By John Helmer, Moscow
Sergei Ivanov had been in charge of protecting Russia’s environment for just ten weeks when he arrived in Chelyabinsk city last November 1. The former Kremlin chief of staff and principal advisor to President Vladimir Putin took with him a large delegation of federal officials, including a deputy prime minister, the minister of natural resources and environment, and the chief of the environmental control agency, Rosprirodnadzor, to meet Boris Dubrovsky, the Chelyabinsk governor (lead image, right).
Much was promised for cleaning up the air of the city and region. A month later, on December 5, President Vladimir Putin visited Chelyabinsk region, and flew by helicopter with Dubrovsky over several of the worst air pollution areas. Dubrovsky announced that he favoured a new set of air control standards for enforcement by federal and regional governments. Putin replied with the acknowledgement that air pollution was especially serious in Chelyabinsk. He claimed: “we need to encourage entrepreneurs, and industry to apply the latest technology, the best technology available. This program starts to work, and I very much hope that it will have the desired effect in 2017.”
Then in mid-January the smog struck Chelyabinsk city. Ivanov, Dubrovsky and Putin had all failed to prevent the longest air pollution crisis in the city for years. Mechel’s owner, Igor Zyuzin (lead image, left), had succeeded in keeping his plants operating with minimal interruption, a promise to do better, and no criminal charges. A local environmental activist says: “People in the west think Putin is so powerful he can change the outcome of elections in the US, UK, France and Germany. So how come he can’t put a stop to the говно in the Chelyabinsk air coming from one oligarch who owns the plants?”
The wind struck again over the last weekend. That’s to say, the lack of wind, caused by a temperature inversion above Chelyabinsk, when the upper atmosphere becomes warmer than the lower atmosphere. During these inversions airborne pollutants pumped from the smokestacks of Zyuzin’s Chelyabinsk Metallurgical Plant (ChMK) and Mechel-Coke are trapped at the level where people breathe.
From Friday evening, February 10, until Sunday afternoon, February 12, the Chelyabinsk meteorological bureau issued notices of adverse weather conditions intensifying air pollution, warning residents who already suffer from respiratory ailments to stay inside, and those afraid of contracting lung damage not to breathe outside without masks. A group of residents organized flash mobs in the city streets to don masks, and circulated a medical advisory on how to survive in the smog through the local internet.
The social and internet media of Chelyabinsk blame the city’s industrial plants, particularly the two Mechel plants owned by Zyuzin. Zyuzin was reported by local media as meeting in the city last week with Governor Dubrovsky. Mechel refuses to respond to questions about the meeting; Dubrovsky refuses to confirm it happened.
A petition circulating on the internet accuses the plant owners and government regulators of corruptly conspiring to do nothing. This morning there were 29,969 signatures; the organisers’ target is 35,000. The Chelyabinsk population is over 1 million. ChMK employs 18,000; Mechel-Coke, 3,000.
“The Chelyabinsk region has nothing to breathe because of emissions and smog,” the petition says. “it is already impossible to live in Chelyabinsk without putting at risk health and life! How many complaints have been written to management of Rosprirodnadzor [Federal Service for Supervision of Use of Natural Resources] across Chelyabinsk region, but nothing changes. We want our constitutional rights to be observed. We want to live, walk and breathe without fear for the health of the children.”
“Very keenly we ask [the President] to pay attention to our problem, to take measures for investigation of the plants for their compliance with the law, to control emissions, to punish officials for connivance and non-observance of their official responsibilities and for corruption because nobody believes that such actions are legal.”
Artem Sidorov, the head of Rospriradnadzor since September 2015, has hung on to his job. He came from Tatarstan where for five years he was the minister for the environment and where he says he “managed to achieve a game-changing level for ecological safety assurance in the Republic.”
Left: Artem Sidorov, head of RPN; right: in Chelyabinsk on November 1, Governor Dubrovsky, Minister of Natural Resources Sergei Donskoy; and Ivanov; Sidorov is wearing a white hat but obscured behind Ivanov.
The release from Ivanov’s office following his visit said: “The participants conducted a survey of environmentally problematic sites in Chelyabinsk and its surroundings, visited the industrial sites of large enterprises which have a significant impact on the environment in the city: JSC Chelyabinsk metallurgical plant, LLC Mechel-Coke, OJSC Chelyabinsk tube rolling plant. In the framework of the visit a meeting was held with representatives of large industrial enterprises of Chelyabinsk, which addressed topical issues of implementation of environmental legislation. The discussion highlighted the need to increase the environmental responsibility of business, to establish a constructive dialogue between representatives of the Executive authorities, society and business representatives to find mutually acceptable solutions aimed at improving the state of the environment, subject to real regulation of discharges and emissions, a transparent permit process and the assistance of the state in the implementation of best available technologies.”
At the start of December Putin met Dubrovsky in Chelyabinsk (right) but was non-committal in response to the governor’s call for higher standards and tougher regulatory enforcement. Then in Moscow on December 27, at a session of the State Council, an advisory body, on environmental policy Putin sounded a warning note for business himself. “I expect the business community to heed my words: the implementation of this technology should not be delayed. We can no long afford to put these issues on the back burner. It was decided to roll back some initiatives, as I will explain later, but there will be no further adjustments .”
At the same meeting Dubrovsky warned Putin bluntly of the priority “need to control air quality. No tangible reduction in air pollution in industrial cities has been recorded since 2000. This indicates that we have exhausted the potential of the current model of controlling ambient air and must look for other approaches.”
“Such tools exist and here they are. It has been suggested that we need to estimate the combined influence of all pollutants in a city, conduct a summary assessment of maximum acceptable emissions and, based on this, determine the allowable contribution of each pollutant in the standard quality of air in a given residential area. Companies will proceed from this contribution or quota in drafting specific programmes and making technical solutions.”
Noone in Chelyabinsk has openly asked why the Ivanov meeting with Dubrovsky in November, or the apparent readiness of Putin to accept Dubrovsky’s new emission quota scheme failed to prevent the January crisis, and this month’s repeat.
A leading local investigator explains — the name has been withheld in order to protect the source. “About the new emission quotas ordered in December, these quotas are still very high, and the industries can continue production even during the adverse weather conditions. The quotas are aimed at the volume of production, not at the volume of emissions, and the plants may not be exceeding them. But the meteorological measurements are usually made in the ‘sanitary zones’, areas far from the industrial zones and the residential buildings. However, the laws don’t permit to make such measurements [of plant pollution] in the residential areas where they will be non-objective because of domestic emissions and cars. But the fact is that people are living and breathing here in the city, not in the so-called sanitary zones.”
“As for the checks by Rosprirodnadzor [RPN], they did take place. But what happened was strange. RPN did a check on Mechel-Coke. The plant stopped work after that, but the next day work was permitted again. The policy of the Dubrovsky administration is to keep a balance between ecology and industry. The environment is important but people also need work. Dubrovsky wants the right to set the emission quotas and the control of emissions to be removed from RPN [Sidorov] to the regional government [Dubrovsky] in order to prevent such crises as in January.”
The source is sceptical that promises of investment in anti-pollution equipment will be implemented. “About ecological investment, the promise was issued that Mechel is going to spend a lot of money on ecological equipment, but nobody knows if the money will really be spent. ChMK [Chelyabinsk Metallurgical Plant] invested a lot in cutting emissions, and the result can be seen easily – the air is usually clear over it. The smoke is usually hanging over the plants of Mechel-Coke.”
On February 13 Mechel reported that its production and sales of steel were jumping in the December quarter of last year, though for 2016 as a whole, pig-iron volume was flat and steel volume down 2%.
MECHEL’S LATEST OPERATIONAL REPORT FOR 2015-2016
This week’s Mechel report also reveals why Chelyabinsk has been obliged by Mechel to choke on the company’s attempt produce more steel by feeding more coke into the steel furnaces.
According to Mechel chief executive Oleg Korzhov, “global coal prices have reached new lows in 2015, prompting experts to unanimously forecast an equally difficult 2016. After the third quarter, few cared to remember those forecasts, as spot prices for the coal producers’ main benchmark — premium coking coal FOB Australia — went up by 190% by the end of the year. As a result, coal won the status of the most efficient commodity of the year… The price rally made the export market particularly attractive for commercial deals. The Group’s sales subsidiaries took on a proactive position on this issue, and in the fourth quarter we significantly increased our coal export sales to benefit from the favourable trend. In 4Q2016, nearly half of all exported coal was shipped in accordance with updated prices on the existing contracts, while the other half was sold on spot deals, with exports accounting for nearly 85% of all coal sales to third parties.”
The brief boom in coal also transformed Mechel’s profit-loss line. The last financial figures, issued on November 29 for the nine-month period to September 30 reveal that the Mechel group had moved from a loss of Rb74.2 billion in 9-month 2015 to a profit of Rb7.9 billion. This was Mechel’s first profit in five years. For the backfile on Mechel’s loss-making record and de facto nationalization by the state banks, read this.
According to the new financial report, Mechel’s debt was still higher than it had been in 2014, but the trend line from 2015 has been downwards. With earnings growing, Mechel’s debt to earnings ratio — one of the most important covenants in the loan restructuring arrangements Mechel has been negotiating with the Russian state banks — was shrinking. The more the state banks holding Mechel’s debt were pacified, the more relaxed the Kremlin’s attitude towards Zyuzin and his Chelyabinsk smokestacks has become.
MECHEL’S DEBT FROM 2014 TO SEPTEMBER 2016
Zyuzin owns his control stake in Mechel shares through a complicated set of Cyprus companies and Russian bank pledges and covenants. Because Mechel has been technically insolvent for several years, but kept out of bankruptcy by the state banks, exactly how many of these shares are pledged and on what terms to the state lenders and other claimants is not exactly clear. Zyuzin used to own 67% of Mechel; by May of last year, and at present, he was down to 55%.
The Financial Times Moscow Bureau has reported that Zyuzin has been the innocent victim of the Kremlin; the newspaper claims Zyuzin’s brave resistance had drawn unfair criticism from the president who accused Zyuzin of rigging the coking coal price and gouging other Russian steelmakers. The Financial Times has also promoted Zyuzin’s description of himself as “at the more abstemious end of the oligarchy scale: he does not own foreign villas, yachts or football clubs.” For details of Zyuzin’s business practices overlooked by the reporters, Courtney Weaver and Jack Farchy, read this. Zyuzin also arranged for Farchy to enjoy a guided tour of Chelyabinsk on a breezy day in summer; Farchy continued to breathe easily after he flew out of the city, but he hasn’t been back during temperature inversions.
For Putin’s unusual public apology to Zyuzin for damaging his share price, and the dividend stream Zyuzin was accumulating through his offshore companies in Cyprus, read this.
In August 2016 another FT reporter portrayed Zyuzin as the innocent beneficiary of lending from state bank VTB on orders from Putin to prevent mass layoffs. “One problematic client is Mechel, the steel group that VTB, Sberbank and Gazprombank helped save in June  from what would have been Russia’s largest corporate bankruptcy. Igor Zyuzin, Mechel’s chief executive, managed to retain control of the company despite years of agonised legal negotiations with the banks. Mr Kostin says Mr Putin told him to avoid big cuts to Mechel’s 70,000-strong staff. “They care about people, because it might create certain social — not unrest, but [an] unfavourable climate, and this will concern the government. But it doesn’t concern them who owns what — Zyuzin or [anybody] else.”
The stock market has been clearer about Mechel. Since August 2016 its New York Stock Exchange-listed share value has jumped from a low in July of $1.46 to a peak last month of $6.79. That’s a gain of four and a half times. The market capitalization of the company rose at the same time from $304 million to $1.4 billion.
ONE-YEAR SHARE PRICE TRAJECTORY FOR MECHEL
It was the effect of rising metallurgical coal and steel prices which helped push Mechel upwards. As this chart of the Australian coal-price marker shows, coking (also called metallurgical) coal rose to peak in December. But it has been dropping since then.
HOW THE COKING COAL PRICE HAS GONE SHARPLY UP, THEN SHARPLY DOWN
The share price trend for Mechel has followed the coal price downwards, but not so steeply. The trajectory of Mechel’s share price for the past month since the smog came down on Chelyabinsk, along with the RPN inspectors, and Zyuzin made his urgent call on Dubrovsky, has been downward by 11%. Current market cap at $5.86 per share is $1.2 billion.
MECHEL’S SHARE PRICE CORRECTION OVER THE PAST MONTH
The city and regional press have reported that RPN measurements in December, January and February identified unlawfully high emissions of air pollutants, including nitrogen oxides, hydrogen sulphide and fluoride, and phenols, from three Mechel group plants — the steel mill, the coke plant, and also the Mechel-Energo electricity plant. Public reaction to the smog triggered what was announced as a criminal investigation, but no outcome has been reported. The closure of Mechel-Coke, ordered by RPN on February 1 and lifted on February 3, has also been inconsequential; the RPN threat to close Mechel-Coke for 90 days vanished.
Mechel’s press office has denied that the steel and electricity plants were releasing higher than permitted pollutants. The company has announced a plan to spend Rb71 million ($1.2 million) on air emission controls at the coke plant.
The smog which descended on the city on January 13 had lifted by January 29. According to the spokesman for the federal Ministry of Natural Resources and Environment, Yulia Radionova, the cause of the smog was the weather for trapping the airborne pollution, not the plants for releasing the pollutants into the atmosphere. RPN is refusing to confirm how much the agency has fined Mechel, or how much the company has paid.
Radionova was asked by telephone this week how the federal ministry explains the failure of its emission control agreement of 2014 with Mechel and other companies in Chelyabinsk to prevent the latest smog crisis. “Is the wind in Chelyabinsk your principal source of air emission control?” she was also asked by email. The ministry spokesman refuses to reply.
Mechel was asked this week if they have paid their fines, and what proof of investment in air emission controls they can provide. The company responded with a copy of the press release the company had issued on December 13. This claims that from 2011 until now Mechel had spent “almost 1.2 billion roubles”, and that the money has shown “a significant environmental effect. Gross emissions of pollutants in recent years have decreased by almost 40%, including phenols [which are] down by 61%; naphthalene, down by 86%; hydrogen sulphide by 80%.”
“The governor has explicitly denied this claim, and everyone obliged to live in the city knows it’s untrue,” a Chelyabinsk reporter comments. “If Dubrovsky went soft on Zyuzin last week, can we expect Putin to do the same?”