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By John Helmer in Moscow

Ronald McDonald is the most famous brand-name franchise in the world.

It operates 32,000 sales points, with more than 58 million clients, in about 118 countries around the world. Currently, the McDonald’s Corporation has a market capitalization of $61 billion; this is only 16% below the peak of its pre-crisis value last year.

This is what the McDonald’s Corporation says about how it does business: “McDonald’s has always been a franchising company and has relied on its franchisees, our Owner/Operators, to play a major role in the System’s success. McDonald’s remains committed to franchising as a predominant way of doing business. We are actively seeking highly qualified business people to join our System as Owner/Operators. Owning a McDonald’s restaurant is a tremendous opportunity. We are seeking individuals with significant business experience who have successfully owned or managed multiple business units or have led multiple departments and who have significant financial resources. We are a family of over 2400 Owner/Operators passionate about satisfying our customers, growing our business, making money and having fun.”

Russia’s metals and mining industries are run along similar lines, except that there are fewer than a dozen owner/operators in the family. The capital value of their assets is much greater, although their market caps have dropped more deeply over the past year; and they haven’t been making as much money lately. Also, it is the prospect of losing their franchises that causes them to be having much less fun than they used to. It is Prime Minister Vladimir Putin’s power to award their franchises, and also to take them away, that gives the Russian system its focus and accountability, and fixes its running costs.

Just over a year ago, Putin verbally attacked Igor Zyuzin, the controlling shareholder of the Mechel group of steel, coal, nickel, and chrome assets, creating the impression that Zyuzin was about to lose his franchise. There had been several rivals for that over the years, but until Putin acted, the rise in the New York-listed share price of Mechel had made a conventional takeover much too expensive. By dressing Zyuzin down publicly, Putin cut Mechel’s share price, and thus the franchise transfer fee, almost in half.

But that was just before the entire Russian steel sector collapsed. Twelve months since, on August 21 of this year, Zyuzin appeared before Putin again. This time Zyuzin had put on his dancing-shoes, and Putin was more agreeable.

Moscow industry and brokerage reports have now disclosed details of the massive state aid plan for Zyuzin’s franchise which Putin has offered. This counts between $40 million and $60 million in annual tax cuts over ten years; more than $300 million in state bank purchases of Mechel company bonds; and additional state repayment guarantees for another $900 million in Mechel obligations. These details come from a government report of the discussion the Prime Minister held with industry and state bank officials at Mirny, in the Sakha republic, on August 21.

The purpose of that meeting had been to consider the financial position and welfare needs of the fareastern region, which is dependent on diamond-mining by Alrosa, and on coal-mining by several companies, including Mechel. A detailed newspaper report of the minutes of the meeting cites Putin as ordering four state banks — Sberbank, VTB, Gazprombank, and VEB — to consider buying up Rb10 billion ($316 million) in bonds which Mechel has proposed as the financing instrument for railway construction and other development costs for the Elga coal deposit Mechel owns in the region. Putin is also quoted as asking the banks and federal ministries to come up with a scheme for guaranteeing at least Rb30 billion ($949 million) in additional Mechel bond issues, enabling Zyuzin’s group, to reschedule secured debts from a group of foreign banks, and thereby relieve the prospect of asset losses. A third measure Putin agreed to, according to the report of the August 21 session, was a 10-year holiday for the mineral resource extraction tax that is payable once Mechel’s ElgaUgol unit starts producing coal.

The Elga field is estimated to hold between 2.2 and 2.7 billion tonnes of coal. Mechel bought the mining rights at a state auction in October 2007, paying $2 billion after ArcelorMittal was excluded from the bidding. Zyuzin then raised $2 billion in loans to finance the acquisition from ABN AMRO, BNP Paribas, Calyon, Natixis, Sumitomo Mitsui Banking Corporation Europe Limited, Société Générale Corporate & Investment Banking, and Commerzbank Aktiengesellschaft. Last year’s crash has left him without means to cover those loans, and the even larger costs of building the project. Development costs for the start-up of a 20 million-tonne annual capacity mine and mill are at least $2 billion.

The Prime Minister’s spokesman Dmitry Peskov, Mechel spokesman Alexander Tolkach, and a senior official of the federal Ministry of Economic Development are reported to have confirmed Putin’s new proposals. Zyuzin attended the meeting with Putin, Tolkach said, adding: “we are glad [the tax relief proposal] has found support.”

Tolkach and Mechel’s chief spokesman, Ilya Zhitomirsky, were unavailable to answer detailed questions about the terms of the rest of the deal.

Until Putin’s intervention two weeks ago, Mechel had announced a plan to raise by itself Rb45 billion ($1.4 billion) in infrastructure bonds to finance the Elga project. But after months of delays and negative news from its negotiations on short-term debts, the chances of finding regular buyers for the bond issue had dimmed. Alfa Bank steel analyst, Barry Ehrlich, has reported to clients today: “We treat the news on state support as POSITIVE for Mechel, as it further reduces its balance sheet risk and increases the likelihood of a timely launch of the Elga project, which makes Mechel a coal growth story.” Estimates of the value of the tax break vary with the volume of coal to be produced by ElgaUgol, and range between $40 million and $60 million per annum, or up to $600 million over a decade.

Also reported, but unconnected in the bulletins of the Moscow brokerages, is the news that Mechel has agreed to supply steel billets for reprocessing by the Gurievsk Metallurgical Plant (GMW), one of the units of the bankrupt Estar group owned by Vadim Varshavsky. Based in the Kemerovo region, where it is the oldest steelmaking enterprise in Siberia, GMW operates two open-hearth steel furnaces, with capacity to produce almost 200,000 tonnes of crude steel per year. GMW’s rolling mill turns out a variety of hot-rolled angles, squares, bars, rods, and balls. According to a press release issued by Estar on August 13, the plant produced 16,700 tonnes of crude steel in August, up 17% on the 12,238t produced in July, and close to full capacity.

After Varshavsky failed to refinance his debts, GMW halted production in May. It then underwent a regional court bankruptcy hearing, resuming limited production after intervention by the regional government. This, combined with Putin’s intervention a fortnight ago, appears to oblige Mechel to take charge of inputs to the plant’s production line, and handle sales of its production through the Mechel trading network. Mechel refuses to discuss these terms, costs, or Mechel’s financial liability, which is viewed by Moscow and international analysts as a drag on the group’s US-listed share price. This fell 2% in Wednesday trading; it is down 12% on the week.

It is believed that Zyuzin has agreed that, in exchange for Putin’s underwriting of his coal-mining debts and obligations, Mechel will guarantee the continuing operation of several of the Estar plants abandoned by Varshavsky, supplying coking coal, semi-fabricated steel for rerolling, and other inputs and credits, as well as trading and marketing of the products.

Mechel sources have told CRU Steel News that Zyuzin has recently visited “a big number of enterprises for negotiations about various possibilities of business relations, trade, furnishing of raw materials, etc.” But the company spokesmen will not disclose the terms of deals reportedly reached for Mechel to support other failing Varshavsky mills as well — the Rostov Electrometallurgical Works (REMZ), in the Rostov region; and the Zlatoust mill in Chelyabinsk region. According to Ehrlich of Alfa Bank, “at this point, it is hard to estimate the cashflow consquences for Mechel; however, we do not rule out they may be slightly negative until the steel market recovers.”

You don’t have to be Ronald McDonald to do the arithmetic. Whatever Zyuzin is obliged to outlay to compensate up for Varshavsky’s losses is a small price to pay for the rich new franchise terms he has been given.

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