2010-01-13 | Iwona Wiśniewska and Anna Górska

An agreement providing for the sale of 50% plus 2 shares in the Industrial Union of Donbass (ISD), one of Ukraine's metallurgy potentates, was signed on 31 December. The stake was purchased by a consortium of Russian investors organised by the Swiss-based Carbofer, a company in which the Russian Vneshekonombank holds a share. The difficult financial situation forced the Ukrainian group to sell the stake. However, the decision also has symbolic significance; Russian investors have entered the metallurgic sector, which had been defended by the Ukrainian owners more than any other, and have thus strengthened their position on the EU steel markets.
 

A forced transaction
 
The Industrial Union of Donbass had recently made substantial investments in modernising its metallurgy assets in Ukraine, and in the acquisition of the Częstochowa Steelworks in Poland and the Dunaferr plant in Hungary. This gave it a competitive advantage, especially towards other steel producers in Ukraine, which the ISD nevertheless could not exploit because of the crisis. The company was burdened by a huge debt of more than US$3 billion, as well as the fact that it did not have access to iron ore deposits of its own. The ISD’s owners did not manage to obtain a new loan or find an investor other than the Russians. On 8 January it was officially announced that a group of Russian investors had acquired 50% plus 2 shares. The composition of the consortium was not revealed; it was only disclosed that two large investors from the metallurgy sector were participating, and that Vneshekonombank was involved in financing the transaction. Unofficially, it has been claimed that the metallurgy sector investors were Evraz (owned by Roman Abramovich) and Metallinvest, the company managed by Gazmetal (owned by Alisher Usmanov). The sale agreement concerns only the metallurgic assets of ISD, which consist of two steelworks in Ukraine and the plants in Poland and Hungary. At this stage, it is impossible to confirm speculation concerning the options to purchase the remaining shares in ISD (49.98%) from Serhiy Taruta and Oleh Mkrtchan by the end of 2010, or the reports that Evraz will buy the shares from the remaining consortium participants.
The price of the transaction has not been revealed. Unit Credit analysts have estimated the value of the ISD's assets at US$5–7 billion, and the price for which the stake was bought at US$2–2.5 billion. In 2008, the ISD produced 9.9 million tons of steel, and become one of the top thirty largest steel producers in the world.
 

The Russian investors’ interests
 
The Russian black metallurgy concerns have been making efforts to strengthen their international position for more than ten years. The peak of their foreign expansion was observed in the mid-2000s. The leaders of this expansion include Evraz Group, a company controlled by Roman Abramovich, a Russian multibillionaire with close links to the Russian authorities. Evraz Group holds assets in Italy, the Czech Republic, the USA and elsewhere.
Taking over foreign assets is in the interest of the Russian companies as it enables them to easily maintain or increase steel production without having to bear the very high costs of modernising their assets in Russia. Another objective of the Russian expansion is to increase the sale of finished steel products, and move away from the sale of unprocessed steel.
This Russian capital’s foreign activity is also motivated by protectionist measures (such as steel supply quotas) on the US and EU markets. Acquiring shares in steelworks already operating in those areas is a perfect way for the Russian companies to overcome the barriers impeding their access to those markets. With such investments, the Russian companies not only gain direct access to buyers, but are also able to increase their production with high added value.
The expansion is also in line with the Russian government's general strategy of strengthening Russia's international position, including its economic stature (which the global reach of Russian companies is meant to symbolise). Russian authorities have been encouraging businesses to take advantage of the current economic crisis and acquire foreign assets at the current, reduced prices, and have been willing to co-finance such transactions.
 

Consequences of the ISD transaction
 
The sale of a stake in ISD is mainly important for Ukraine in the symbolic dimension. Against the setting of a broad expansion of Russian capital (petrochemical industry, finance markets, telecommunications), the Donbas oligarchs had effectively protected the steel sector from Russian capital, mainly because they were concerned about competition from stronger partners. The steel sector has also been immensely important for the Ukrainian state; before the crisis it accounted for 40% of Ukraine's total exports and 27% of its GDP.
The takeover of ISD by Russian companies, and in the end perhaps by Evraz Group itself (see the Appendix for more information on the supposed Russian investors) will enable the group to achieve many of its expansion objectives: it will limit competition from Ukrainian metallurgy, build up the Russian presence on the EU market and enhance the Russian companies' potential.
 
 
Appendix
Russia is the world's fourth largest producer of steel products and one of the largest steel exporters (accounting for over 8% of global exports). Most of the Russian iron metallurgy sector was privatised in the 1990s, and is currently controlled by several powerful capital groups. However, due to the specific nature of Russia, the state continues to exert major influence over the economic processes and private companies in the sector.
 
No details about the ISD transaction have been revealed. However, according to press reports:
 
1. The transaction is to be financed by Vneshekonombank (VEB), a Russian state corporation whose board of directors is chaired by Vladimir Putin. During the current crisis, VEB has become the main distribution channel for state aid to the Russian economy and economic operators. It has also been involved in important Russian foreign investments, co-financed power plants in Kazakhstan, and acquired Ukraine's Prominvestbank (2009);
 
2. ISD has been taken over by a Russian consortium composed of:
Carbofer General Trading – a Luxembourg-registered trader dealing in steel and coal among other commodities (with a turnover of around US$4 billion in 2008), controlled by Alexander Katunin, a former co-owner of Evraz Group.
 
Evraz Group – Russia's largest metallurgic company and one of the world's top ten steel concerns with a dominant position in a number of market segments (including rail production). 82.6% of shares in Evraz Group are held by the Cypriot company Lanebrook controlled by Roman Abramovich (50%), Alexander Abramov and Alexander Frolov. The company's holdings include Palini e Bertoli (Italy), Vitkovice Steel (Czech Republic), 91.5% in Oregon Steel Mills (USA), and a majority stake in Highveld Steel & Vanadium (South Africa).
 
Gazmetal – one of the smaller Russian steel companies, it produces substantial quantities of iron ore concentrate but does not have enough steelworks to process its production. 50% of shares in Gazmetal are controlled by Alisher Usmanov. Usmanov is one of the most vocal advocates of consolidation in the Russian steel sector. He has close relations with Gazprom. Gazmetal has already held co-operation talks with ISD in 2007.
 

Permalink