By John Helmer, Moscow
A year is a long time in Russian politics, and Vladimir Putin isn’t the same man he was a year ago.
Then — on July 15, 2011 — he visited Magnitogorsk, presided at the official commissioning of the new automotive steel production line known as Mill-2000, and spent three hours answering questions from the workers of Magnitogorsk Metallurgical Combine (MMK). This Monday, July 16, Putin was back at MMK, pressing the button alongside MMK owner Victor Rashnikov to inaugurate two sub-sections of a sub-production line. The Kremlin has (so far) released no record of what was discussed with the steelworkers.
Rashnikov is also a changed man. In between the two Putin visits, Rashnikov attempted to invest half a billion dollars of MMK’s cash, and $1.5 billion in borrowed money, some of it from a state-controlled Russian bank, in an Australian iron-ore mining project known as Flinders Mines twelve thousand kilometres away. Then in late March Rashnikov suffered an abrupt loss of will and change of mind. Twelve weeks later, at the start of July, he formally withdrew from the entire scheme. Not once did Rashnikov explain what he was doing .
Putin didn’t mention this farfangled idea yesterday, nor did Rashnikov. Nor is the Kremlin transcript of Monday’s proceedings a fraction as fulsome as it was a year ago of what Putin, Rashnikov, other steelmakers and MMK workers had to say to one another. One thing is clear, though: if Rashnikov hadn’t abandoned the Australian project at the start of this month, Putin isn’t likely to have joined him for the button-pressing, bestowing fulsome congratulations on the MMK owner for what Putin described as his “very decent” investment record.
“For 12 years, nine billion [roubles of investment], that’s very decent money,” Putin is reported as telling Rashnikov at the commissioning ceremony. “Most importantly, it creates even more jobs, and good ones. In this workshop, I think, when the entire unit is operational, it will employ 1,382 people… This is very decent. If we do the same in all branches [of industry], 25 million new jobs we will create.”
Here is what Putin, then running for election as president, had to say a year ago . And here is the Russian-only Kremlin transcript of a small part of what was said yesterday , with more promised.
A year ago Putin claimed Russian steel demand was expanding. In particular, he said he foresaw rapid growth in demand for construction steel and steel pipes. “Construction is growing,” Putin said then, “and so is pipeline transport. Moreover, we are building the East Siberia–Pacific Ocean oil pipeline, and we’ll also build its second stage. In addition, there is a truly enormous market for pipes in connection with pipeline repairs. Soon we will start building a second line parallel to the gas pipeline under the Baltic Sea, called the Nord Stream. Next on the agenda is the South Stream and perhaps another stage of the Nord Stream. The market is assured. The issue concerns only the economics of each project. I am sure that as the global and Russian economies improve, this market will only expand, there is absolutely no doubt about it. No doubt about it.”
Time has proved Putin was misadvised, and was misjudging the economic cycle. At the moment, domestic demand for construction steel is so weak that MMK’s peers, major steelmakers like Novolipetsk and Evraz, are cutting production, although they prefer to explain this as due to repair and maintenance schedules, not lack of buyers or state budget procurement funds.
Pipe demand has been falling this year by more than 30% compared to a year ago because Gazprom and Transneft aren’t buying. At the start of the month, Gazprom made this official – this year it will buy 1.4 million tonnes of large-diameter pipes for the pipeline projects Putin mentioned. That’s 36% less than Gazprom bought from the Russian pipemakers last year. They in turn cannot continue buying wide steel strip from MMK’s Mill-5000 if there is no point in turning it into pipes Gazprom doesn’t want. Putin opted not to address this problem yesterday, at least not in the public transcript.
Instead, Putin used a pliant, even suppliant tone. “I hope that colleagues and our other large enterprises will continue to work to improve the environmental situation. A good example was today’s event, and here at Magnitogorsk. I want to say once again today, when strategic investors are working in industry, it is necessary to calculate the prospects for sales in both domestic and foreign markets, to build long-term cooperation with customers. I think that this long-term pricing system, which we have said many times, and which I mentioned in my opening remarks, must play its role.”
“In conclusion, we emphasize once again that the Russian steel industry is not only showing a positive trend, but has obvious resource growth. Our goal – to use them to the maximum.”
Had Putin been shown the production report from Evraz for the second quarter ending June 30, he would have registered that its Russian steelmills produced 11% less steel compared to the first quarter. The Evraz forecast for the current quarter is for another 3% cutback. Likewise, a few days ago, Novolipetsk Metallurgical Combine (NLMK) announced it is shutting down one of its blast furnaces for at least two months and will cut its steel volume for this period by 6%.
Is Rashnikov promising Putin he will not cut production? Did Putin extract such a promise?
The transcript indicates that both of them were avoiding the point. Six months ago, in the last stretch of the presidential election campaign, it was another story. Putin’s then deputy for the metals industry, Igor Sechin, called the steelmakers into a series of meetings and told them the government’s competition, work safety and environmental control regulators wanted to see hefty investment commitments in each of their areas, and once the targets were fixed, the regulators would police them .
Yesterday, however, acknowledging that the current steel market is “volatile”, Putin appears to have abandoned the idea of government-regulated investment planning. “An important sign of recent years has been increasing investment activity of the industry,” Putin said. “I am pleased to say, wherever and whatever happened elsewhere, we see high investment activity [in Russia]. This means that the owners, key shareholders,[and] the management of steel companies think about their teams of workers, about social problems, think about the environment and the future of the industry.”
So what is to be done? Leaving aside Rashnikov’s ignominious adventure into Australian mining, Putin is now telling the steel oligarchs there’s a new quid pro quo—if they promise to invest at home for counter-cyclical purposes, he will keep the regulatory agencies from making sure they do, and enforcing what appeared in January to be the scheme  of then Deputy Prime Minister Igor Sechin. “Your product,” Putin announced instead, “must be in demand in the domestic market. We have already mentioned that the producers and consumers need to build long-term partnership contracts with clear pricing. This predictability will allow enterprises to build a truly long-term strategy for industries to invest more in their technical and technological rearmament. You already know that the 2011 directive approved the representatives of state interests in companies with state participation. I would like to hear now, too, how this is working. Please tell us today, as has been done in this area from all sides, from the state and the business community, what additional measures should be taken to boost domestic demand and provide new incentives for metallurgists to modernize production.”