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By John Helmer in Moscow

Vadim Varshavsky, the owner of the bankrupt Estar group of midsize, specialty steel mills, has made his first public appearance in Russia since his financial group collapsed with debts of up to $4 billion. Until recently, he had been thought to be staying in London, or in another location abroad.

Varshavsky was in Rostov on Saturday to meet the Rostov region governor, Vladimir Chubb, the governor’s spokesman told CRU Steel News. The meeting also included the Mechel group chairman and controlling shareholder, Igor Zyuzin. According to the governor’s office, the meeting was intended to confirm terms of transfer of Varshavsky’s management and financial interest in the operation of four Estar units in the region — the Rostov Electrometallurgical Works (REMZ), the newest of the mills of the Estar group; Lomprom, a scrap unit of the Estar group; a power station supplying electricity to the Rostov mill; and a small coal mine.

In Chubb’s statement, it is claimed that Zyuzin has agreed to the transfer. “Management of these assets within the framework of a commercial partnership will be carried out by Mechel,” the statement claims, without giving details of the commercial deal. Chubb also hints that Saturtday’s agreement may be a temporary one. “As Igor Zyuzin assured the governor, Mechel is interested in normal work of these enterprises, and preservation of existing jobs at them. Vladimir Chub underlined that on the eve of the forthcoming cold season, the most pressing question for the regional authorities is about the stable functioning of the experimental thermal power station, providing heat to inhabitants of the Krasnosulinsky district.”

Zyuzin has conceded privately that he is under pressure from the federal government to take over several Estar steelmaking assets, in exchange for government financing and other concessions, principally for Mechel’s coalmining operations. However, Zyuzin is reluctant to accept Varshavsky’s liabilities. In all, Varshavsky appears to have issued personal guarantees and pledged Estar assets for between $3 billion and $4 billion in loans that are now in default.

Ilya Zhitomirsky, Zyuzin’s spokesman at Mechel, refused this morning to confirm the details of the meeting with Chubb, or the terms of Mechel’s takeover of the Rostov plants. Varshavsky’s spokesmen at Estar headquarters in Moscow appear no longer to be working. Varshavsky’s whereabouts are a secret from his parliamentary office, where he remains a deputy for the Rostov region. Earlier this month, Varshavsky was in London.

The regional governor is lobbying the Kremlin to back the transfer of Estar assets to Mechel, in order to prevent their collapse, tiggering regional distress. But no agreement appears to have been reached on covering Varshavsky’s liabilities. The Rostov 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 issued early this month 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 according to local newspaper reports Zyuzin then visited the plant.

A similar regional government-led 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.

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