Publication: Eurasia Daily Monitor Volume: 2 Issue: 117

One of the uneasy topics discussed during Nursultan Nazarbayev’s May meeting with Russian President Vladimir Putin in Chelyabinsk, but overshadowed by other issues, was the long-standing row between Russia’s Magnitogorsk Metallurgical Combine (MMK) and the Sokolov Sarybay State Industrial Corporation. Sokolov Sarybay is the largest mining and enrichment enterprise in Kazakhstan, and for years it supplied MMK with raw material.

But just days before the presidential meeting, Sokolov Sarybay suspended deliveries of iron-ore pellets to Magnitogorsk. All year MMK has demanded that Sokolov Sarybay slash iron ore prices by 40%, a concession totally unacceptable to the struggling Kazakh mining company. Russia, which is responsible for 70% of Sokolov Sarybay’s iron ore sales, is one of the most important markets for Kazakhstan. Raw material supplies from Kazakhstan are also vital for the Russian steel industry. Prior to the meeting in Chelyabinsk, the Putin administration encouraged the MMK executives to ease their demands, and Putin personally attended a conference in the Urals District that discussed the worsening relationship between Sokolov Sarybay and MMK (Interfax, May 17).

The dispute shows no signs of abating and may have even worsened. Stepping up pressure on Sokolov Sarybay, the Magnitogorsk Metallurgical Combine concluded iron ore supply contracts with five ore-enrichment companies in Russia. Mining experts believe that supplies from Russia and Ukraine will be able to cover all of MMK’s raw material needs in June, July, and August. The Russian and Ukrainian markets have a large surplus of iron ore, as the demand for raw materials in Europe is declining at the moment (Express-K, June 14).

Some observers note the political connotations of the seemingly purely economic dispute. The construction of the Baku-Ceyhan pipeline and Astana’s tilt towards closer economic cooperation with Ukraine and Georgia stand to weaken Russia’s influence on Kazakhstan, something Moscow cannot tolerate. The most effective levers to regain control over Astana are found the in mining and energy sectors. In an attempt to revive the slackening Eurasian integration process, MMK management hastily cooked up a project for a $12 billion Eurasian ore and steel company designed to produce 78 million tons of steel annually. Ukraine flatly rejected the project.

The standoff between Sokolov Sarybay and Magnitogorsk Metallurgical Combine has made experts seriously deliberate over alternative export channels for Kazakhstan’s iron ore. Kazakhstan would be well advised to redirect its iron ore exports from Russia to China, a country with sizable and well-regulated steel markets and to develop its own steel industry rather than being just a raw materials supplier for Russia. The only impediment to implementing this idea is the need to construct a narrow-gauge railway to link Kazakhstan with China (Zhas Qazaq, May 20).

Quite unexpectedly for Astana, the Magnitogorsk combine has received massive support from Indian steel tycoon Lakshmi Mittal, founder of the Mittal Steel Temirtau joint-stock company, which is Sokolov Sarybay’s sole domestic consumer. Lakshmi Mittal, siding with MMK executives, demanded the reduction of Sokolov Sarybay ore prices by 50%. He threatened to conclude contracts with Russian raw material suppliers if his demand is not satisfied. There are reasons to assume that Mittal Steel Temirtau and MMK have planned a concerted action against the Kazakh mining and enrichment company, since the pressure from Lakshmi Mittal comes shortly after the talks between the executives of the two companies in London (Ekspress-K, June 14).

Sokolov Sarybay is owned by the powerful Eurasian Industrial Association (EIA). Nazarbayev’s critics have repeatedly alleged that EIA appropriated one-third of Kazakhstan’s iron-ore industry by improper means. If EIA fails to save Sokolov Sarybay, it will weaken Nazarbayev ahead of the upcoming elections. Nazarbayev used his trip to Karaganda region this week to familiarize himself with the Mittal-owned operation and talked with survivors of the miners killed by a gas explosion in the Shakhtinsk coal pits last December (See EDM, December 7, 2004).

The public considers the foreign companies wooed by the president to be plundering Kazakhstan’s wealth. Although Lakshmi Mittal has repeatedly pledged to protect Kazakhstan’s national interests, even a pro-presidential newspaper cannot conceal the fact that Mittal Steel charges Kazakh consumers $1037 per ton of its steel products but sells the same amount of steel to China for $720 (Yegemen Kazakhstan, June 14).

Russian pressure on Sokolov Sarybay is a part of an all-out drive to expand into Kazakhstan’s economy. Russia is also stepping up its efforts to acquire key areas of Kazakhstan’s energy sector, particularly the Ekibastuz hydroelectric power station and the Severniy coal basin. The government pins its hopes on setting up an association of mining industries to protect them from international steel consortiums. But the root cause of all the woes of the national mining industry seems to be pervasive corruption and shady business practices at the top-most levels.