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By John Helmer, Moscow

In the Naughty-Boy School of Government, it is required for the boys to apply for the master’s permission to sit; stand; ask a question; refill their inkwells, and leave the room to answer the call of nature. In the history of the great English Public Schools, a great deal of bladder control was taught by this method, along with a certain callosity across the knuckles and on the buttocks.

In the recent history of Russian business, the unruly organs of the oligarchs have been kept under control in equivalent fashion. But fifteen years makes the natural course for such an education, even for the slow-witted. The master will remain, but it’s time, he seems to be hinting now, for the senior class to graduate and move on.

Two lads to have been despatched recently, albeit with something less than honours, are Dmitry Rybolovlev of Uralkali ($5.3 billion for sale of his control shareholding) and Sergei Pugachev of the United Industrial Corporation ($1 billion in unrepaid Central Bank advances). Others in their class may now be approaching their matriculation – Mikhail Fridman (image 2nd row, far left), Victor Vekselberg (2nd row, second left) and their associates at TNK-BP (asking price $30 billion); Oleg Deripaska (2nd row, centre) as stakeholder in Norilsk Nickel ($16 billion); Sergey Frank as trustee of Sovcomflot (what payout for one of the worst blotted exercise books in school history?).

New boys to have won the master’s favour have names like Roman Trotsenko (United Shipbuilding Corporation), Sergei Levin (United Grain Company), and Eduard Khudaintov (Rosneft).

There is classroom gossip that Victor Rashnikov, owner of steelmaker Magnitogorsk Metallurgical Combine (MMK), is feeling his age; wants more time to enjoy his new digs in London; and is trying to secure a handover to younger family members. Vladimir Lisin (2nd row, far right), owner of Novolipetsk Metallurgical Combine, is allowing it to be known that he wants to take cash out of his port, stevedoring and transportation assets by sending them to an IPO. Alexei Mordashov (front) is already doing that with his spinoff goldmining company, Nord Gold. He is also blubbing with the same boyish enthusiasm for acquisitions that got him into more than $8 billion in debt just two and a half years ago.

In such a classroom, pity the poor master who must, by virtue of his superior knowledge and power, judge what puerile chatter to reward, what to punish, and by what standard to educate the younger boys to emulate. Take last Friday afternoon’s classroom proceedings, for example.

Deputy Prime Minister Igor Sechin, who supervises the Russian metals and mining sector, convened a meeting with the federal government’s industry administrators and price regulators, along with representatives of the steel and carmakers. Mordashov attended for Severstal, along with Igor Komarov, chief executive of AvtoVAZ, Russia’s largest carmaker. Others attending included the two other domestic auto sheet suppliers, Magnitogorsk and Novolipetsk, and other automakers — GAZ, Sollers, and Kamaz, which builds mostly trucks, buses, and utility vehicles.

Sechin listened to the applications, and then issued his orders. Steelmaker Severstal was told to reopen negotiations with AvtoVAZ over the former’s proposed 30% price hike for auto steel supplies. The Federal Antimonopoly Service (FAS), which had earlier ruled that the Severstal price was in line with raw material cost growth and international price benchmarks, was also ordered to reopen its inquiry with different comparative criteria.

Industry experts have calculated that with average steel consumption of 700 kgs per vehicle, Severstal’s 30% price hike should translate into a 3% to 4% increase in car prices on the AvtoVAZ list. But the profitability of making cars is a fraction of the profitability of making the steel which goes into them. So if the former are to sell more cars, the profits of the latter must shrink. And if vice versa, those who make steel, plus the iron-ore, coking coal, and scrap metal which goes into the furnaces, are helping to push sharply upward on the Russian cost of living.

The latest consumer price index data for January from the Russian state statistics agency Rosstat indicate that inflation is now running at 9.6% year on year, the highest level since 2006; the rate in December was 8.8%. With national elections due to start this coming December, the Kremlin is particularly concerned to avoid at a consumer backlash, especially as the current drivers of the inflation rate are food and gasoline price growth.

Officially, the steel and car makers are not commenting on the results of Friday’s meeting with Sechin. Unofficially, however, meeting attendees have reported the outcome as a partial, possibly temporary victory for AvtoVAZ in its effort to roll back Severstal’s price demand, despite the fact that the steelmaker has already announced a full-year contract agreement with Sollers for a 20% price increase. Sechin reportedly told Severstal and AvtoVAZ to go back to negotiations this week, and to return by week’s end with a new agreement on terms. A follow-up meeting has been scheduled for February 11.

Severstal’s owner Mordashov is reported during the meeting to have offered Komarov of AvtoVAZ a 12% price hike for those types of sheet for which Severstal is the monopoly source for the Russian carmakers, and no restriction on other types of sheet for which there are substitute suppliers. Komarov, whose enterprise reports a profitability of less than 5%, reportedly said no. Sechin then told them both to resume their bargaining.

The cane wasn’t mentioned or waved about. But Sechin didn’t need to remind everyone in the room that the government is considering a tax or duty on exports of steel, maybe iron-ore too, unless the producers curb their appetites and make an agreement on a new domestic price.

Documents leaked fron the federal Ministry of Economic Development, and published in a Moscow newspaper on January 27, reveal that two options for the export duty level have been proposed — one fixed at 10% for steel and 30% for iron-ore; and one a sliding scale tied to international prices for these commodities. The more the Russian exporters try to capitalize on rising international steel and iron-ore prices, the bigger the margin the Kremlin plans to take from them as their cargoes leave the port, possibly to add as cost and sale price subsidies to the carmakers.

According to Vladimir Zhukov, steel analyst for Nomura in Moscow, “we have been told that the prime cause for the government thinking in this direction is an attempt to help the domestic car industry which struggles to achieve decent profitability levels (if any profitability at all).”

Zhukov’s report for Nomura’s clients suggests that rises in coking coal, scrap and iron-ore are likely to engender a steel price rise over the year of about 15%. Zhukov adds that “we understand from industry sources that Russian auto manufacturers are already buying galvanized steel (the main steel product supplied to car manufacturers) at some 10-15% discount to Europeans (approximately $850/t vs $930-1000/t). Therefore, introducing export duties on steel will widen this discount even further.”

Government estimates attached to the export duty proposal by the Economic Development Ministry indicate that in the nine months to September 2010, the profit margin on iron-ore production was almost 88%; 18% for hot-rolled steel sheet; and 10% for cold-rolled sheet. The Ministry has also reported that the cost of production for Russian iron-ore was $40 per tonne, and for hot-rolled sheet, $145/t, compared to global averages of $560/t and $700/t, respectively.

Duties on iron-ore would impact most heavily on Metalloinvest, a private group controlled by Alisher Usmanov. He says he is hoping to sell shares to Japanese trading companies and in an IPO this year. The overall share of exports in Metalloinvest’s output is 60%.

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