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By John Helmer in Moscow

In Russia today, there is a word that dares not speak its name — and it isn’t the one that got Oscar Wilde into his famous trouble at the Old Bailey in the spring of 1895. That word is банкротство — “bankruptcy”.

In the short history of Russian politics, it is to be expected that now — just as in 1998 and 2003 — the dominating fear of Prime Minister Vladimir Putin is of a domino-effect collapse of the banking system. Given the growth and potential size of the non-performing loans Russia’s banking system is currently carrying, it is realistic to fear this could happen some time in the second half of this year. For the time being, then, it is realistic for the Russian government to aim at short-term measures to avert a series of corporate bankruptcies that might then trigger bank failures, with tsunami impact on the cities and regions that depend on them. This has the policy corollary of persuading all high-policy decision-makers to camouflage or protect the insolvent trading positions of oligarchs like Oleg Deripaska. He has managed to get President Dmitry Medvedev to beg Alfa Bank to call off its loan repayment call (in vain); and then Putin to announce, months before it falls due, a rollover of his largest debt, while obliging a state bank and a regional budget to cover the wage bill his Pikalevo cement plant had run up.

For the time being, therefore, the men who produce aluminium, nickel, and copper are being protected at the highest level from the B word. The steelmakers are another kettle of fish — and most of those are getting the same protection. But not all — and not Nikolai Maximov.

In a short announcement issued on Friday, Novolipetsk Metallurgical Company (NLMK), Russia’s fourth largest steelmaker, announced it has paid Rb1.39 billion ($44.5 million) for shareholding stakes in steelmaking, alloy, and scrap units of the formerly independent Maxi Group, which NLMK acquired in November and December 2007. In the original transaction, NLMK, owned by Vladimir Lisin, agreed to acquire a 50% plus 1 share in the Maxi holding company, owned by Maximov. At the time, Maxi owed a total of about $1.4 billion, and was facing loan calls from international and Russian banks of about $300 million. A year before the collapse of the global steel market, Maximov was the first Russian steelmaker to qualify for the B word.

NLMK initially undertook to pay $558 million in cash for Maxi, but subject to a due diligence process and independent asset valuation. To keep Maxi from default and preserve the assets it was buying from the banks, NLMK also issued loans of about $390 million. A down-payment of just under $300 million in cash was issued to Maximov. But subsequent investigation by NLMK, and analysis of the Maxi Group’s liabilities, reduced the net asset price to $274 million, thereby eliminating the balance of what Maximov claimed Lisin owed him for the takeover. An auditor’s note, attached to NLMK’s annual report for 2008, and issued just three months ago, discloses that “the purchase price negotiation is not finalized and under discussion between the parties, however Group’s management believes that the final adjustment, if any, will not be material.”

NLMK’s annual report for last year also includes an impairment writedown for long steel product assets, apparently those of the Maxi Group, totaling $128.4 million.
These curt financial announcements don’t say so, but this is the end of the road for one of the most imaginative, and costly, schemes in Russian steelmaking history. Though it’s not the end of the road for Maximov, his days as a steelmaker are over. Three years ago, speaking from an empty office suite at what used to be Mikhail Khodorkovsky’s headquarters in Moscow, Maximov outlined a scheme to make himself the single largest steelmaker in Russia, with the capacity to turn out 12 million tonnes of crude steel and products, and the demand for all of the steel scrap that was being exported at the time to Turkey and other European destinations. All this, Maximov claimed, would be realized within five years — by 2012. By then, he figured, he would have created a network of small, scrap-fed steelmills, strategically placed in the heart of the most steel-hungry of Russia’s regional markets — Moscow, the Volga River region, and Novosibirsk, in western Siberia. Maximov reasoned that he could produce steel closer to his customers, and for much less cost per tonne, than Russia’s giant steelmills hundreds of kilometres to the east. He borrowed heavily.
That was then. Today, the 18-month old dispute between Lisin and Maximov has been compounded by differences over their agreement to subscribe fresh capital of $1.2 billion; and over the loan covenants and repayment obligations of the 2007 credits.

At the end of last year, NLMK called the loans in for repayment; and when that wasn’t forthcoming, Lisin’s group has now proceeded to an asset auction of the collateralized stakes, in order to clear the debt. The stakes are: 32% of the Revda, Nizhne Serginsky, and Berezovsky plants, which have a capacity for 2.4 million tonnes of long products (collectively NSMMZ); 100% of Uralvtorchermet, a scrap group with annual capacity of 3 million tonnes; and 48% of the Urals Precision Alloys Plant (UZPS).

Naturally, bank and brokerage analysts, having forgotten their enthusiasm for Maximov’s big plans, believe that Lisin is better off taking over the Maxi units. “Acquiring Maxi-Group assets would strengthen NLMK’s position on the domestic market and provide exposure to the growing domestic infrastructure capital investment,” reported Renaissance Capital to its clients, when the takeover was first announced in November 2007. At the time, analyst Yury Vlasov’s asset valuations soared beyond the price NLMK was offering, creating a bargain effect intended to boost NLMK’s share price. “Maxi-Group’s steel-making assets can be valued at $1.1bn based on the replacement cost of $550/t. This would raise the company’s total value to $2.4bn.”

According to a report from Renaissance Capital issued today, “in our view, Maximov does not have adequate funds to fulfill initial terms and conditions of the transaction. At the same time, we believe NLMK needs to take maximum control over Maxi-Group for further cash injection and development of the asset.”

Maximov has been reported in the Moscow press and by bank sources as having invested his cash payment of $300 million to buy a 1.4% stake in the state savings bank, Sberbank. It is unclear whether Maximov started buying immediately after the NLMK payoff, when Sberbank was at its peak price above $4.40 per share; or during the second half of 2008, when it crashed to just 39 cents. At today’s price, Maximov’s stake in Sberbank is worth about $384 million.

That’s the way the B word can turn out in Russia, at least for proprietors — Maximov is currently making a gain on asset value of at least 19% per annum.

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