Date: Mon, 29 May 2006
From: Vlad Ivanenko <ivanenko60@yahoo.com>
Subject: Re: JRL 124-14 Helmer "Mordashov pays $2.7 bn to exit"
I agree almost always with John Helmer's judgment because his pieces are very intuitive and logical. I find that his article "Mordashov pays $2.7 bn to exit" is a rare exception.
In his contribution, Helmer relies prominently on the Kommersant's publication (written by Kolesnikov) about the meeting that took place between Mordashov and Putin two weeks ago. In my opinion, the Kommersant reporter has completely missed the main topic - the oncoming merger. This is a significant judgmental mistake on the part of Kommersant. Certainly, the merger was kept secret but lateral developments has indicated that the iron and steel sector is consolidating in Russia. For example, two major steel companies - Novolipetsk Steel Plant (Lisin) and Severstal (Mordashov) - consolidated assets in 2005-6. This development is indicative of mergers and acquisitions because it makes sense to raise the book value of holdings if it is "on sale". The Kommersant reporter could find more hints in the information that he had; for example, Putin asked Mordashov's opinion about the reaction of Federal Antimonopoly Service (FAS, which is responsible for monitoring large-scale mergers). Mordashov replied that apart from FAS he worked with Gref implying that what his plans had been agreed with the state strategy on economic policy.
It is not obvious why Helmer believes that Mordashov is cashing out of Russia. First, by all appearances, Mordashov stays in steel business. He takes bank credit to pay for additional shares, which is not what one expects from a retiring oligarch like Abramovich. It is true, that Mordashov gets a minority stake in a larger company but this share is sizeable (32 percent) he has already hinted that he plans to expand it to 45 percent. Given that the EU bureaucracy is unhappy with growing Russian clout in the iron and steel sector - Russian steel is subjected to EU anti-dumping rulings - and may block the merger, until the deal is finalized to keep a low profile is a prudent strategy. Second, the Helmer's comment that Mordashov is afraid of the post-Putin uncertainty is a bold but unsubstantiated hypothesis. Uncertainty is a part of our lives and this is "bad" certainty that matters. There is simply no obvious reason why Mordashov should "be on the run" because he has the reputation of a "Russian patriot", well-connected with authorities, and not implicated in large-scale corruption scandals.
Finally, Helmer alludes that Putin commits a strategic blunder agreeing on the merger ("Mordashov tried to pull the wool over Putin's eyes "). On the contrary, such a merger fits perfectly the Putin's strategy on Russia's integration, first of all with the EU. There are suggestions - supported by stock evaluations - that Severstal may increase its export share in the EU but the Arcelor's share of the market will stay flat after the merger. Next, creating global corporations with strong Russian presence is one of the key tasks set by the Putin administration - Gazprom, Rosneft and United Aviation Corporation may follow Severstal shortly. Finally, Mordashov fits almost perfectly the vision of a "loyal" national entrepreneur, the lack of which Putin's chief ideologist Surkov - who coined the term "offshore aristocracy" - lamented in his February speech. Therefore, it is very natural for Putin to support Mordashov's aspiration to take a major role in Arcelor. Of course, there is risk that Mordashov becomes overly independent and loses the "Russian connection" in the process but it is risk that Putin is aware of and has to take.
These considerations suggest that previous "cashing out" deals that Russian oligarchs attempted with various degree of success and the current merger are structurally different events contrary to what Helmer states.
Vlad Ivanenko, PhD economics
Ottawa.