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By John Helmer in Moscow

Prime Minister Vladimir Putin yesterday launched an orchestrated attack on steel prices and the profit margins of Russia’s steelmaking groups during a meeting with the head of the Federal Antimonopoly Service (FAS), Igor Artemyev.

Putin told Artemyev that “as our country is recovering from the crisis, certain industries have independently expressed their wishes, unjustified in my mind, to increase prices. It is clear that costs may increase and that the economic situation has changed. However, this is no justification for hiking up prices… For example, the possibility of an increase in prices for metal products has recently been announced. We need to have a very serious discussion about this issue with our colleagues representing businesses. We need to look into the actual conditions, pricing policies and other elements affecting this process.”

Putin did not name a specific steel maker, but he already knew what Artemyev was about to say. Artemyev, a St. Petersburger who never initiates antitrust action against oligarch-owned properties before asking the prime ministry for clearance, told Putin his agency has already opened an investigation of Evraz. “Last week we launched an anti-trust investigation into Evraz Group for setting high, monopolistic prices. We are currently examining the entire production chain, from the raw iron ore to iron ore pellets, metallurgical coal and metal, including rolled metal and other finished products. The issue of greatest concern is that the pricing is based on inadequate assessments of global markets and trends. Therefore, expenditures and costs are exaggerated. The distribution systems often include intermediaries, so-called trading houses. We are currently investigating the distribution system for the metal production industry. We often find companies that resell finished goods that can be bought at a factory with a 20% to 30% mark-up.”

Evraz, whose government relations chief, Konstantin Lagutin, is relatively new at his job, has responded that it knows nothing about the week-old FAS investigation. In a statement from Alexander Agureyev, spokesman for Evraz, the company said: “Evraz has not been provided with any details of the investigation as of the current time. Evraz will cooperate fully with the investigation, and will make a further announcement once official communications from FAS are delivered.”

It is the second time in a week that Putin has directly involved himself in Evraz’s affairs. Last week, on May 17, Putin required the controlling shareholders of the company, Roman Abramovich and Alexander Abramov, to participate in a conference Putin chaired by videolink on the aftermath of the Raspadskaya coalmine disaster of May 8-9. Abramovich and Abramov jointly share ownership of Raspadskaya with Gennady Kosovoy and Alexander Vagin, the mine company’s veteran executives.

Abramovich’s appearance for the conference at the Novokuznetsk studio was unusual, but he was asked nothing by Putin, and he had nothing to volunteer in the conference record.

Abramov was asked by Putin what he was proposing to do for employment of relatives of the 90 men killed in the mine blast and rescue attempt. Abramov replied: “we are ready to provide jobs for all relatives at the group’s facilities in Novokuznetsk and the Kemerovo Region. The trade union is aware of this.” One miners’ union representative and one mine foreman were present during the conference; none was asked by Putin to speak.

Although he was Governor of the Chukotka region between 2000 and 2008, Abramovich has made it his practice to avoid local parliamentary statements; after he resigned from the governorship, Abramovich won election to the Chukotka parliament in October 2008, with 97% of the votes cast. The only thing known for certain about his parliamentary membership is that it preserves Abramovich’s tax status in the region. For years, all press questions to him have been referred to an American spokesman, John Mann. Abramovich’s latest silence is therefore not unusual, but it is not the result of a speech defect. It is not known whether his other skills include writing or speechmaking.

The apparent leniency with which Putin handled Abramovich’s appearance at the May 17 meeting contrasts with a string of explicit attacks Putin has made on most of Abramovich’s oligarch peers in the metals and mining industries. This has drawn fire from critics of Evraz and Raspadskaya, and of the Kemerovo region government for corruptly acquiescing in law-breaking. Boris Nemtsov, once a favourite of Boris Yeltsin and a perennial federal opposition candidate, told the Russian media he has appealed to President Dmitry Medvedev to investigate Abramovich’s apparent immunity. The Communist Party in the federal parliament has also attacked the Kemorovo governor, Aman Tuleyev, once a Communist party candidate for president himself, for showing favouritism towards Abramovich and the Evraz group.

Blunting this line of attack, Putin has been reported by other government officials as having ordered federal ministries to find ways to help Raspadskaya with the restoration of the damaged mine. Putin reportedly gave state officials one month to start providing assistance to Raspadskaya, but according to Deputy Prime Minister Victor Zubkov, in a wire service report on May 24, “preliminary estimates should be ready much faster.” Putin’s aid order is interpreted in the industry as taking the heat off the company’s senior managers and also the controlling shareholders.

By Monday evening, the Moscow stock market reacted to the latest Putin move against Evraz for price-rigging, and cut 4.8% off the Evraz share price, while the two main market indexes remained positive. Among Evraz’s steel peers, Mechel’s share price dropped even more by 5.8%; while Novolipetsk and Magnitogorsk remained almost unchanged.

The Putin attack reminded the market of his criticism of Mechel, and its owner, Igor Zyuzin, in July of 2008, when the focus of Putin’s ire was rising coking coal prices. Zyuzin was also Putin’s named target at the time. The FAS then followed the prime minister, launching price-rigging investigations of all the major coalminers, including Mechel and Evraz’s Yuzhkuzbassugol. All paid fines, and agreed to price monitoring restrictions. But by the time the FAS had completed its work, the global market crisis had forced both coal and steel prices into a sharp dive.

Putin’s intervention is also late this time, as domestic Russian steel prices have already started falling in line with the global trend, and the lack of Russian investment and domestic demand for steel-consuming industries, such as construction, car and truck manufacture, and white goods. Moscow industry analyst Sergey Donsoy reported today to clients of Troika Dialog: “In our view, the whole discussion looked more like a well prepared PR move supposed to remind steel producers of their place in the big scheme of things, and warn about the perils of excessive profit seeking. We think that the statement regarding the practice of using inflated input prices merits particular attention. In our view, it could be meant to demonstrate the government’s awareness of the advantages of vertical integration that most Russian companies enjoy, and to relate that the growth in realized prices of the mining subsidiaries of one company cannot be a legitimate reason for strong fluctuations in the prices of its steelmaking subsidiaries.”

Barry Ehrlich of Alfa Bank has noted in his report to clients that Evraz may be targeted because it is the monopoly producer of rails in Russia, and because during the 2008-2009 crisis it failed to shave prices for supplying the state railways system in line with the decline of other steel product prices. “The one market where there is clearly a dominant position is rails, where Evraz is currently the monopoly domestic supplier, with approximately 1.0 mln t of domestic rail supply. It appears that Evraz’s rail prices fell far less than other steel prices in 2009 and a large premium opened up relative to construction steel products. This suggests that Evraz may be forced to reduce its prices on railway products. If prices are reduced by $100, this would have a $100 mln negative impact on EBITDA.”

There have been complaints about rising steel prices to the Kremlin from state companies in recent months. Putin was also involved in April in requesting FAS action on a complaint of price rigging by Uralvagonzavod (“Ural Wagon Works”, UVZ), the state-owned manufacturer of railway cars and tanks, road-building vehicles, metallurgical products, tools, and the Russian Army’s main battle tank. In the complaint lodged by UVZ’s chief executive Oleg Sienko, it was reported that four steel suppliers — Evraz, Mechel, Magnitogorsk, and Severstal — had demanded price increases, starting on April 1, of 10% to 30% above the previous contract delivery level for UVZ.

Sienko’s submission to FAS argued that the rise in costs of raw materials to the steelmakers should not be passed on to consumers, and that domestic prices should be frozen for a year. If the steelmakers refuse, UVZ is calling on the government to cancel import duties on steel, and impose a 15% export duty on steel shipped abroad; this is comparable to the 15% export duty on exports of scrap which has been in effect for more than a decade.

With more recent price increase notifications issued to the state-controlled auto companies from Magnitogorsk, Severstal, and Novolipetsk, the government is evidently concerned that inflation may undermine the strength of consumer-led recovery. According to Ehrlich of Alfa, “Putin’s support for the [FAS] probe increases the likelihood that actions will be taken that will dampen domestic steel prices. MMK would suffer the most if the probe forces down all domestic steel prices.”

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