UKRAINIAN-RUSSIAN STEEL MERGER ENTAILS TOP-LEVEL POLITICAL RAMIFICATIONS

The Industrial Union of Donbas (IUD), Ukraine’s second-largest steel-making group, is negotiating a merger with the Russian Metalloinvest group controlled by Alisher Usmanov, who also heads Gazprom’s investment arm for assets other than gas, Gazprominvestholding. An IUD-Metalloinvest merger could generate far-reaching political and business repercussions in Ukraine and beyond.

On February 19, the sides signed an agreement on the mutual evaluation of their assets, preparatory to a merger (Financial Times, February 20). A merger would be followed by an initial public offering of the integrated holding on Western capital markets. The stated ambition is to match or overtake the output of Severstal, Russia’s largest steel producer.

The IUD is a rival to Renat Akhmetov’s Systems Capital Management (SCM), which is also based in the Donetsk region, largely bankrolls the governing Party of Regions, and holds sway on personnel appointments throughout the economic ministries and agencies. However, SCM by no means fully dominates or represents the Donetsk region’s interest groups and has proceeded to pressure some of them.

IUD owners Vitaly Hayduk and Serhiy Taruta — each with a stake of slightly under 50% — formed a political alignment with the embattled President Viktor Yushchenko during the second half of 2006. Since then, Hayduk serves as Secretary of the National Security and Defense Council; and Oleksandr Chaliy — IUD’s top political adviser — serves as deputy head of the Presidential Secretariat, while Taruta oversees IUD’s daily operations. This alignment seeks to counterbalance the close relationship between Akhmetov’s SCM and the government of Prime Minister Viktor Yanukovych. However, a merger of IUD with Usmanov’s Metalloinvest, an ally of Russian energy giant Gazprom, could lead to a reshuffle of top-level political and business relationships in Ukraine.

The Russian holding’s iron- and steel-related assets — grouped in the Gazmetall concern — include the Ural Steel plant, the Lebedinsky and Mikhailovsky ore-mining and ore-dressing plants, as well as a 50% stake in the Ormeto Machine Plant in co-ownership with Uralmash. Gazmetall produces six million tons of raw steel annually.

Usmanov and the Metalloinvest co-owner Vasily Anisimov are also said to be the main shareholders of Moldova’s Ribnita steel plant, situated in the Russian-controlled Transnistria region and said to bankroll the latter’s officially acknowledged budget. Ranked among the most modern steel plants in the former USSR, the Ribnita plant has passed through various hands of Gazprom-connected Russian companies, from Itera to Metalloinvest, in notoriously opaque transactions. A certain “Austro-Ukrainian Hares Group,” named after Yushchenko’s Arab businessman-friend Yusuf Hares, acquired 90% ownership of Ribnita in 2004, then sold an undetermined portion of that to the current owners, some of them hidden under undecipherable acronyms (Moldpres, Olvia Press, January 29, 30).

The IUD includes the Alchevsk coke and steel plants and the Dnyprodzerzhinsk steel plant in Ukraine, as well as the Dunafer and Huta Czestochowa steel plants in Hungary and Poland, respectively. IUD produces nine million tons of steel pipes and rolled goods annually.

An IUD-Gazmetall merger would result in a combined capitalization of some $15 billion, reduce production costs, and pool existing steel output capacities of 15 to 20 million tons annually. According to the Uzbek-born Usmanov, the integrated holding would be a leader “on the wide expanses of our former fatherland” (Interfax-Ukraine, February 20).

Such declared ambitions notwithstanding, the merger scheme largely stems from the need to surmount certain handicaps on either side. Gazmetall controls only small production capacities for steel products such as pipes and rolled goods. Moreover, it does not own industrial assets on European Union territory, which IUD does in Poland and Hungary and would include these in the integrated holding. For its part, IUD does not own iron ore mines and dressing plants in Ukraine or anywhere, but would gain access to such resources through Gazmetall in Russia, thus offsetting a major handicap against IUD’s Ukrainian competitors.

IUD’s major disadvantage in this regard stems from the manipulative privatization of the Ukrainian Ore Industry (Ukrrudprom) in 2004 by then-president Leonid Kuchma and the first government of Viktor Yanukovych. That privatization awarded the lion’s share — the Central and Southern iron ore-dressing plants — to Akhmetov’s SCM, along with a stake in the Southern plant to Ihor Kolomoysky’s Pryvat Group and with the Inhulets ore-dressing plant to Russian businessman Vadim Novinsky’s Smart Group. At present, Gazmetall and Smart Group seek to acquire stakes in the Kryvyy Ryh ore-dressing plant, which is up for privatization and in which SCM is also an interested party (Ukrayinska pravda, February 18).

Deprived of a domestic iron-ore base of its own, IUD has had to resort to costly ore imports from overseas or to buy it from its political and business rivals, which in turn have resorted to overpricing. With SCM now essentially in control of the government, IUD is reaching out to Russia for iron-ore supplies through Gazmetall. Given Usmanov’s close relations with Gazprom, it seems likely that SCM also hopes for special arrangements on gas supplies (as SCM is said to have obtained for itself in 2006).

These realignments entail not only business but also political ramifications, reflecting the political roles of major steel producers in Ukraine, with SCM and IUD backing the government and the presidency, respectively, in their ongoing power struggle.

(Interfax-Ukraine, February 18, 19, 20; Ukrayinska pravda, February 18)