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By John Helmer in Moscow

A blindfold has been tied over the whereabouts of Russian member of parliament and steelmaker, Vadim Varshavsky, as estimates of his liabilities multiply, and questions are raised of how his borrowings were spent, and where the money is now.

The Rostov Electrometallurgical Works (REMZ), the newest of the mills of the Estar group, owned by Vadim Varshavsky, is being considered by state administrators for a handover to other Russian steel groups in order to prevent its collapse. The minimill was launched for operational testing in late 2007, with a capacity for 750,000 tonnes of liquid steel per annum, and a product portfolio of long products intended for the southwestern Russian construction sector. After a highly publicized commissioning in February of 2008, Rostov’s production reached design capacity by mid-2008, and had been slated for growth in 2009, according to company statements. This has not materialized.

Initially said by Estar to cost $170 million, it is now believed that project costs were considerably greater, and borrowings secured against the mill’s assets and output even more. A Moscow report of last week estimated the end-2008 debt of REMZ at Rb13.2 billion (($418 million). Revenue for the first operating year was reported at Rb7 billion ($222 million), with a bottom-line loss of Rb330 million ($10 million). Moscow Narodny Bank has been publicly identified as among the international lenders to the mill.

Court-ordered administration of the mill was put into effect at the start of August, and later last month a Moscow newspaper reports that Igor Zyuzin, owner of the Mechel steel group, visited plant. Estar refuses to comment officially, but the newspaper report cites an Estar source as claiming that the group is hoping that Mechel will take over management, supply, and current financing of REMZ on a lease basis. A similar deal is being negotiated between Mechel, the Chelyabinsk regional government, the state-owned speciality steelmaker, Russpetstal, and the Zlatoust mill of the Estar group. Zlatoust is insolvent, with a reported Rb11 billion ($355 million) debt.

Mechel will not discuss these ongoing negotiations, nor the status of its operational relatiopnship with units of the Estar group. Industry sources say Zyuzin is reluctant to add to the current financial risks and liabilities of his group, but he is under pressure from the Russian government, whose banks are currently enabling Zyuzin to survive.

Mechel spokesman Alexander Tolkach told CRU Steel News that, regarding the visit to REMZ, “we don’t have such information on this particularly factory. Igor Vladimirovich [Zyuzin] lately visited a big number of enterprises for negotiations about various possibilities of business relations, trade, furnishing of raw materials, etc.”

Unlike the acknowledged intervention of regional governors in the salvage of Estar assets in Chelyabinsk, Novosibirsk, and Primorsk, Vladimir Chubb, the Rostov regional governor, said through his press spokesman that he knows nothing about Mechel’s involvement with REMZ. The regional official in charge of industry, who directly supervises REMZ, Nikolai Mikhalyov, did not respond to a request for comment.

Sources close to the Moscow-based B&N Bank (also known by its Russian name, BIN Bank) said this week they believe that Varshavsky’s total debts, against which his steelmaking assets have been pledged, have been underestimated. Estar said in March that B&N Bank — controlled by Varshavsky’s former partner, Mikhail Gutseriyev — has been engaged as the group’s financial advisor responsible for “refinancing of the debt portfolio of the [Estar] Group.” This week, the B&N Bank source said that an investigation by the bank had revealed that Varshavsky’s debts were roughly $3 billion, adding that the bank wound up its interest in refinancing them. The source also said that the bank believes Varshavsky has liquidated assets into cash, and that most, if not all of the remaining assets have been taken over by creditors. In addition to Zlatoust, CRU Steel News has reported the state-directed takeover of the Novosibirsk mill, and the Alfa Bank seizure of the Donetsk mill in Ukraine.

Although he is a deputy in the State Duma (lower house of parliament), Varshavsky’s office does not answer telephones. Staff at the parliamentary Industry Committee, where Varshavsky is deputy chairman, say they are finding it “difficult” to locate him. Creditors believe Varshavsky has left Russia.

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