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January 14, 2009 at 3:14 AM EST=20

ROME =E2=80=94 The financial distress of Oleg Deripaska's aluminum =
business in Montenegro is threatening to turn the hottest economic =
growth story in the Balkans into the next Iceland.=20

The Russian oligarch, through his En+ Group Ltd. subsidiary, has told =
the Montenegrin government it cannot afford to keep the aluminum =
refinery, Kombinat Aluminijuma Podgorica, known as KAP, operating at a =
loss and is likely to close the entire operation unless it receives =
financial support in a hurry.=20

"We cannot pay our bills," KAP director Andrej Kuznjecov said in a phone =
interview from Moscow yesterday. "We're talking three to four weeks =
before we make the decision whether to shut it down."=20

KAP and its related companies, including a bauxite mine also controlled =
by Mr. Deripaska, form the most important industry in Montenegro, the =
small Adriatic country north of Albania that declared independence from =
Serbia in 2006. The KAP companies have 3,750 employees and account for =
40 per cent of gross domestic product.=20

Aluminum made up slightly more than half of Montenegro's exports in =
2007.=20

Aluminum production and exports keep the seaport, the railway and about =
100 local suppliers in business.=20

KAP's woes provide a graphic illustration of how the credit crisis and =
recession are creating a domino effect around the world, hurting even =
robust economies farthest from the world's financial centres. Since =
2006, Montenegro has been growing at 8 per cent a year as investors from =
Russia, Western Europe and Canada pumped up the country with =
construction, tourism and aluminum projects.=20

Growth has since fallen off a cliff.=20

Construction is slowing considerably. One of the country's main banks, =
Prva Banka, which is partly owned by the family of Prime Minister Milo =
Djukanovic, had to be bailed out. The International Monetary Fund last =
month estimated growth of just 2 per cent in 2009. All growth bets are =
off if KAP implodes.=20

Mr. Deripaska made his fortune in the aluminum business - he controls UC =
Rusal, the world's biggest aluminum company.=20

He added KAP to his empire in 2005 when commodity prices were soaring. =
Still, KAP was losing money because of high costs; its long-term success =
depended on securing cheap sources of electricity, the main expense at =
any aluminum refinery. But Mr. Deripaska's effort to buy the state-owned =
electricity-generating plant failed and the refinery was stuck with high =
energy prices.=20

In the first 10 months of 2008, KAP's operating loss was about =
$38-million (U.S.). The losses could deepen because aluminum prices have =
fallen by about half since July.=20

"The current economic downturn has left us no alternative but to start =
talks with the government over an urgent aid package aimed at keeping =
KAP alive," En+ spokesman Peter Lidov said. "We have not reached an =
agreement over KAP's support with the government so far."=20

Closing KAP would not end Mr. Deripaska's presence in Montenegro. He is =
an investor, along with Barrick Gold Corp. chairman Peter Munk, =
Nathaniel Rothschild and several other wealthy businessmen, in Porto =
Montenegro, a luxury superyacht marina under construction on =
Montenegro's Bay of Kotor.=20

In an interview last month, Mr. Munk said the recession would not =
jeopardize the =E2=82=AC260-million ($420-million Canadian) project and =
that the equity funding from the investors, including Mr. Deripaska, was =
in place.=20

The oceans are still brimming with yachts and Mr. Munk expects Porto =
Montenegro will attract a lot of them.=20

"They won't disappear," he said. "They have to live somewhere."

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