Akhmetov, Russians Clash Over Ukrainian Steel Mills

KIEV, Ukraine -- Consolidation has been the name of the game this year in Ukraine’s strategically important and vast metals sector, as homeboy billionaire Rinat Akhmetov battles it out with Kremlin-backed investors for control of the country’s ore-starved steel mills.

Rinat Akhmetov

And although the process hasn’t been pretty in terms of the takeover tactics employed, it’s at least becoming a bit clearer who’s getting what and why, in Ukraine’s metallurgical industry, ranked amongst the top 10 in the world in terms of size and exports.

Accounting for 40 percent of Ukraine’s exports, metallurgy had in prior years made many Ukrainian tycoons rich and brought badly-needed foreign currency into the country. But the 2008 global financial crisis hit some domestic producers hard, making them vulnerable to takeover by regional competitors with access to highly-coveted raw materials and the finances to float an offer.

Ukraine’s richest man, Akhmetov has been one of the fortunate. Along with partners, he owns Ukraine’s largest steel group, Metinvest. Replete with a top-five mill, its own iron ore and ample coking coal, the company has been far from squeezed in these recession-days. Rather, it has been prowling for bargain deals, on a buying spree.

But Akhmetov is not alone. Since earlier this year, he’s found himself in a tug-a-war with stealth investors from up north. Despite being a longtime backer of Kyiv’s current Moscow-friendly president, Viktor Yanukovych, he could now be nervous about Russian business groups breaking onto his home turf to seal deals that benefit the Kremlin.

The front

A UK court recently released details of a lawsuit between Akhmetov and the owners of Zaporizhstal, the country’s sixth largest mill. Zaporizhstal owners Eduard Shifrin Alexander Schnaider, two Soviet-born businessmen, had engaged Akhmetov as a buyer, but then sold the mill to unidentified buyers with links to the Russian government.

“Mr Rinat Akhmetov, whose family effectively owns [the plaintiff] Luxe received a telephone call from Mr. Eduard Shifrin who told him that [Zaporizhstal holding company] Midland was pulling out of the deal because they had found another buyer. Midland thus would pay $50 million in fines,” reads a document of the England and Wales High Court (Chancery Division) Decisions.

The price tag of the deal, which fell apart in May, was a tidy $690 million. But Akhmetov continues to delay a Russian takeover of the mill through litigation.

The cloaked advance of Russian investment into Ukraine’s metals sector began at the beginning of the year, when a controlling stake in major Ukrainian steel holding Industrial Union of Donbass (ISD Group) was sold to a grouping represented by Russian businessman Alexander Katunin with financing from Russia’s state-owned Vnesheconombank – the same bank involved in the Zaporizhstal deal and controlled by Russian Prime Minister Vladimir Putin. As premier, Putin serves as supervisory chairman of the bank.

The deal, revealed in January and valued at around $1 billion, transferred control over two of Ukraine’s top-five mills plus factories in Poland and Hungary. It also signaled the beginning of a fire sale on Ukrainian steel mills weakened by limited access to iron ore and/or heavy debt.

ISD Group, formerly controlled by two Ukrainian businessmen, had been a model of independent development, taking out Western loans to modernize its production and decrease dependence on expensive gas imported from Russia.

But it was its multi-billion-dollar debt which did the company in. Recent Ukrainian media reports have even claimed that the government, demanding payment from gas supplied to the steel maker, has already started seizing its property. Another heavyweight creditor of ISD is Akhmetov’s Metinvest, a major source of iron ore to its Ukrainian competitors.

However, ISD has dismissed such reports as media hysteria: “[ISD] really is in debt to companies owned by Metinvest for supplies of iron ore. However, ISD officially declares that as of July 26, the amount of this debt to Metinvest is being recklessly distorted by some media,” reads a company statement.

Akhmetov’s game

On the surface, it appears that Akhmetov may be using debt to pressure the new Russian owners of ISD, just as he is challenging their ownership of Zaporizhstal through the courts.

Metinvest was unavailable for comments to confirm or deny such a scenario.

To Galina Reznik, a specialist on Ukraine’s metallurgical industry at Kyiv-based consultancy Ukrrudprom, such a response by Akhmetov to his Russian challengers would not be unusual or unjustified.

“Why should he subsidize a competitor?” she asked. To Reznik, as well as other market watchers contacted by the Kyiv Post, the asset grab taking place on Ukraine’s metals market is a natural evolution to re-direct the country’s exports from raw materials toward more finished steel products.

Akhmetov, as well as his Russian counterparts, have often found it more profitable to export the ample iron ore that he possesses to countries like China rather than sell it to domestic competitors.

By taking over competing mills, Akhmetov and his Russian counterparts can expand production and product range, while cutting the high cost of raw materials. “It’s still cheaper to modernize the plants than build a new one,” Reznik said.

Zaporizhstal is particularly attractive to Metinvest, not just because it lacks iron ore and money for modernization, but also because it makes products not produced by Akhmetov’s other mills, such as hot rolled coils used in the construction industry, Reznik said.

Another Ukrainian steel mill that fits Akhmetov’s needs is Mariupol-based Ilyich, the nation’s third largest, and the recent victim of a so-called raiders attack.

On May 26, two men claiming to represent offshore companies registered in Cyprus, announced the sale of Ilyich to an unknown Russian investor. No banks were involved in the alleged transaction, which valued the $2 billion factory at only $30 million.

Shortly thereafter, Ilyich CEO Volodymyr Boyko announced a merger between his company and Metinvest through a share capital increase. Although rumors as to who was behind the raider attack on Ilyich have yet to subside, Reznik said Akhmetov is likely to have reacted to the situation rather than created it.

“Every crime has a finger print, and this one doesn’t look like the style of Akhmetov or the Russians,” she said, suggesting instead the work of another Ukrainian oligarch who hoped to resell the asset to the highest bidder.

Akhmetov vs. Kremlin

As to who is specifically behind the acquisitions of Zaporizhstal and ISD, Reznik is more categorical. “This is all being done with the support of the Russian government,” she said, referring to the participation of Vnesheconombank.

And the Russians’ motivations are as economically justified as any geopolitical ambitions.

“Under [Soviet leader Joseph] Stalin, when Ukraine’s metallurgical industry was built, ore mines were developed in one republic while the production facilities were built in another to keep the republics economically dependent on one another and the Soviet Union together. Now, the Kremlin has a chance to reestablish these ties,” she said.

Nevertheless, the current consolidation process – with its court cases, raider attacks and secret buyers – seems to have taken the country a long way from September 2005, when the nation’s biggest steel mill, Kryvorizhstal, was resold by the state to Mittal Steel (now ArcelorMittal) for a record-breaking $4.8 billion in a nationally-televised auction.

“Of course, these are not the most transparent approaches,” said Peter Vanhecke, CEO of Renaissance Capital for Ukraine, Belarus & CEE. But, he points out, the transactions are private.

“This is not the state selling assets with a lack of transparency. In addition, the interest of foreign players to invest in the Ukrainian steel sector has been extremely low over the last 24 months, and none of these parties seem to have been deprived from entering the processes.

You can put a question mark next to the way in which things have played out but that is probably where the observation has to stop, as the asset owners always have the option not to sell,” he said.

Source: Kyiv Post