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By John Helmer, Moscow

Man has been eating his best friend for at least 9,400 years – and that’s just in the US. In Russia, he’s been doing it for even longer. He’s still doing it.

Recent analysis of primeval human excrement from south-west Texas, near the Lyndon Baines Johnson Museum, has been found to contain the bone of a dog which had been eaten by his master and partially digested. The bone has been identified as coming from the dog’s neck; other traces suggest the recipe was something like that traditional Milanese favourite, Osso buco.

In Siberia, anthropologists believe the man-eats-dog dish was closer to borsch and dates from at least 15,000 years ago. Either way you lick it, the old boy needed the right tools for his repast.

But this isn’t a tale of primeval feeding and friendship habits. It’s yet another chapter in our ongoing investigation of how today’s Russian tribesmen use the most primitive of tools with which to feed their appetites. For example, we have reported before on how the chief Moscow enforcer of veterinary standards, food chemicals, and epidemiological rules has protected the profit-making of Russian producers of milk, baby food, chicken, red meat and other consumables. Naturally, the conclusion in this record is that Inspector Onishchenko’s conduct is motivated by the highest patriotic concern for the welfare of his fellow Russians, and is above reproach.

This little tale is about the Russian Customs Service (Russian acronym FTS), whose sacrifices in the cause of supporting the state also cannot be doubted. It is also about one of the raw materials required for smelting steel – that is, steel scrap, processed from old steel products, which is melted in electric arc furnaces for manufacture of rods, bars, and other products used in the construction of buildings, bridges and the like.

Here is the draft of a new Customs rule, prepared for the approval of Deputy Prime Minister Igor Shuvalov by… well, the drafters of the document are apparatachiki working in the industry department of the prime ministry. Who has prompted them into this action isn’t revealed, but it’s easy to guess – at least two, possibly more of the major Russian steel companies who would benefit if the new rule is adopted. They include the steel groups Severstal, Novolipetsk (NLMK), and Magnitogorsk (MMK), owned by Alexei Mordashov, Vladimir Lisin, and Victor Rashnikov. In this case, though, the easy guess may be the wrong one. The man behind the man eating the dog in this tale looks to be somebody else.

Technically, the proposed new plan, dated February 14 but originating at the customs service in December, aims to limit to three the number of customs clearance checkpoints through which steel scrap export cargoes may be processed for sea transportation; for rail transport through the border (China, Kazakhstan, Belarus), just 2, and for road transport, 5. The obvious outcome is that costs of transportation to the authorized ports will jump, and bottlenecks will slow down scrap loading for shipments outside of Russia; both will absorb the profit margin on the export price of the metal, and thereby divert the scrap back into the domestic market. The three ports through which scrap exports would be allowed are Azov (Black Sea), Kaliningrad (Baltic), and Magadan (Pacific Ocean).

The spokesman of the Murmansk port, on the Barents Sea in Russia’s northwest, said: “The new customs ruling is negative for our local economy. The scrap exported through the port is collected in the Kola region. If exports get banned, it will be unprofitable to ship scrap to Kaliningrad, and scrap collection will stop, which will also tell on our environment.”

The port source intimated that the motive for the rule is unpatriotic profit-making. “I believe the move will be only convenient for the customs service itself — everybody else will be harmed.”

That is hardly what Deputy Prime Minister Shuvalov, a renowned Russian collector of antiques and connoisseur of the precious metals, could be expected to believe. Instead, this is what he has been told by his subordinates is the rationale for the new form of export control:

“The scrap trade s characterized by a considerable number of law violations (over 25 thousand criminal cases a year, the number of metal stealing episodes grew 32% over 10 months of 2010 in comparison with the corresponding period of 2009). According to the MVD [Ministry of Internal Affairs] of Russia typical law violations in metal exports are the failure to indicate large shipments of scrap in customs declarations and incorrect classification of scrap in order to evade payment of customs duties….The Customs Service of Russia believes that this decision will help provide the necessary customs control over the process of scrap declaration, level of radiation and explosion risks of scrap.”

A fat dog-leg goes to the official who thought up exploding scrap as a new reason for closing down the largest of Russia’s scrap export ports, and replacing them with the smallest.

Lest Shuvalov fail to understand his duty as the government’s senior policymaker for the future of Russian manufacturing industry, the document goes on: “in the years to come an overall deficit of scrap supplies to the metallurgical sector is expected. The metallurgical enterprises situated in the near-border regions already experience a shortage of scrap supplies. For example, according to VEB [Vnesheconombank] which granted the credit of 2,2 bln rubles [$73 million] to OAO Amurmetall and which became the owner of the enterprise in the beginning of 2010, the furnaces of the enterprise are loaded at only 40% of the capacity because of the constant scrap shortage, which endangered the realization of the amicable agreement with the money lenders. The capacities at the Rostov electrometallurgical plant, situated in the port area, are not fully loaded either for the same reason….there are currently 23 projects for construction of new and modernization of the existing steel-smelting units in Russia which use ferrous scrap as their principal raw material, which will increase scrap consumption by Russian enterprises from 21 mln tons in 2010 to 25 mln tons in 2013 and 32 mln tons in 2015…It is important to note that world scrap prices over 2010 grew 1,5 times to 460-480 dollars a ton, which stimulates further scrap exports growth and may endanger the realization of the planned investments programs in metallurgy.”

It’s quite impossible to keep Russian government secrets like this when big money is at stake, and it hasn’t been long before European buyers of Russian scrap got wind of the administrative measure. These buyers and importers are organized into an industry lobbying group called the Bureau of International Recycling (BIR), based in Brussels. On February 24, they issued a press release warning they “are very concerned by a recent development in Russia. BIR has been informed that the Russian Federal Customs Service intends to reduce the number of checkpoints for exports of ferrous and steel scrap from Russia. If this project were to be implemented, the free and fair access to a raw material that is indispensable for steel mills and scrap merchants worldwide would be heavily jeopardized.”

If the proposed new rule blocks loading and shipment of scrap out of Rostov-on-Don and St. Petersburg ports, BIR went on, this “would cause serious problems for countries such as Greece, Sweden and Spain to be supplied with Russian scrap. Finland is also facing similar problems due to the potential closure of some railroad checkpoints.” Spain took roughly half of all Russian scrap exports last year, according to BIR figures. Turkey is another major buyer of Russian scrap, according to the government documents revealed.

“Russia’s technical barriers to the scrap trade are not acceptable,” declared Francis Veys, Director General of BIR. “This will increasingly restrict access to important raw materials, which are indispensible for the steel industry and scrap operators in the EU and worldwide. BIR strongly condemns the increasing trend towards protectionist measures regarding scrap movements, such as duties, taxes, quota and environmental barriers, which also represent a violation of WTO rules.”

The customs service spokesman in Moscow is Dmitry Kotikov. Asked about the proposed new restriction on export of scrap, he said: “Yes, I know of such a document.” Asked whether only three seaports will remain for shipment of scrap cargoes — Azov, Kaliningrad, Magadan – he requested a fax be sent to the head of his press service, Alexander Smelyakov. Receipt of the fax was then confirmed by his secretary. No answer has been received.

An export tax of 15% on Russian scrap has been in place since the 1990s. It was lobbied into the trade rules by the domestic steel producers as a method of lowering the profitability of exports, and thereby pressuring the price of domestic scrap, so that they can feed their steel furnaces more cheaply. The government in Moscow has kept this duty in place despite counter-lobbying and penalties for Russian exports of finished steel to the European Union market by the European Commission in Brussels.

From time to time, when domestic scrap prices rise faster for Russian steelmakers than they are able to pass on in cost price hikes to steel consumers, the steelmakers lobby the Kremlin for higher export duties for scrap. The hope is that this will depress the scrap price at home below the level the commodity will fetch on foreign markets. The Russian scrap industry lobbies against this, but the latter are much weaker financially; and that means politically too. Once the biggest and most articulate of the Russian scrap exporters, Victor Makushin of MAIR, was compelled to stop operating in Russia between June and November 2009. A series of falsified criminal cases was initiated against Makushin and his group, aimed at forcing him to sell off MAIR’s assets at a firesale price.

As Makushin was pushed out of the scrap business, the target of a raider attack, the steelmills tightened their control over their sources of scrap. The top Russian exporter, based on data for the peak year of 2007, was Vtorchermet, which is based in St.Petersburg, and is owned by Mordashov’s Severstal. Novolipetsk bought out the scrap supplier Nikolai Maximov when he was heading into insolvency in late 2007. That ended the latter’s ambition, like Makushin’s, to turn a scrap business into a steelmaking one. Maximov also has the distinction of going broke during the Russian steel boom, a year before there was a steel crisis. He now faces court claims in Moscow in which Novolipetsk charges him with falsifying the value of his assets and liabilities, and demands its money back.

These man-eat-dog and dog-eat-dog affairs have been concentrated in central and western Russia. That’s because scrap volumes in these regions are usually in greater abundance in relation to the needs of the steelmills to smelt the stuff into new steel. Result: these are the regions from which the surplus scrap is exported.

By contrast, in the Urals and Siberia, where the catchment area for scrap for MMK is located, there is less scrap available and more mills which need it. So the supply of the raw material is scarcer, and the price higher. MMK used to procure its scrap supply from a suitably named company called Profit; it was run by a member of the same Rashnikov family which owned MMK, until it was absorbed by the company at a price which suited the family. Prospectus disclosures by MMK suggest that transfer pricing between the mill and the scrap businesses was likely.

But the steelmaking oligarchs have a reputation for philanthropy when it comes to sharing some of their profits with those who help with what are known in Russian as “administrative measures”. So when the steelmaking oligarchs succeed in lowering the price of scrap and raising the profitability of steel sales, it is believed, certainly among the scrap processors, that those in the administrative chain of command get their rewards. And if the oligarchs are disadvantaged by administrative schemes hatched for the profit-making of rivals and smaller fry, they can be generous to those who arrange to neutralize them. This is simple Anthropology 1 in the study of tribal behaviour.

The Russian customs agency has attempted the administrative measure of closing ports for scrap exports before. Starting on paper in 2008 as steel prices were crashing, and implemented by Customs order no. 1514, dated December 2, 2008, 10 customs points in the country were authorized from which scrap metal could be shipped for export. The list of 10 exit points was a different one from the one now being proposed. In 2008-2009 the customs order allowed only one scrap outlet in the Russian fareast, and this was Petropavlovsk-Kamchatsky, at the southeastern end of the Kamchatka peninsula, on the Pacific. That port was more than a thousand kilometres northeast of the main Russian fareastern seaports — Vladivostok, Nakhodka, Khabarovsk, and Vostochny – and of course, much, much further from the Asian ports receiving shipments of scrap. At the time, Vladivostok was the main exit port for scrap headed to South Korea, Taiwan, and China. MMK and the Far Eastern Shipping Company (Fesco) were the main interests hurt by the customs order.

On Russia’s western seabord, the scheme fixed Murmansk and Kaliningrad as the principal outlets for scrap in the northwest; while Rostov-on-Don and Taganrog were named for the southern Black Sea and Azov Sea export trade.

After months of disruption and falling scrap prices, the scrap exporters and the ports took the customs agency to the Federal Antimonopoly Service (FAS), complaining the administrative measure was in violation of the law. Citing a provision of the antimonopoly legislation which bans administrative orders hindering competition and free trade, FAS commenced its proceedings on June 9, 2009. Ultimately, FAS forced the customs service to rescind the order. At the time, Kotikov, the customs spokesman, was as tongue-tied as he is this week.

The FAS was asked today whether it will open a new inquiry. A fax was requested and delivered. FAS has yet to respond.

A source at one of the leading steel traders in western Russia says he “doesn’t see any reason for [the new proposal to restrict port outlets]. That’s a rather stupid and inadequate decision. The port of Magadan is too far away and the port of Kaliningrad is too small to supply Europe with scrap alone, and there won’t be enough railroad cars for this end either. The whole affair is too complicated technically.”

Alexei Bezborodov, a leading maritime industry analyst in Moscow, said: “It’s a waste of time to comment on the customs service’s stupidity.”

A report to steel company shareholders by Renaissance Capital steel analyst, Boris Krasnojenov, issued today, said the need for new restrictions on the flow of metal is “questionable: as: 1) we expect less Russian mini-mill capacity to come on stream compared with current market expectations; 2) Russia is among the top-three largest scrap exporters, with the US and Japan, and scrap export duties may be implemented to balance the market; 3) China, as the second-largest scrap importer after Turkey, reduced ferrous scrap imports by 59.6% YoY in 1H10. China could have accumulated an adequate scrap reservoir over the past 15-20 years to be self-sufficient in scrap in the medium term.”

Krasnojenov added in interview that he doesn’t believe there is a shortage of steel scrap to warrant the proposed new administrative measure. The two new domestic steelmills with furnaces requiring scrap are the Severstal mill at Balakovo in the Saratov Region, with a 1 million tonne output capacity, but this will not be operational for at least another three years, Krasnojenov said. NLMK’s new mill at Kaluga, near Moscow, has output capacity of 1.5 million tonnes, and won’t be ready for two years. “Central Russia has a surplus [of scrap], Krasnojenov added. “In the Urals there is a deficit, and that’s why MMK claims there may be a shortage for its needs.”

MMK spokesman Yevgeny Kovtunov says they don’t have any shortage of scrap supplies.

Oleg Bykov of Severstal appeared to be surprised by the question of whether his company is feeling a pinch in supplies, and requested more time for response.

So whose dog is being eaten to satisfy whose appetite, this time round?

A Moscow scrap specialist responds: “This measure if taken by the customs service will be profitable for two companies, Amurmetall based in the Far East, and the Rostov electro-metallurgical plant (REMZ) [in the southwest]. Scrap exports will be limited to the ports they need, so they are direct beneficiaries of the proposed order. Severstal, MMK and NLMK will only get an indirect profit, due to the decrease of scrap prices, but they will lose something, too. Severstal, for instance, has its own scrap export enterprises in Arkhangelsk, Murmansk and St. Petersburg, and they will have to close down. MMK and NLMK have no scrap supply shortages now, as far as I know.”

Amurmetall has a notorious history of fighting among its shareholders, and it was bankrupt in 2009, when it was taken over by the state bailout bank, Vnesheconombank (VEB). Prime Minister Vladimir Putin, the VEB board chairman, personally and publicly presided over that transaction in July of that year. Amurmetall’s controlling shareholder at the time, Alexander Shishkin, reportedly has an option to buy back the mill from VEB.

REMZ, one of the newest of the steel mills to be built in southwestern Russia, used to be owned by the Estar group of Vadim Varshavky, and also by Shishkin, because he had a stake in Estar as well. But REMZ was mortgaged by Varshavsky for more than it was worth, and when Varshavsky’s debts exceeded $3 billion, REMZ went bankrupt in August of 2009. The mill then passed into the control of Mechel, owned by Igor Zyuzin.

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