By John Helmer, Moscow
Arkady (right image) and Boris Rotenberg are under investigation by the Federal Antimonopoly Service (FAS) for running a cartel and price-rigging to cheat Gazprom, their longstanding business partner and patron.
This is unusual for several reasons. One of them is that the Rotenbergs neither produce the goods in trade targeted by FAS, nor are they the end-buyer and end-user, Gazprom. So how can the go-between between buyer and seller be capable, let alone culpable of running a multi-billion dollar cartel? Igor Artemyev, head of FAS (left image), has announced that he’s going to the mat to find out.
Arkady Rotenberg is well-known as an expert at judo and coach of the martial arts in St. Petersburg. The Rotenbergs’ businesses include companies supplying steel pipes to Gazprom called Stroygazmontazh and North European Pipe Project (NEPP; Russian acronym SETP). These pipes are of special steel, with high-technology features and welds enabling them to carry gas above the Arctic ice and below the sea, at very high pressure and without corrosion. They are among the most expensive types of gas transporting pipe produced in the world. Multiply the unit price by the thousands of kilometres required to cover this map, and you understand the business:
TMK, owned by Dmitry Pumpyansky and his associates, does not provide a detailed breakdown of its large-diameter pipe sales or the average selling price. And neither does the United Metallurgical Company (OMK is the Russian acronym), whose Vyksa mill is the leading producer of this type of pipe in Russia, turning out about 1 million tonnes per annum; it doesn’t disclose its pricing.
But Severstal does give a clue. Its quarterly production and sales reports indicate that in the nine months to September 30 this year, the Izhora mill has sold 409,000 tonnes of large-diameter pipes; that’s an increase of 22% over the same period of last year. According to Severstal, the average sale price for the product over this period has been $2,055 per tonne.
If you know one supplier price, you know them all, if the FAS is to be believed.
Last year, according to Russian press reports, the Rotenbergs did more than 1.5 million tonnes of pipe buying and reselling for revenues of at least Rb86.2 billion ($2.5 billion) in revenue, and profit of at least Rb8.3 billion ($266 million). Add something like the rate of growth for this year’s Izhora pipe sales, and multiply by $2,055:
1.8 million tonnes x $2,055 per tonne = $3.7 billion
Assuming the same ratio of profit to revenue as 2010 (11%), the Rotenberg pipe trade this year stands to put away almost $400 million.
The brothers also own their own bank – SMP (Severny Morskoi Put, Northern Sea Route). About that, Moody’s rating report warned in 2008 of the “currently limited franchise (which is in Moody’s view to a substantial extent reliant on the bank’s shareholders), high credit risk concentrations, low diversification of the bank’s funding base and potentially volatile profitability.” If the Rotenbergs went bust, Moody’s claimed, “any support from the Russian financial authorities is unlikely”. They haven’t; they didn’t.
Until this week. Artemyev’s move follows a brave ippon he delivered, also this week, to another oligarch, Victor Vekselberg, blocking the proposed merger of, and takeover by, Vekselberg’s KES holding and electricity units of Gazprom’s GazpromEnergoHolding. “We will never support the [merger] application in its current form,” Artemyev is reported on the wires as saying.
An announcement of the steel pipe cartel inquiry appeared on the FAS website on October 26.
It was noticed there by the Moscow business papers and by most analysts of the steel and pipemaking business in the Moscow investment banks and brokerages, all of whom have pooh-poohed its significance. They did not notice that Rotenberg’s trading companies, which buy the pipes from Russia’s four pipemills before reselling them to Gazprom, is also a target.
Maxim Ovchinnikov, head of the industry department at FAS, who is responsible for the new steel investigation, has announced: “In fact, market participants have refused to compete and coordinated their activities, which certainly is evidence of restriction of competition”.
Ovchinnikov said that FAS has already sent its inspectors to look through the Rotenberg trader’s books, and understands that they sell from 70% to 90% of large-diameter steel pipes which Gazprom buys. He said the FAS doesn’t (yet) have the exact figures. The FAS investigation, he added, will find out if the Rotenberg companies participated in the price collusion. NEPP, Ovchinnikov said for the third time, is an “interested party” in the investigation.
The inspections preceding the announcement appear to have been something of a surprise to the pipemakers, and possibly to Gazprom. Alexander Deineko, chief lobbyist for the sector and head of the Russian Foundation for Pipemaking Development, has been out to lunch, his secretary says, since he was asked to comment on the FAS announcement. In February, the pipemakers asked the FAS to protect them from price collusion they alleged against the steelmakers, Severstal and Magnitogorsk Metallurgical Combine. There have also been negotiations between the pipemakers and Gazprom on a formula for pricing large diameter pipe next year, which Deineko has declined to discuss. In September, Gazprom’s chief executive Alexei Miller met with the pipemakers at Chelyabinsk to discuss next year’s contracts. The two sides said at the time they are considering a benchmark adjustable once every six months, based on the movement of the prices of raw materials for the steelmaking, including coal, iron-ore, ferroalloys and scrap.
|The FAS inspectors appear to have made their move after Miller returned to Moscow from Chelyabinsk (Miller, right, sitting with Andrei Komarov, owner of ChTPZ). Gazprom’s press release on the meeting mentioned a discussion of “a number of crucial issues”. Miller is quoted by his company as saying Gazprom will increase by 30% its purchase of large diameter pipes next year “only if the domestic products fully comply with our requirements to [sic] the price and quality and sustain competition with their foreign counterparts.”|
The Rotenbergs were asked to confirm what they know of the FAS action through spokesmen at Stroygazmontazh and SMB Bank. They have not replied.
The text of the announcement from the watch-dog agency omits the Rotenberg companies in the list of targets, saying only that FAS has “initiated a case against [pipemakers] TMK, OMK-Steel, Izhora Pipe Plant, and ChTPZ [Chelyabinsk Pipe and Tube-Rolling Plant] for violation of paragraph 3 of Part 1 of Article 11 of the Federal Law On Protection of Competition.” For background on the waning of ChTPZ’s fortunes, read this.
Ovchinnikov’s subsequent statements confirm that omission from the public announcement doesn’t mean that FAS has released its hold on the Rotenberg pipe operation.
According to the FAS posting, “the grounds for legal action were the materials of an unscheduled inspection, conducted in September-October 2011 in respect of suppliers of large diameter pipes. The main consumer of these pipes is OAO Gazprom, which uses these products for the construction of gas pipelines….During implementation of the control measures, documents have been identified, according to which Russian manufacturers of large diameter pipes engaged in Gazprom’s competitive procurement procedures in the period between 2008 and 2011 coordinated delivery schedules of large diameter pipes to JSC Gazprom. Deliveries of large diameter pipes to JSC Gazprom were divided between the Russian pipe companies on a territorial basis (depending on the location of the gas pipeline), the volume, range of goods sold (depending on the size and strength class of large diameter pipes) and the composition of the suppliers.”
FAS concludes its recital by saying that it “sees in the actions of TMK, OMK-Steel, Izhora Pipe Plant, ChTPZ violations of the antimonopoly legislation.”
Dmitry Smolin, steel analyst for Uralsib Bank, reported to clients yesterday that he believes the probability of a significant fine being imposed on the pipemakers is low. “As the large-diameter pipes market in Russia is dominated by Gazprom, it dictates the terms of the contracts, and usually purchases pipes through a single trading company [sic]. Thus, in our view, it is relatively difficult for Russian pipe producers to overprice or manipulate sales volumes. We do not expect the case to have a significant impact on TMK. In our view, the most negative outcome would be a 5% fine of 2010 LDP sales, which we estimate at less than 1% of 2011E revenue and 4% of 2011E EBITDA for TMK and less than 1% of 2011E EBITDA for Severstal.”
Barry Ehrlich, steel analyst for Alfa Bank Moscow, reports that “Gazprom buys pipes only via tender offer. According to press reports, the tender is almost always won by one of the trading companies controlled by the Rotenberg brothers. For example, in 2010 SETP (one of the Rotenberg brothers’ trading companies) supplied 94% of the 1.4mt bought by a Gazprom subsidiary…While the investigation will likely be settled with no major fines, Gazprom may gain additional leverage in its negotiations for 2012. This may also influence negotiations over the long-term pricing formula currently under discussion between Gazprom and the pipe suppliers.”
Arkady Rotenberg has always said his business success trading steel pipes to Gazprom owes much to his martial arts discipline — but nothing to one of his judo-wrestling pals, Prime Minister Vladimir Putin. Or as Bloomberg, whose people familiar with the matter never mislead, has quoted him as saying: “Knowing high government officials has never hurt anyone in our country but it’s by far not helped everyone. For me it’s unacceptable to use such connections.”