Fed money may benefit Russian-backed firm

Republican Sen. Richard G. Lugar, one of the deans of Congress, and his junior colleague, Democratic Sen. Evan Bayh, have been leading the charge to secure federal money for a company that wants to build the next generation of advanced lithium-ion batteries.

The Indiana lawmakers have secured $6.5 million in congressional earmarks for Ener1, Inc., and have talked up the company’s efforts to secure a slice of nearly $3 billion in two Energy Department programs offering grants and loans as part of President Obama’s stimulus package.

Their pitch sounds as American as apple pie: The New York-based company would create much-needed jobs in the nation’s heartland and help jump-start production of energy-efficient hybrid and electric vehicles.

But there’s one detail they don’t mention.

Ener1 has substantial financial ties to Russian industrialist Boris Zingarevich, a wealthy timber magnate and longtime business associate of Russian President Dmitry Medvedev. Mr. Zingarevich is frequently listed among the powerful and influential businessmen known in Russia as oligarchs.

According to federal records, Mr. Zingarevich is the “provider of substantially all of the funding” for Ener1 and its wholly-owned subsidiaries. The companies he owns, controls or is associated with - including Bzinfin SA, an off-shore firm that holds 66 percent of the shares of Ener1’s parent company - have the potential to exercise substantial sway over Ener1’s operations, documents filed with U.S. securities regulators state.

Foreign ties

Rep. Duncan Hunter, California Republican and a member of the House Armed Services Committee, said there should “definitely be concern” about foreign-controlled or owned companies attempting to break into the lithium-ion market in the United States and using multimillion-dollar government loans and grants to aid their development and production.

“It also presents significant security concerns that need to be thoroughly examined before any decisions are made,” said Mr. Hunter, a former U.S. Marine who served two combat tours in Iraq and one in Afghanistan. “Our nation’s energy market should be reserved for U.S. companies and workers, especially now when we are looking to be a global leader in this technology.”

Mr. Hunter’s father, Duncan L. Hunter, who retired from Congress in 2008 after 28 years, steadfastly supported the development of the lithium-ion battery because of its military applications, but as chairman of the House Armed Services Committee, he advocated that the Defense Department purchase its needs from U.S. sources.

Some security experts see a risk in giving Ener1 federal money and access to hybrid technologies that are supposed to fuel the next generation of American products and U.S. military equipment. They note that Russia has taken an increasingly competitive stance toward the United States under Mr. Medvedev and his mentor, Prime Minister Vladimir Putin.

Frank J. Gaffney Jr., former assistant secretary of defense for international security policy in the Reagan administration, described as “insanity” any plan that would allow “building a national battery infrastructure in the pockets of the oligarchs of the past and future Soviet Union.

“We ought to be very concerned about this deal,” said Mr. Gaffney, founder and president of the Washington-based Center for Security Policy. “The Putin regime is not an entity we can trust.”

Mr. Zingarevich’s office has not returned calls for comment, and his attorney, Patrick T. Bittel in Geneva, did not respond to telephone calls or e-mails seeking comment.

Ener1 confirmed Mr. Zingarevich’s significant role in funding the company but told The Washington Times there was no factual basis for any security concerns. It said its wholly owned subsidiary, Indiana-based EnerDel Inc., which would build the batteries in Indiana, has cooperated “productively and consistently” with the U.S. government on a wide range of high-priority projects.

Foreign ownership or control of key U.S. technologies or assets has become an increasingly sensitive issue since the Sept. 11, 2001, terrorist attacks. U.S. lawmakers successfully scuttled plans to turn over operations at key U.S. ports to a Dubai-based company in 2006, and concerns were raised more recently about the Pentagon’s use of Chinese-made computer routers in an era of cyberwarfare.

The fears about foreign entities owning critical infrastructure generally stem from the belief that “foreign companies do not have as vested an interest in security as U.S. firms” and could heighten vulnerabilities to terrorist attacks, according to a February 2007 report by the Council on Foreign Relations.

That report noted that U.S. officials should keep sensitive military technology and the production of defense-related goods under the control of American companies.

Ener1 and Mr. Lugar’s office dismissed concerns about the company’s Russian investors, and observers also noted that many of the firms against which Ener1 is competing have their own foreign ties.

For instance, A123 Systems Inc. builds its batteries in China and wants U.S. government loans to build new U.S. plants in Massachusetts and Michigan; Valence Technology, Inc. also has plants in China but is seeking funding to build a facility in Texas; and LG Chem Ltd., the largest chemical company in South Korea, has proposed building a multimillion-dollar lithium-ion battery plant in Michigan.

Johnson Controls Inc. and Saft Advanced Power Solutions LLC, a French battery maker, have formed a partnership to invest $220 million in a new advanced-battery manufacturing facility in Michigan.

A123 Systems and Valence acknowledged in separate SEC reports that doing business in communist China posed a risk, adding that they can be affected adversely by China’s diplomatic and political relationship with the United States. China has said it hopes to lead the world in the production of hybrid and electric vehicles.

Neither firm responded to telephone calls and e-mails for comment.

Prabhakar Patil, chief executive officer at Compact Power, Inc., the U.S. subsidiary of LG Chem, said that except for some critical but limited funding, his Troy, Mich., operation has “pretty much been left alone” by its South Korean parent in its pursuit of the government cash. He said CPI would be financially independent by 2012.

“In the end, any business that wants to be successful has to have a level of independence and, ultimately, the ability to sustain itself,” said Mr. Patil, who retired at Ford Motor Co. in 2005 after 27 years, including five as chief engineer for the hybrid electric vehicle division. “And you have to be prepared to do it without government intervention.”

Mr. Patil said LG Chem recognized early that the United States would be a “strategic priority” in the production of lithium-ion batteries and has given him the “level of independence to make that happen.”

Currently, the U.S. has almost no lithium-ion manufacturing capability, although EnerDel began the first commercial-scale production line in Indianapolis in May. The battery cells produced at the Indianapolis facility would be assembled at a second EnerDel plant, in Noblesville, Ind.

Lithium-ion batteries are highly prized by both public and military users because they have more power and are smaller and lighter to help extend the range and mileage of hybrid vehicles. The auto industry is looking to build more fuel-efficient cars, and the U.S. military has focused on the battery’s long life cycle and cost savings over conventional batteries for such important weapons as unmanned aerial vehicles (UAVs).

Ener1’s political backers

Mr. Lugar and Mr. Bayh have used their political clout to help secure for Ener1 $6.5 million in earmarks - money set aside for special pet projects in the government’s annual spending bills. One called for $1.6 million last year to develop hybrid tanks and UAVs for future U.S. Army combat systems.

The two lawmakers have supported the company because if it wins the government money, it would create as many as 3,000 jobs in Indiana.

Mr. Lugar, top Republican on the Senate Foreign Relations Committee, has known about Ener1’s foreign investors “for a long time” but isn’t concerned about government money going to a Russian-connected company, his Senate office said.

“The manufacture of lithium-ion batteries is an expanding international business, and a lot of foreign companies are involved,” spokesman Andy Fisher said. “As the business grows, I would expect that the number of international companies involved will expand.”

Mr. Bayh’s office declined comment on what it knew about the Russian investors: “Not going to have anything for you on Ener1,” spokesman Brian Weiss said in an e-mail.

Ener1 has applied for the government cash under the Energy Department’s $2.4 billion Advanced Technology Vehicle Manufacturing program and a $480 million Advanced Battery Manufacturing Initiative loan program.

Ener1’s ties to Russia

The company insists its foreign investors don’t have control over its day-to-day operations, but the firm acknowledged in a prospectus to the SEC on Feb. 17, 2009, that the Ener1 Group - in which Mr. Zingarevich’s company, Bzinfin, holds a two-thirds interest - has the ability to “dictate the management of our business and affairs.”

SEC documents describe Bzinfin as “a holding company for investments of Mr. Zingarevich,” adding that the British Virgin Islands corporation is “owned and controlled by Mr. Zingarevich.”

Reports in Russia say Mr. Zingarevich and Mr. Medvedev, Mr. Putin’s handpicked successor as president, became business partners in St. Petersburg in 1992, when the two men helped found a company known as Fintsel, which later became Ilim Pulp Enterprise, a $1.6 billion producer of pulp and paper.

Mr. Medvedev also served as Ilim’s legal director until 1999, when Mr. Putin named him as his chief deputy and later helped him win the Russian presidency.

Ilim Pulp, now known as the OJSC Group, is among the world’s top-10 pulp producers and the largest in Russia. Mr. Zingarevich has been identified as Ilim Pulp’s majority stockholder and has been a director since its 1992 founding.

SEC records show that Bzinfin SA, an offshore company in the British Virgin Islands that lists Mr. Zingarevich as its “indirect beneficial owner,” holds 66 percent of the shares of Ener1’s parent company, the Ener1 Group, an $11 billion privately held investment and advisory firm in Fort Lauderdale, Fla. According to the records, the Ener1 Group controls 57 percent of Ener1’s outstanding common stock.

The records said the voting power over the shares of Ener1 rests with the board of directors of the Ener1 Group. In various federal documents, Mr. Zingarevich is described as the major source of funding for the Ener1 Group and Ener1 and has been listed as a director of both companies.

Companies tied to Mr. Zingarevich have either approved, overseen or authorized $48 million in credit lines and loans to Ener1, according to the government records.

In 2003, Ener1 told the SEC that Bzinfin SA had given an $18 million loan to the Ener1 Group, significant portions of which were used to provide working capital to build its batteries. In a March 12, 2009, report, the company said it had obtained a commitment for a $30 million line of credit from the Ener1 Group in December and that it borrowed $5 million against that in February.

“Our parent company, Ener1 Group, has, from time to time, had loans from its principal investor, Bzinfin SA. Mr. Boris Zingarevich, who is a director of Ener1 Group, is an officer of Bzinfin and controls Bzinfin,” Ener1 acknowledged in a May 9, 2005, SEC report.

The document also said Bzinfin SA held the rights to three of Ener1’s five pending battery-related patent applications as collateral for the loans from Bzinfin to the Ener1 Group.

Ener1 has acknowledged that Mr. Zingarevich was the first major investor in the company - his help coming at a time the firm had run into financial difficulties - and that without his millions of dollars in investments, it would not have survived.

In a written statement, Ener1 denied that any foreign investor had any control over the company, adding that the process of raising additional capital for its lithium-ion battery program had diminished Mr. Zingarevich’s stake in the firm.

“Like many American businesses, our stock is owned by a diverse mix of investors,” the statement said. “Mr. Zingarevich was the first major investor in the company, and the process of raising additional capital is continuously dilutive over time of his stake, which is a common phenomenon in moving from a start-up to an emerged technology company.”

Charles Gassenheimer, Ener1’s board chairman and chief executive officer, told reporters earlier this year that the company’s foreign investors had no influence on projects or decisions regarding its production of the lithium-ion batteries and that Mr. Zingarevich had no day-to-day role in its operations.

As for Mr. Gaffney’s concerns, the company said it learned from “outside sources” that he has a “particular historic enmity toward Russia and Russians” and it hoped he had not allowed that to “obscure his view of the facts.”

The company noted that no money provided under the government programs could be used for research and development, only to build or modernize its battery manufacturing facilities. It blamed concerns about its foreign investors on a “particular short-seller,” whom it said had sought to drive down its share price.

It said the Financial Industry Regulatory Authority (FINRA), which regulates securities firms, is investigating the matter. FINRA would neither confirm nor deny the existence of any investigation.

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