Russia Looms Over Balkan Giant's Fight to Survive: QuickTake Q&A

Croatia’s largest employer, Agrokor d. d., a retailer and food manufacturer, has been in an uphill struggle to raise financing. Its future may depend on a Russian state-owned bank bailout, handing Vladimir Putin indirect leverage over a company that is the largest in the former Yugoslavia and is responsible for 15 percent of Croatia’s national output alone. Agrokor’s outsized role as an employer threatens to cause economic instability if it wobbles. Putin and his political allies in the region are feeling emboldened in their push to increase their influence after the election of President Donald Trump in the U.S. and the rise of populist movements throughout Europe.

1. Why is Agrokor so important to the Balkan economies?

Agrokor may be too big to fail. With about 60,000 employees across Croatia, Slovenia, Serbia, Bosnia-Herzegovina and Hungary, and annual sales of 6.5 billion euros ($7 billion), it might trigger financial instability on a wide scale if it goes down. So Croatia’s government wants any financing solution to include suppliers who are waiting to collect billions of euros in debt. Political parties are also clamoring to save thousands of jobs in a company that grew from a small flower seller to a group of more than 20 companies. With Agrokor’s interests ranging from ice cream and mineral water to olives and mayonnaise, many businesses have reasons to worry.

2. How bad are Agrokor’s finances?

Profits have fallen amid increasing competition by discount retailers and Agrokor stretched its resources too far with debt-financed acquisitions. After failing to syndicate a loan in January, suppliers grew worried and its largest creditor, Russia’s Sberbank, had to provide a rescue loan to pay them off. To fund acquisitions, Agrokor issued debt, including a loan that pays interest when it matures in 2018. That loan was used to purchase a Slovenian competitor three years ago. Bond and loan prices have collapsed in the last two months and Moody’s also weighed in, saying that accounting is “opaque in certain areas.” Agrokor says its sustainability is "not in question" and that it’s working with investors on a new business model. Analysts at Exotix this week recommended buying the bonds on the grounds that the price had fallen enough.

3. Who are the big losers financially?

A restructuring of its 3.5 billion euros of debt is inevitable if Agrokor is unable to meet its obligations. Holders of loans due in 2018, said to include Canada Pension Plan Investment Board and Invesco Ltd., are among those most at risk of taking losses. Trading prices indicate they may not recover more than 20 percent of their principal. Ivica Todoric, the founder of the company, may also be forced to give up at least part of his 95 percent stake. Bondholders are better placed, but may need to renegotiate the terms of their investment.

4. How did Russia enter the picture?

Russia’s two biggest banks -- both state-owned -- hold more than a third of Agrokor’s debt. When the Russian ambassador to Croatia, Anvar Azimov, suggested in February that his country might not help Agrokor refinance its loans unless it "cooperates," suddenly it seemed that the retailer’s problems weren’t purely financial. It remains unclear whether Azimov was speaking out of line or whether he gave a rare glimpse behind the curtain of a Russian power play. Even Sberbank says it requested a clarification from the foreign ministry.

5. Is Sberbank willing to help out?

Sberbank publicly has been playing the good cop to Azimov’s bad cop. Chief Executive Officer Herman Gref said the bank is in close contact with Agrokor’s owners and doing everything possible to make sure the company survives. Russian cooperation may come at a cost, with Sberbank and other creditors pushing Todoric to cede control in return for a rescue.

6. Are there any other financing options?

With the Croatian government seeming to rule out a bailout and without access to international debt markets, Agrokor’s only alternative is selling assets. The company is considering selling holdings in some major subsidiaries, including its water-bottling business. Any disposal would improve liquidity and help negotiate a deal with creditors, but potential bidders may also offer low prices since Agrokor is under pressure to sell. Croatia has also talked up the option of helping to sell the whole company. Croatian government officials made a passing mention in a meeting with representatives of Industrial and Commercial Bank of China Ltd., about acquiring Agrokor. It’s not clear how much interest that elicited.

The Reference Shelf

  • Here is an explanation of Agrokor’s complex corporate structure.
  • And here are articles on Russia’s expanding web of economic, political and military ties in the Balkans.
  • Background on Russia using Sberbank for dominance in the region.
  • An exclusive take on the Russian lender’s aspirations for Agrokor.
  • How it came to this: Agrokor’s debt binge explained.
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