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By John Helmer in Moscow

Vladimir Gusev was a surprise new member of the 7-man board of directors, voted by Mechel shareholders at their annual general meeting on Thursday. The controlling stake is held by Igor Zyuzin, who has reported to the US Securities & Exchange Commission (SEC) that he holds 66.76%. J.P. Morgan holds another 5.7%; Mechel management less than 1%; and the remainder of 26.34% comprises the free float, including no individual stakeholder with more than 5%.

The board remained as it was in 2008 at seven. Independent Alexander Yevtushenko was elected the new chairman, replacing Valentin Proskurnya. Yevtushenko comes from coalmining, and has served in both corporate and government positions in the sector. Proskurnya is also from the coal-mining sector. Altogether, counting Zyuzin, four of the new 7 directors are coalminers. The only steel veteran left on the board is Valentin Polin, the senior vice president and chief operating officer.

Gusev replaced the Mechel and Glencore veteran, Alexei Ivanushkin, a trader by background, who was recently shunted out of the central group management, and into the chief executive’s post at the ferroalloy division (formerly Oriel Resources). Gusev is described by the company as an independent. From 20005 to 2008, he served as deputy director of the Federal Tax Service (FTS).

In its June 24 Form-20F filing with the SEC, Mechel disclosed a number of tax claims and litigations that have been pending in Moscow between the company and the tax service. Several appear to date from Gusev’s tenure at the FTS. The largest of the claims, filed as a formal appeal against an FTS adjudication last October, sought additional tax of Rb3.6 billion ($116 million) for the years 2005 and 2006. In March of this year, the company filing says, “the Moscow Arbitrazh Court invalidated the tax authorities’ assessment in part, but recognized a tax assessment in the remaining amount of 421.5 million rubles. The decision has not yet come into force. Both sides appealed the decision.” Another case moved through the courts during 2008, as Mechel sought to overturn an assessment, also for 2005-2006, of Rb454 million ($14.6 million). The SEC filing claims that Mechel won and overturned the assessment at the appellate level, but a further appeal may occur. According to Mechel, “we consider it unlikely that such an appeal will be successful”.

Altogether, the Form 20-F summary of the group’s tax problems suggests that Rb895.7 million ($29 million) in FTS claims for 2005-2006 remain to be annulled or paid. “In addition”, Mechel told the SEC, “we have identified possible tax liabilities arising out of differing interpretations of tax laws and regulations in the amount of up to approximately $26.0 million as of December 31, 2008, which are not accrued in our consolidated financial statements.” According to a report by Alfa Bank steel analyst Barry Ehrlich, “while this is the first the market has heard of this, it probably reflects past decisions by the government that are no longer valid. Therefore, we would not conclude from this news that there is greater risk of future tax claims or government attacks against the company.”

Company spokesman Ilya Zhitomirsky told CRU Steel News Mechel will not comment on the tax matters. Another senior Mechel executive said: “I can officially tell you that now Mechel has no problems with the tax service”.

The Form 20-F reveals that Mechel’s Russian tax payments and liabilities for 2006 through 2008 “as of December 31, 2008…remained subject to examination by Russian tax authorities.” For the three-year period, Mechel reports aggregate income before tax of $3.7 billion, and income tax paid of $705 million (19%). Income tax was calculated for Mechel units at 24% of taxable profit in Russia (changed to 20% from the start of 2009); at 10.5% in Switzerland, at 16% in Romania, at 15% in Lithuania and at 30% in Kazakhstan. The Group’s subsidiaries incorporated in Liechtenstein and British Virgin Islands are exempt from profit tax. Trading units of the group are registered in Switzerland, Germany, and Liechtenstein.

The possibility of enforcement of Russia’s transfer pricing statute is acknowledged in the Form 20-F. A recital of pending court cases and contingencies identifies this one: “In August 2008, certain Tomusinsk Open Pit Mine minority shareholders filed several legal claims against the Group alleging improper conduct of business and use of transfer pricing to derive profit from TOPM. As the claims contain no substantial economic and legal arguments, Mechel expects a favorable outcome of the case.”

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