$62 million loan from Denmark was given to Armenia, sustaining the highly controversial Teghout project, fostering corruption, breaking internal guidelines and sending the wrong signal. © Vallex, 2013

PensionDanmark also owns a $9.2 million US share in FLSmidth. This company, among the 20 largest ones in Denmark, offers all-in-one provider solutions for the mining sector. In 2008, FLSmidth supplied exploratory mining equipment to the Teghout mine. This connection is not surprising taking into consideration that the new Danish capital provided to Vallex from PensionDanmark came with a provision - Vallex could use the funds to exclusively purchase Danish equipment from FLSmidth. (The order has been confirmed, details of which are pending.) FLSmidth’s former CEO, Jørgen Huno Rasmussen explains the company’s approach to corporate social responsibility this way: “We have always tried to behave properly, but we can not and should not take responsibility for all our customers' activities [...]. We cannot save the world.

PensionDanmark referred all questions by CivilNet on their engagement in Armenia to EKF (the public Danish export credit agency) for answers.

Where is the link between Denmark and Armenia? © Corporate Compliance Insights/CivilNet, 2014

The Danish triangle is completed by EKF, the public Danish export credit agency. Its main role in this deal is to cooperate with Armenian stakeholders involved in the project. EKF is owned and guaranteed by the Danish state and is regulated by law, therefore a guarantee from EKF has the backing of Denmark. On their website it states: “As a state agency, EKF is invested with a special responsibility. If your business is found to be irresponsible in any way, both your company and EKF will be held accountable.” Therefore, EKF’s mandate is also to assure compliance with certain international standards. “EKF's evaluation of a project's sustainability adheres to a number of international agreements and principles. In issuing our approval, EKF endorses your export transaction from a social, environmental and commercial perspective.”

Søren Møller of EKF answered CivilNet’s questions © EKF, 2012

EKF’s Deputy CEO Søren Møller admits that “mining sites are always difficult because they are what they are.” Nonetheless, EKF issued a buyer credit guarantee to PensionDanmark. This means that EKF would bail out Danish taxpayers’ money, in the event that PensionDanmark does not receive back its loan. This is a possibility should the political or economic climate in Armenia change. EKF presents the advantages of their guarantee as “a good selling point for Danish exporters negotiating contracts abroad. If they are able to offer a competitive loan and reliable product, there is every chance of making a sale.” It then matters little that the Teghout mine has come under severe criticism in Armenia and in the Diaspora alike for the environmental and social dangers it poses.

Allegations of Corruption

The Northern Armenian mine is managed by Teghout Closed Joint Stock Company (CJSC), a full subsidiary of the Vallex Group. Vallex operates several mines in Armenia as well as in Nagorno-Karabakh and is steered by Russia-based businessman Valery Mejlumyan. Its ownership structure has been described by Hetq as “a financial labyrinth” with offshore ties to Cyprus and Liechtenstein. Since the mine is not yet operational, it cannot generate income through the sales of natural resources. The Vallex Group expects production to start in October 2014. Until then, the company relies on its main lender and shareholder, VTB Bank, for financial support.

Vallex Chairman Valery Meljumyan is at the center of his non-transparent business empire © Hetq, 2014

According to the Vallex Group, Russian VTB bank loaned US$350 million to the Teghout project. In their written response to CivilNet, they clarified that the US$62 million of Danish capital is to be used to reduce interest rates on the VTB loan. Although Vallex downplays the importance of the Danish loan, it constitutes almost one sixth of the entire VTB loan volume. Accordingly, there was a concerted Armenian effort to assure the EKF guarantee for PensionDanmark’s loan. Armenia’s ambassador to Denmark was involved in negotiations with Danish stakeholders. EKF, the leading Danish party in the negotiations, is a public agency. This association is a case study of the relationship between business and politics.

Sona Ayvazyan of Yerevan-based Transparency International Anti-Corruption Center is “positive that there has been corruption in this case.” Her institution also possesses “informal information that Vallex representatives have bribed Armenian governmental officials.” In the past, there have been several cases of impropriety related to the Armenian Ministry of Nature Protection, co-responsible for the oversight of the Teghout mine. This clashes with EKF’s Corporate Social Responsibility (CSR) policy, which establishes “an ethical and corporate responsibility for ensuring the greatest possible level of sustainability in the business transactions that we participate in.”

The Politics of Mining

Mining is essential for Armenia’s economy. According to the Armenian Development Agency, more than half of the country's exports in 2011 were natural resources. Expert Aleksandr Grigoryan of Apella Institute argues that mining alleviates external shocks to Armenia’s GDP. Despite this importance, the sector is cost-intensive. Transport expenditures are high and the resources are refined outside Armenia by foreign companies. Moreover, oversight is necessary, but the Armenian Ministry of Energy and Natural Resources admits that there has not yet been an inspection of the Teghout mine.

The Alaverdi Copper Smelter, operated by Vallex subsidiary ACP, will process ore at the Teghout mine © Sara Anjargolian, 2012

Grigoryan points out that mines create stable and relatively well-paying jobs. For the Vallex Group “the mining industry in general brings substantial benefits to the country's socio-economic development.” Yet, Aleksandr Grigoryan adds that “mining amplifies income inequalities,” because of huge wage differences. With few owners and foreign investors, there is also the danger that “the interests of the few are prevailing over society’s interests,” as Sona Ayvazyan puts it. Accordingly, Armine Ishkanian of the London School of Economics argues that the 2012 Law on Rates for Environmental Protection Levies effectively establishes that “the wastes created as a result of mining are not taxed.”

The three experts call for better domestic mining policies. There are indisputable gaps in Armenia’s environmental laws, stark violations of international standards and little, if any, added value for the Armenian people. In this situation, Armenia would require the help of its international partners to improve the mining sector across the country. But Danish investment in Teghout signals to Armenian decision-makers and mining entrepreneurs that they can proceed as they did before.

Wrong From The Beginning

One example for this is the Teghout licensing process. The mine received a preliminary license in 2001. There was no public consultation at this point. In 2006, an Environmental Impact Assessment (EIA) was commissioned with little consultation involved. Since the EIA gave positive conclusions, the license that was already given was confirmed. The EIA for Vallex was conducted by the Lernametallurgical Institute, which also belongs to Vallex. According to Sona Ayvazyan, the EIA was “falsified” in several regards. EKF confirmed this assessment: “EKF benchmarks our projects against IFC Performance Standards and relevant Environmental, Health & Safety (EHS) Guidelines. The EIA from 2005 does not meet these international standards

Hence, EKF admits that the license to Teghout was given in violation of international standards. They categorized the Teghout mine as one “with significant adverse environmental and social impacts.” Nonetheless, their guarantee assured US$62 million for the exact same project. Moscow-based consultancy agency ERM conducted a gap analysis on the Teghout project in 2010, finding several non-compliances with international standards. CivilNet obtained a draft copy of this report, which states that “although the project has been changed, the EIA was not amended and does not reflect the recent project changes.” In addition, there had never been a social impact assessment of the Teghout project.

As a part of EKF’s mandate, they are required to balance the shortcomings in each project they provide a guarantee for. This includes on-site visits. Moreover, EKF demanded that impartial environmental agency WSP from Manchester develop a framework for an Environmental and Social Action Plan (SDAP), which is available on the Vallex website. Considering the shortcomings with the licensing process, this looks at best like the attempt to fix something that was already wrong from the beginning. At worst, it looks like a justification for the Danish triangular deal worth US$62 million.

Bold Claims, Mere Hopes and Danish Involvement

Anette Eberhard, CEO of EKF, stated that “the mine will be the first in Armenia to satisfy the international standards.” This is a bold claim because it implies that Teghout does not meet these standards at the moment. If implemented, the WSP plan would in fact be in accordance with the international IFC standards of the World Bank. Vallex however does not report regularly on its implementation. The report was published online in 2012. Moreover, it means that all other Armenian mines, including Vallex operations do not meet Armenian standards.

The Danish-Armenian business deal is essential for the Teghout project. © WWT/CivilNet, 2013

The current track record of Vallex as well as of the Teghout does thus not show compliance with international standards. This should have given EKF an idea of Vallex’s business practices. EKF Deputy CEO Søren Møller however sees no contradiction between this and EKF’s involvement. Instead, the Danish public agency works under the assumption that the standards will be met at some point in the future. EKF hopes for a “spill-over effect on other projects,” but unveils its own naivety in Søren Møller’s concluding sentence: “But this is a mere hope for me.” One could see good will in these Danish actions, if they did not appear to be framed in deep indifference towards Armenia.

EKF has been in cooperation with Teghout CJSC since 2010. Protesting citizens and officials of Vallex subsidiaries have clashed repeatedly over the controversial mine. During one incident in 2012, a villager of Teghut was beaten up by the Teghout mine security personnel and was taken to hospital with a broken leg and citizens blocked the roads to the mining complex. CivilNet interviewed Søren Møller on the mining complex during his June 2014 inspection visit to Teghout, where he lauded the company for working “with the right type and portion of leadership.” Even putting this aspect to one side, is there some truth to Anette Eberhard’s claim that Teghout will meet international standards?

International Standards

EKF adheres to the UN-sponsored Global Compact Initiative. This international standard is based on ten principles, which includes for instance that “businesses should support a precautionary approach to environmental challenges.” The Teghout waste management plan does not take into account the propensity of devastating earthquakes in Northern Armenia. The Teghout mine will include a highly toxic tailing dump along the River Debed. In case of an earthquake, neighboring Georgia would also be affected from a decision that can hardly be called precautionary. This transboundary dimension would affect Armenia internationally as well. Nonetheless, the Ministry of Nature Protection refuses to see this impact across borders.

Søren Møller dodged questions on earthquakes the same way he avoided answering the question about the level of civil society involvement. The United Nations has denounced the continuous failure of Vallex Group and of the Armenian government to comply with the internationally ratified Aarhus Convention. This has happened throughout the 4 years of EKF’s involvement with the Armenian copper mining project. Thus, the Aarhus Convention’s concern for public knowledge about health issues in local communities, which both Aleksandr Grigoryan and Sona Ayvazyan see as essential for the mine, wanes in face of the Danish investment. Ironically, the Aarhus Convention is named after a city in Denmark.

The conclusions with regards to Armenian failures to adhere to the Aarhus Convention are interpreted differently by the actors. The Ministry of Energy and Natural Resources sees them beyond its responsibility. EKF sees signs of improvement in them and for Sona Ayvazyan, they prove the allegations of environmentalists against the Teghout project. Reforestation is a similar bone of contention. Civil society activists maintain that more trees have been cut than originally agreed upon. In turn, Sona Ayvazyan of Transparency International argues that the reforestation is not going to be a success story, because not all planted trees will survive. The documents produced by EKF and its affiliates, however work under the assumption that reforestation will be 100% successful. On its own account, “The Ministry of Nature Protection has not yet carried out inspections concerning deforestation and forest restoration activities.”

Unethical and Unsustainable Decisions

PensionDanmark’s Socially Responsible Investment policy clearly states: “PensionDanmark does not invest in companies, which deliberately and repeatedly violate laws and regulations laid down by national authorities on the markets in which the company operates, or deliberately and repeatedly violate laws and regulations laid down by international organizations ratified by Denmark.” Vallex however does both.

Several conclusions adopted by the United Nations’ Economic Commission for Europe establish that Vallex Group has violated regulations of the Aarhus Convention, which has also been ratified by Denmark. In addition, the documents prepared by EKF for their guarantee states that “one of the species positively identified during the site visit (short-toed eagle) is listed as rare in the Red Book of Armenia.” This constitutes a violation of domestic Armenian law. Article 26(3) of the Republic of Armenia Code “On Soil” prohibits soil management in areas, where red-listed species have their habitat. Open-pit mining in Teghout falls under soil management despite the red-listed species on-site.

In conclusion, by manipulating its own internal guidelines, PensionDanmark stands to profit on the back of Armenian mining. Furthermore, Denmark pledged in the 1999 EU-Armenia agreement “to promote trade and investment and harmonious economic relations between the Parties and so to foster their sustainable economic development.” For Teghout, facts cast shadows of doubt over the claim of sustainability. In the words of Sona Ayvazyan: “The next generation is going to be responsible for something that is done today by a few oligarchs. So it is not fair. The whole project from the beginning to now, is kind of a bunch of problems in different aspects.

A Determining Twist

In light of all this, how could PensionDanmark still release US$62 million for Teghout? The pension fund’s press release of August 26, 2013 stated that “collaboration between FLSmidth, Eksport Kredit Fonden (EKF) and PensionDanmark has secured Danish export orders worth DKK 350 million [US$62 million] for a mining project in Armenia.” Only upon request did EKF disclose that the money was in fact received by VTB Bank, the main lender to Teghout and shareholder in the Vallex Group. This was omitted from official documents on the Teghout deal.

For Søren Møller of EKF “it is the Vallex Group, which is the main driver of the process.” Yet, VTB Bank handles the money. The advantage of this set-up is connected to PensionDanmark’s internal guidelines. Vallex violates domestic and international regulations. It should therefore not have been eligible to PensionDanmark funding. As it appears, VTB Bank can however receive the multi-million dollar capital injection and forward the purchased equipment to Vallex. As a result of this business configuration, PensionDanmark has very little leverage over Vallex.

The money is loaned without the possibility to exercise influence on Vallex’ business practices. In turn, EKF’s guarantee becomes crucial, as this is the tool of influence on the Teghout project. Impact on issues such as reforestation or occupational safety are only possible through EKF’s involvement. If EKF were to retract its guarantee, PensionDanmark would have no handle on Vallex, while relying on VTB Bank to return the loans. Therefore, only EKF’s guarantee gives stability to the loan. Moreover, it sends the wrong signal to Armenian politicians that not even Danish partners don’t always play by the book. The current legislation in Armenia is not perfect, but apparently it is sufficient to secure US$62 million from Denmark, leaving calls for policy reform by experts like Aleksandr Grigoryan and Sona Ayvazyan unheard.

“Something is Rotten in the State of Denmark”

Vallex states “that the Danish companies have made the decision based on the results of the Company’s activities to ensure compliance with International Financial Corporation’s proposed performance standards.” Equally, EKF’s position is summarized in their claim that “by being able to meet standards set by IFC, the project is acceptable to us.” As it appears, violations of domestic Armenian law by the Vallex Group are of secondary concern to the Danish public agency. In fact, the documents commissioned by EKF and authored by impartial and renowned agencies, which are meant to improve the situation, give clear evidence of such domestic violations. It could have happened in any country of the world that a triangle of Danish actors, working in tandem, benefit from the mining sector. This time it happened in Armenia.

Why in Armenia? Because Danish capital is vital to the Teghout mine. The purchased equipment will move the exploration of the site forward. EKF appears to place trust in its cooperation with the Armenian government and Vallex. This stands contrary to the disappointment of Sona Ayvazyan and other activists against the mine: “We had a really good meeting [with the Danish representatives]. We brought all our arguments, they listened and understood everything. And we were very sure that they cannot invest in Teghout, being Danish. You know, it was Denmark, they have higher environmental standards and different approaches. But we later learned that they did in fact fund the project.

Full documentation for the investigation is available here.

Benedikt van den Boom is a visiting journalist at the Civilitas Foundation in Yerevan