Page 1 of
2 Kremlin writing on the wall for
Mittal By John Helmer
MOSCOW - The Russian government has become
the first in the world to tell Lakshmi Mittal to
take his cash and his steelmills elsewhere.
India's and England's richest individual,
and the world's largest steelmaker, has been
suffering from a hearing defect, and apparently
did not understood the message when it was
initially passed discreetly. Then last Friday
morning, following the auction of almost 4 billion
tonnes of Russian coal assets, from which
Mittal had been disqualified,
a minor state property official announced that the
government will take five days before sending
Mittal a letter, explaining the reasons for his
exclusion.
Mittal is not the only powerful
Indian figure in Russia to suffer from the painful
syndrome typified by vanity blocking the aural
passages, and wishful thinking that causes
frontal-lobe distortions in impulse control and
judgement. A series of recent Indian ambassadors
to Moscow and ministers in Delhi, not to mention
the Congress Party and Gandhi family treasurers,
have all believed in the prospect of taking a
share of Russia's resource wealth. But after
establishing a modest office in Moscow in 2003,
Mittal, his brothers, and son were repeatedly
advised to rermain where they were - across the
border in Kazakhstan and Ukraine, and not to
imagine they will be allowed to permanently move
north, except for social visits, and even those
have been limited.
President Vladimir
Putin has rejected several overtures from Mittal,
and refused to receive him in Moscow. There have
also been personal clashes with individual Russian
steelmakers such as Alisher Usmanov (Urals Steel)
and Alexei Mordashov (Severstal), whom Lakshmi
found it easy to outwit, but who have also been
burning with thoughts of vengeance ever since. On
the other hand, Mittal's son Aditya has been the
welcome guest of Victor Rashnikov (Magnitogorsk).
Privately, some Indians believe the
problems they run into in their business dealings
with Russians can be blamed on racism. This
doesn't explain, however, why while bidding for
Russian oil assets, the Chinese have been far more
effective than the Indians; and why in this latest
case of coal, it is the Japanese, who have come
out on top. It is characteristic of all the big
Indian failures in Russian business that their
promises are announced with great fanfare ahead of
time, only to be defeated in the clinches and
behind the scenes. Indian intelligence gathering
on Russia also seems to find its way into the
markets of Delhi, where classified documents,
regularly pilfered from ministry files, expose a
degree of infighting and commission mongering that
is bound to convince Russians to be wary, if not
fully resistant to Indian methods.
Most
recently, Mittal was welcomed by Vyacheslav
Shtirov, president of the far eastern region of
Sakha (Yakutia), and by Sergei Vybornov, chief
executive of Alrosa, the Sakha region's dominant
enterprise, and the world's second largest diamond
miner. According to the Russian media, the Mittals
recently offered Shtirov and Vybornov a number of
promises they could not resist and they forgot to
ask for the Kremlin's blessing. Their subsequent
embarrassment with their shortlived Mittal
partnership was almost as painful as Lakshmi
Mittal's who had delivered exaggerated promises of
what he could deliver.
The simple facts
are that on Oct 5, at the Moscow offices of the
Russian state property fund, the fifth-ranked
Russian steelmaking group Mechel offered Rb58.196
billion (US$2.3 billion) to take a 68.86% stake in
Elgaugol (Elga Coal), comprising smaller stakes
held by the regional Sakha government and the
Russian state railways company, RZD; and a 75%
minus 1 share in Yakutugol (Yakut Coal), owned by
the Sakha government. Altogether, the coal
reserves of the two companies have been estimated
at 3.9 billion tonnes, mostly of coking coal.
Mechel's bid price was 23% above the Rb457.4
billion reserve fixed by the selling authority.
The bidding took 30 minutes, and at
conclusion, a representative of Arcelor Mittal
declared that his company "is surprised that it
has not been admitted to the bidding, and waits
for an explanation of the reasons". If this
sounded like a threat to take the Russian
government to court, it compounded the folly of
making Mittal's bid public in the first place.
With coal reserves of 1.7 billion tonnes,
Yakutugol was partially privatized in Mechel's
favor in January 2005, when it paid $411 million,
outbidding other domestic steelmaking rivals. The
price then was seem as a risky gamble by Mechel,
based either on a promise from Sakha boss Shtirov,
of control shareholding at a cheaper price; or
based on financial backing from a Japanese trading
house. Calculated in terms of value per tonne of
coal reserves, Mechel's price in January 2005 was
40% more than the valuation Mechel subsequently
offered to take Elgaugol and the rest of Yakutugol
off the hands of the Sakha government and RZD.
Mechel's Russian rivals then tried to revoke
the 25% sale, and prevent Mechel, or Shtirov,
combining to take the rest. A faction of officials
urged the Kremlin to revoke the initial 2005
privatization, on the ground that the transfer of
the mine asset to Sakha a decade earlier had been
unlawful. Court proceedings to rule on the issue
were started. They were then stopped by an
agreement on asset transfers between Yakutsk and
Moscow and restructuring of Alrosa. This left
Mechel in the lurch with Shtirov, whose promise
that he would agree to sell Mechel majority
control of mine was not endorsed by Putin.
According to a source inside Mechel at the time,
"negotiations are still going on, but they are
tough ones, as we have to negotiate both with
Russian [federal] and the local Sakha authorities.
We are proposing various schemes as we are
interested in all the assets – Yakutugol,
Elgaugol, and probably a merger of them in the
form of Sakhaugol. We expect the answer by the end
of the year."
Weeks later, there followed
the Brazilian iron-ore miner Companhia Vale do Rio
Doce (CVRD), which entered the bidding for
Mechel's plan to merge the two coal deposit
companies, and provide the substantial foreign
investment required for mine development and
export marketing of the coal. A press leak of
CVRD's interest appears to have been orchestrated
to add the allure of a large Brazilian cash
injection to Mechel's plan. In addition to CVRD,
Mechel reportedly approached the LG and Posco
groups of South Korea; Sumitomo and Mitsui in
Japan.
The reckoning has now come, and
Mechel cannot afford its winning bid, by itself.
Nor could Alrosa afford to compete. The New York
Stock Exchange-listed Mechel has a current market
capitalization of $7.6 billion, more than double
what it was at the start of this year. Alrosa is a
closed shareholding company, wholly owned by the
Russian state, with an estimated asset
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
