MBS Blog

Good article in the Kiev Post. Russians make moves on Ukraine’s steel industry.

As Ukrainian industry is driven toward consolidation by global trends, native son billionaire Rinat Akhmetov is fighting to hold his own dominating position in the nation’s lucrative metals sector against what looks like a stealth invasion from Russia.

Battles are currently being fought for control of two Ukrainian steel mills, with tactics ranging from the covert transfer of shares to intense struggles among competing bidders.

One such ownership tug-of-war is flaring over Mariupol-based Ilyich Steel Mill, the nation’s third largest, triggering President Viktor Yanukovych’s call this week for law enforcement officers to investigate what is happening.

When the dust settles, the question of who owns the nation’s top engines of industry and how they were acquired could send strong signals internationally. For one, it could gauge how far Ukraine’s economy will tilt under Russian control. Secondly, it could show whether the country is moving away from free-market levels of transparency back towards the wild 1990s decade of gangster capitalism where tycoons close to top political leaders grab assets at will.

For now, the question to what lengths the would-be consolidators of Ukraine’s metal sector will go is an open one that has many growing increasingly nervous.

Ilyich spokesman Serhiy Mahera, who claims his company is the target of a hostile takeover, said: “If this raider attack on Ilyich is successful, it will show that it’s no longer possible to conduct normal business in Ukraine.”

Nick Piazza, head of sales at BG Capital investment bank, said the stakes are high, but for slightly different reasons.

Piazza said steel-mill owners are driven by the need to be “vertically integrated” – meaning they need to control as many stages of production as possible, from acquisition of raw ore, which Ukraine has the world’s fourth-largest reserves of, to exports of finished products, where Ukraine ranks globally among the top 10, and everything in between, in order to be competitive globally.

Ukraine’s richest man Rinat Akhmetov is fighting to hold a dominating position in the nation’s metals sector. (Ukrinform)

Integration means survival of the fittest – and the fittest in Ukraine could end up being Russia and its oligarchs, who have started advancing into Ukraine quickly since the Moscow-friendly Yanukovych became president. “Akhmetov is the strongest domestic player in Ukraine, Russia is a regional giant and metallurgy is the sector where it’s all going to start,” Piazza said.

The first shots of the battle for Ukraine’s metallurgical industry, which accounts for 40 percent of the country’s exports, were heard at the start of 2010, when unspecified Russian investors took control of steelmaker Industrial Union of Donbass, including two of Ukraine’s top-five mills.

Now, just a few months later, the action is centered on two other top metallurgical facilities – Zaporizhstal (ranked 6th in production) and Ilyich. They are ripe for the picking due to their reliance on other sector players for iron ore.

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.

Ilyich chief executive officer Volodymyr Boyko, who manages the shares of the mill’s holding company, accused unidentified corporate raiders of trying to seize the asset.

A week later, at a June 2 press conference, the broker who actually transferred the shares in Ilyich, refused to reveal the seller in whose name he carried out the deal. “I am inhibited by client confidentiality,” Sergey Velikanov, director of GPI Brok, told journalists in Kyiv.

Ilyich spokesperson Mahera accused Velikanov of abusing his status as temporary custodian of the shares to push through the shady deal. “We let down our guard,” Mahera said, adding, however, that “not a single soul can prove that we authorized the broker to sell these shares.”

Another Ukrainian steel mill set to change hands is Zaporizhstal, which Akhmetov’s holding company System Capital Management, acknowledged it was trying to acquire. However, Ukrainian media have recently reported that more unspecified Russian investors had outbid Akhmetov in negotiations with Zaporizhstal’s owners – a grouping led by two Soviet-born businessmen: Toronto-based Alex Shnaider and Eduard Shifrin.

Akhmetov company spokesperson Anna Terekhova said, however, that her company is still in the running. “We submitted all documents but a final decision has not been taken yet,” she said.

So is there a link between the mysterious Russian investors in Ukraine’s metallurgical industry, which is ranked 7th worldwide?

Ivan Dzinka, an analyst at Kyiv-based investment bank Eavex Capital, said that although it’s not exactly certain who bought the controlling stake in Industrial Union of Donbass, it is highly likely that the same people are trying to buy Zaporizhstal.

“It’s a struggle between them and Akhmetov, and it’s continuing to this day,” Dzinka said.

He said that the non-transparency of the Industrial Union of Donbass deal and the speed with which the Zaporizhstal deal came about points to a coordinated campaign.

A link between Russian investors and Ilyich, which System Capital Management holds a small stake in, has yet to be made.

However, industry sources said that leading Russian steel players Evraz Group, co-owned by multi-billionaire Roman Abramovich, and Severstal are both interested in increasing their influence in Ukraine’s metal sector across the board, as is Metalloinvest, the Russian ore conglomerate controlled by Alisher Usmanov.

Back in 2005, when the nation’s biggest steel mill, Kryvorizhstal, was resold by the state to ArcelorMittal for a record-breaking $4.8 billion in a nationally televised auction, it looked like the sector was headed toward greater transparency and corporative governance. Now, the return of shadow investors and illegal seizures could mean that Ukraine is regressing to the crony capitalism of the 1990s, where tycoons close to political leaders forcefully grab top assets at will.

“Investors are primarily concerned about predictability and stability, and any signs of a possible increase of illegal corporate raider activity will cause great concern among the business community further highlighting a culture of weak corporate governance and the unfortunate existence of a broken system that allows this type of reprehensible behavior to take place,” Jorge Zukoski, president of the Chamber of Commerce in Ukraine, said.

In the meantime, the Anti-Monopoly Committee announced that it was “concerned” by media reports about a change in ownership at the two steelmakers as the president has ordered an investigation. “The president has sent out all the necessary instructions, including to law-enforcement agencies. I think that we will wrap things up there very soon,” Prime Minister Mykola Azarov told journalists in Kyiv on June 3.