Email This Post - Print This Post Print This Post

By John Helmer in Moscow

A surprise board reshuffle announced on Wednesday by the Evraz group, Russia’s largest steelmaker, has triggered a sharp negative market reaction. It has fueled speculation that Prime Minister Vladimir Putin and the board of the state bailout bank, Vnesheconombank (VEB), are unhappy with the way in which Evraz has heavily leveraged its Russian mills, in order to buy North American assets, and is threatening more active state supervision of the company’s operations.

Evraz’s share price was cut 8.3% in Wednesday trading in Moscow, while other Russian steel majors remained largely unchanged, and the index as a whole dropped less than 3% on the day. The reaction against Evraz came after the company issued a statement that its board had elected former controlling shareholder, Alexander Abramov, to be chairman of the board, replacing Alexander Frolov.

The board move is a fresh sign of Kremlin displeasure at the way the oligarchs running Russia’s steel business have enriched themselves at the expense of the domestic economy. Evraz is currently producing steel at about 60% capacity at its Russian mills, having cut output and employment more sharply in Russia than in its operations outside Russia. Two of the Russian mills, Nizhny Tagil and Zapsib, were forced to admit last month that they lack the cash to pay their tax bills, and have had to borrow $360 million to cover their obligations. This is in addition to the VEB loan of $1.8 billion, confirmed by the company on November 27. The first tranche of $201.3 million has already been drawn.

Wednesday’s company statement explained the board move, which will leave Frolov as chief executive, as one of “ensur[ing] Evraz is best positioned to deliver the Company’s strategic and operational goals. Alexander Abramov will be responsible for leading the Board and coordinating its activities.”

The company also hints that there has been internal conflict between Abramov and his protege Frolov; the controlling shareholder, Roman Abramovich and his Millhouse holding; and the newly installed Privat group from the Ukraine representing Gennady Bogolubov and Igor Kolomoisky. According to the Evraz release, the Abramov appointment “will ensure there is an effective dialogue with all the Company’s stakeholders, which is of particular importance in the challenging market environment.”

In another guarded reference to the disconnexion between Evraz’s Russian operations and its North American units — the Oregon Steel Mills group, and the IPSCO pipe works — the company statement claims Frolov “will be responsible for the daily management of the Company’s steel and mining divisions in and outside Russia, as well as for realizing synergies of vertical and horizontal integration between the Company’s businesses worldwide.”

Anticipating the negative sentiment, the board is reported to “believe that Messrs. Abramov and Frolov have the extensive business experience and qualities necessary to succeed in fulfilling Evraz’s goals.”

The immediate threat, which industry media are reporting, is that VEB may insist on seating a representative on the board to safeguard the security of its $1.8 billion credit line. A Moscow investment banker close to the group told CRU Steel News he has heard that Abramov has been facing bank margin calls on loans secured by his Evraz shares, which have now lost 90% of their value since the start of the year; 88.8% since September.

Another source told CRU Steel News that Abramov had lost personally when his Diamond Age Capital Advisors, a Moscow-based hedge fund, collapsed recently.

Evraz does not release details of Abramov’s and Frolov’s stakes in the company. Instead, the company has published figures showing that Cyprus-registered Lanebrook owns 69.5% of the shares directly, with another 6.8% held indirectly. Lanebrook’s shareholding structure remains secret, but it is believed to include Abramovich, Frolov, and Abramov.

Industry reports in Moscow suggest that, as of seven months ago, Abramov’s stake in Evraz amounted to 24.29%; Frolov 12.15%; Privat 9.72%; and Abramovich 36.44%. That left a free-float of the London-listed stock at more than 17%. If this is correct, Abramov’s stake in Evraz has fallen in value from $11.7 billion in May to just $670 million at present.

Considerable mystery, and litigation, surround Abramov’s actual shareholding in Evraz, after he was retained by the group founders, Iskander Makhmudov and Oleg Boiko, to consolidate its Russian steelmills, as well as the iron-ore and coking coal suppliers they required. In time, Makhmudov and Boiko sold out, and Abramov declared himself the controlling shareholder. However, he was challenged in a number of cases in the courts of the UK, Luxemburg, and the US. Some claims are still pending; some trustee shareholding claims were settled confidentially with cash payments to the claimants.

CRU Steel News has reported that before Abramovich’s holding Millhouse acquired its 41.3% stake in Evraz in 2006, Abramov controlled 59.11%; Frolov 28.18%; and Valery Khoroshkovsky, a Ukrainian protege of Abramov, 1.88%. Khoroshkovsky was placed in charge as chief executive, until he was replaced by Frolov, and sold out. Abramovich acquired 41.3% in mid-2006, but since then it has not been clear what was left of Abramov’s stake. Evraz and Abranov refuse to be precise.

Abramov is quoted in a Moscow newspaper as saying there will be no changes in the board structure. This is treated with skepticism by bank and brokerage analysts. VEB refuses to say what controls it is imposing on Evraz, and how many seats on the board it may demand. Kremlin intervention to save Evraz’s North American assets from being lost to lenders may also come at a price of “personal guarantees” from Abramovich and Abramov, an industry source suggests.

A Moscow banker told CRU Steel News that, whether or not Frolov has been obliged to take the blame for the short-term debt crisis Evraz is facing, the lobbying required to procure Putin’s backing for the VEB loan is “beyond Frolov’s capacities. It is Abramov and Abramvoich now, who are the key figures in the company’s survival.”

Leave a Reply