Evraz fortifications weaken Russian economy
By John Helmer
MOSCOW - Russian Prime Minister Vladimir Putin has been reading his economic
history.
He knows that the Smoot-Hawley Tariff Act (named after its sponsors,
Congressman Willis Hawley and Senator Reed Smoot) was the American statute
enacted on June 17, 1930, which raised United States tariff barriers against
more than 20,000 imported goods to record levels - over the objections of
then-president Herbert Hoover and most of the US economics profession of the
time.
After the enactment of Smoot-Hawley, other countries retaliated with their own
increased tariffs on US goods, and American exports and imports plunged by more
than half. The combined
impact on international trade is generally thought to have turned the stock
market collapse of 1929 into the Great Depression.
Speaking at Davos a few days ago, Putin warned against Smoot-Hawley. "We must
not revert to isolationism and unrestrained economic egotism. The leaders of
the world's largest economies agreed during the November 2008 G-20 [Group of
20] summit not to create barriers hindering global trade and capital flows.
Russia shares these principles. Although additional protectionism will prove
inevitable during the crisis - and we see it today, much to our regret - all of
us must display a sense of proportion."
In the question and answer session which followed, the Russian prime minister
conceded: "True, we are increasing import duties of certain ready-made
equipment to promote Russian manufacturers - but I don't think we are
extremists in this respect. We are also reducing and even abolishing import
duties for technical equipment, especially of the kind Russia is not
manufacturing, thus promoting Russian industrial advancement."
What kind of Russian industrial advancement was Putin thinking of when, as
chairman of both the government and Vnesheconombank, the state bailout agency,
he recently agreed to make the following loans to the Evraz group, Russia's
largest steelmaker, controlled by Roman Abramovich's holding, Millhouse?
On November 27, one loan of US$1,006.6 billion and then on December 15, a
second loan of $800 million. Total: $1,806.6 billion. The company disclosures
claim the money is "to refinance the company's short-term debt". In addition,
on November 13, Vneshtorgbank, another state-controlled bank, agreed to make
two loans totaling 10 billion roubles (then $360 million, now worth $278
million). According to Evraz, "The loan proceeds were used for regular tax
payments in Russia."
Total Russian government protection money for the steelmaker: more than $2
billion. But as Asia Times Online has already reported, most of this cash has
been spent to protect Evraz's non-Russian steel mills - especially those in the
United States and Canada - from being forfeit to the foreign banks which loaned
Evraz the money to buy them in the first place.
What appears to be happening, therefore, is that Putin's money for Evraz is
being spent by the board of directors and management on reducing steel
production in the company's Russian plants, and raising profit streams in the
US and elsewhere, outside Russia.
Thus, Russian industry is penalized for the company's borrowing profligacy
while offshore profit centers for Abramovich and his associates are protected,
beyond the Kremlin's reach. The only concession the latter have announced is a
change in dividend policy, which was announced by Evraz on December 19. Instead
of paying out 50% or more of the annual profits in dividends to themselves, as
shareholders, some of the cash will be retained. From the final dividend
payment of 2008, due soon, not more than 25% of the net income will be
distributed.
"Making the world stronger" is the company motto on Evraz's website. The latest
production and sales reports from the company suggest the unmentionable
corollary that "Russia gets weaker".
Fourth quarter and full-year production figures, released this week, show that
the group has cut back significantly more sharply on steel output from its
Russian mills, compared to units in Europe and North America.
Total crude steel production for the consolidated group was 17.7 million tons.
This marked a 7.1% increase over the 2007 level. However, Russian crude steel
volume dropped 7% to 14 million tons. From crude steel, the mills produce a
variety of steel products for different industry applications.
The group reports that flat-rolled product volume jumped 19% to 2.2 million
tons in aggregate; the Russian mills, however, produced 325,000 tons, 31% less
for the year. The only category of steel for which Evraz's Russian mills report
growth in 2008 was railway products, which are bought by the state-owned
Russian Railways Company; volume for 2008 was just under two million tons, up
10% on the 2007 level.
In percentage terms for the full year, the biggest drivers of growth in output
of crude steel for 2008 were Evraz's newly acquired Ukraine mills, followed by
its North American units, and then by its South African mill. The operational
results of the Ukrainian assets - Dnepropetrovsk Steel Works and coke chemical
plants - were consolidated into the group's accounts from December 12, 2007;
the operational results of Oregon Steel Mills (Oregon and Colorado) were
consolidated from January 2007, while those of Claymont Steel (Delaware) were
consolidated from January 2008. The results of IPSCO Canada were consolidated
into the group from June 12, 2008. Highveld Steel and Vanadium Corporation, in
South Africa, has reported in the consolidated format since May 2007.
In the fourth quarter, the group aggregate for crude steel was 3.3 million
tons, down 34% on the third quarter. Semi-finished steel was cut even more
sharply - by 51% to 635,000 tons. Construction steel totaled 781,000 tons, down
41%.
Once again, it is clear that Evraz's management decided to reduce capacity
utilization and output at their Russian mills by a larger percentage than they
applied elsewhere. Russian crude steel volume fell 39% quarter on quarter to
2.2 million tons; construction steel was cut 41% to 625,000 tons. While output
was also reduced at the non-Russian mills, the crude steel volume fell by just
10% in North America to 544,000 tons; by 17% in Europe to 182,000 tons; by 21%
in South Africa to 171,000 tons; and by 38% to 149,000 tons in Ukraine.
Construction steel volumes fell by 32% in the Ukraine and by 28% in South
Africa.
The latest company report discloses that sale prices for steel fell
dramatically more in the fourth quarter for Evraz's Russian products than for
comparable products in North America and elsewhere. Russian construction steel
fell from an average price of $1,170/t in the third quarter to $518/t in the
fourth quarter, amounting to a 56% decline quarter on quarter. In Ukraine, the
falloff for construction steel was 51%, from $1,186/t to $587/t. In Europe,
construction steel retreated from $1,334/t to $1,118/t in the same period, a
decline of 16%; in North America, the price for construction steel fell from
$1,331/t to $1,038/t, down 22%. Finally, in South Africa, the same product
dropped from $1,174/t to $975/t, a fall of 17%.
Evraz was asked to check this analysis of the reported figures, and explain how
the company justifies receiving substantial state financing in Russia, when it
has imposed sharper production cuts on its Russian mills than on its
non-Russian units. The company has declined to reply.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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