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By John Helmer, Moscow

In a new and unprecedented Kremlin deal, state-controlled Uralvagonzavod (UVZ), a military tank and railcar builder, is to take over Amurmetall (“Amur Steel”), the struggling steelmaker in the Russian fareast, in exchange for a guaranteed flow of state military procurement orders funded by the state budget.

Saved and apparently scot-free of financial obligations of approximately $1 billion is the former owner of the bankrupt asset, Alexander Shishkin (third image).

Amurmetall, located at Komsomolsk-on-Amur, in the Khabarovsk region, processes steel scrap into profiled iron and rod, plate, and rolled steel for vehicle, shipbuilding, and construction applications. Total output capacity is more than 2 million tonnes per annum. The only steel maker in the Rusisan fareast, it was rescued by the federal government from bankruptcy between 2008 and 2010, when its controlling shareholder Shishkin transferred it to state bank,Vnesheconombank (VEB).

Unlike Vadim Varshavsky, owner of the Estar group of steelmills, Shishkin paid no penalties. Both members of the State Duma at the time of the financial collapse, Shishkin and Varshavsky appear to have taken personal loans against the collateral of their steel assets, but passed their mill debt obligations on to the government.

Prime Minister Vladimir Putin ordered the VEB bailout when Amurmetall’s debts totalled almost Rb27 billion ($930 million). VEB has been trying to sell the asset for months; Shishkin has declined to exercise his buyback option. Mechel, which has been obliged by the Kremlin to acquire several of Varshavsky’s mills and keep them running, has told the Kremlin this time round that it cannot afford to accept Amurmetall’s liabiltiies, according to industry reports. Evraz did likewise, along with Severstal and pipemaker TMK.

Vasiliy Varyonov, UVZ’s government relations director, told CRU Steel News in Moscow today that his company is working on the takeover with VEB. “Negotiations have been conducted over the past six months — there have been many meetings. Now being discussed are the practical steps that already should lead to the programme [for revival of the plant].” He declined to identify the terms of the deal.

It is unusual for a Russian consumer of steel products and manufacturer to move upstream to buy a mill supplying raw materials, although Russpetstal, a subsidiary of the state holding Russian Technologies, has acquired steelmills like Red October and Barricades in Volgograd and Stupinsky Metallurgical Plant, which supply specialty steels to the defence and aerospace industries. Between 2010 and last month, Russian Technologies transferred these steelmills from Russpetstal to a new entity RT Metallurgy, avoiding repayment of the former’s debts, but declined to answer questions about their willingness to take over Amurmetall.

VEB spokesman Ekaterina Grishkovets confirms the sale and purchase deal is under way, and that Amurmetall was unable to meet February and May 15 deadlines this year for debt repayment instalments. She also acknowledges that Amurmetall was required by agreement with its creditors to repay Rb1.6 billion in instalments last year, and was unable to pay Rb803 million due by last month. The Amurmetall management had asked for more time.

UVZ is based at Nizhny Tagil, in the central Russian region of Sverdlovsk. It is the largest builder of main battle tanks in the world. Railcars, tractors and other civilian vehicles comprise roughly 60% of its output and sales, but UVZ management won’t give precise details. UVZ’s general director, Oleg Sienko, is reported by Reuters as confirming the takeover negotiations, but he will not say what the rationale is for UVZ’s acquisition. Russian media reports suggests that he has asked Roman Trotsenko, chief executive of the state-owned United Shipbuilding Corporation (USC) for an undertaking to buy Amurmetall plate for the shipyards it controls in the region, including the new Singapore and South Korean yards, Vostok-Raffles and Zvezda-Daewoo, under construction there. Trotsenko is not commenting on the idea except to say that steelmaking is a non-core activity for USC.

Last year, Amurmetall produced 742,000 tonnes of steel, according to steel industry monitor Rusmet of Moscow. Billets amounted to 372,000 tonnes, long products, 323,000 tonnes. Revenue rose 19% over the previous year to Rb14.5 billion, but earnings (Ebitda) were negative and the net loss came to Rb3.9 billion, up 44% over 2010. VEB stopped funding for the plant on April 1.

A source at USC says that at the moment for USC the steel mill is “100 percent a non-core asset. They don’t produce ship steel.” If the government decides on a rescue plan, USC says it is ready to participate on condition the state will also finance investment in a new specialized production line at the mill for the type of ship steel which can be used by its shipyards.

Mikhail Rodionov, deputy director-general of Rusmet, told CRU Steel News there are serious commercial obstacles for Amurmetall domestically, as rail tariffs for shipping Amurmetall’s products westward are prohibitively high, complicated by VAT and export duty problems. Consumer demand for construction and machinery applications is negligible in the fareast region, while supplies of pipes for the East Siberian-Pacific Ocean crude oil pipeline project of Transneft and the oil companies have come from pipemakers in western and central Russia shipping eastward. Rodionov warns that the price of scrap in the fareast is a key determinant for Amurmetall’s rescue and long-term profitability.

Shishkin was listed on the Forbes richest Russian list of 2008 with an estimated $2.3 billion in fortune. He then disappeared from the lists of 2009, 2010, 2011, and 2012. Forbes doesn’t know how to get in touch with him. Neither does the State Duma, where he was a deputy and member of the Sports Committee. His latest investment is reported to be a group of Ukrainian pharmaceutical companies called Zdoroviye, but it doesn’t answer its telephones. Shishkin is also reported to be associated with the Amur ice hockey club, but it isn’t answering its telephones either. If Shishkin is ready to say how much of his loss of fortune was paid to staunch Amurmetall’s debts, he is urgently requested to call in and say so.

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