East/West: Lawsuit Over Azerbaijani Vouchers Shows Risks Of Privatization



Viktor Kozeny, the Czech businessman who made millions of dollars by manipulating loopholes in Prague's privatization laws, is once again embroiled in a privatization scandal. This time, the scene is Azerbaijan, with the apparent losers Kozeny himself as well as some influential U.S. investors. RFE/RL correspondent Ron Synovitz examines the new scandal:

Prague, 24 February 2000 (RFE/RL) -- A lawsuit by a Wall Street investment fund against Czech businessman Viktor Kozeny has once again focused international attention on the risks of voucher privatizations across the former East bloc.

Leon Cooperman, chairman of Omega Advisers, charged in a London court last week that Kozeny defrauded the Wall Street fund of $126 million. At the center of the affair are voucher coupons in Azerbaijan's stalled privatization program.

Vouchers give average citizens the right to shares in state firms. Typically, each adult receives coupons that are redeemable for shares at a later date. But in the early stages, coupon holders don't know from which firms they will be allowed to choose. In Russia, Bulgaria, and Azerbaijan, many people have sold their voucher booklets --potentially worth anywhere from almost nothing to hundreds of dollars -- for as little as $5.

Four years ago, Kozeny apparently convinced Cooperman and other influential U.S. investors to buy up vouchers from Azerbaijani citizens. The investors paid out more than $450 million for the coupons and the special so-called "options" needed by foreigners to redeem the vouchers for shares in Azerbaijani assets.

Kozeny told his investors they could redeem the coupons for stakes in SOCAR -- the lucrative Azerbaijani state oil firm whose vice chairman is Ilham Aliev, son of President Heidar Aliev. But so far, the paper vouchers have not been redeemable for any of Baku's most valuable industrial assets. And President Aliyev announced recently that vouchers will not be accepted for shares in SOCAR. Meanwhile, the options bought up by Kozeny's Baku-based firm, the Oily Rock Group, are due to expire in August.

Kozeny has filled a warehouse in Baku with vouchers and options. The apparent losers in the endeavor include Kozeny himself -- as well as influential investors like Cooperman, former U.S. Senate majority leader George Mitchell, and Richard Friedman, a U.S. real-estate magnate said to be a friend of President Bill Clinton.

The U.S. ambassador to Azerbaijan, Stanley Escudero, urged Baku last week to extend the expiration date of the options. He also said that the interests of foreign investors should be taken into account in legislation on the second stage of privatization -- which is expected to include large industrial firms.

Escudero's remarks brought criticism from President Aliev's supporters as well as from the opposition. Former Premier Ali Masimov, who now heads a democracy group linked to the opposition Popular Front, said Escudero's comments were inappropriate:

"[Foreign ownership of vouchers] does not give any foreign ambassador the right to give directions to Azerbaijan's government on [privatization]. This kind of advice should be coming from the international institutions [like the International Monetary Fund, the World Bank, and the European Bank for Reconstruction and Development.]

Ali Hajiev, vice chairman of the pro-government Ana Vatan (Motherland) Party, also complained about the U.S. ambassador's remarks. Hajiev told RFE/RL that the paper bought up by Kozeny's Baku fund are not worth anything close to $450 million:

"Options and vouchers owned by foreigners are not [even] worth $5 million [now]. Despite this, those vouchers will be used for the second stage of privatizing Azerbaijan's economy. I think that all of these issues will be taken into account in the second stage of privatization."

In London, Britain's High Court has sealed Cooperman's lawsuit and forbidden the parties to discuss it publicly. But Kozeny had previously admitted there is a great deal of uncertainty surrounding his Baku-based Oily Rock Group voucher fund.

Kozeny said he never asked anyone to invest in the fund. He said U.S. investors begged to participate, regarding it as a way to make money quickly. Kozeny also said all the U.S. investors knew from the start that the endeavor would be risky. In fact, according to Kozeny, he stands to lose $150 million on the investment -- more than anyone else.

Questionable stock dealings in the Czech Republic during the early 1990s left Kozeny with a reputation as one of Central Europe's most notorious rogue traders. He earned hundreds of millions of dollars for himself at the expense of 800,000 small-time Czech investors who chose to pool their vouchers into his now defunct Harvard Investment Group.

Kozeny's manipulation of loopholes in the Czech privatization laws has been closely studied by economists and legal experts in other East European states that have since launched their own voucher programs.

In the case of Azerbaijan, however, Baku appears to be beating Kozeny at his own game. The voucher program brought foreign investment worth hundreds of millions of dollars into the country, and it did so without giving away anything more than a warehouse full of paper that could become utterly worthless in six months.