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Russia: Investors Clash with Big Russian Steel Producer

  • Stephanie Baker

Moscow, 21 February 1997 (RFE/RL) - A group of Western investors have launched a high-profile campaign to win places on the board of directors of Russia's largest steel producing plant, Novolipetsk. Their actions constitutes the latest attempt to call into question the ability of shareholders to enforce their rights over management of Russian companies.

Representatives of the U.S. investment bank Salomon Brothers and the Moscow-based brokerage house Renaissance Capital told a news conference in Moscow yesterday that their request to put forward candidates to the board of directors was turned down earlier this week by management of Novolipetsk.

Jim Dannis, who deals with emerging markets for Salomon Brothers, said the investors are ready to take their battle to court unless the Novolipetsk management gives them representation on the board of directors. Officials at Novolipetsk were not available to comment on the dispute.

Salomon Brothers represents the offshore investment fund Cambridge Capital Management (CCM), which has a 17 percent stake in Novolipetsk. It has joined forces with Renaissance Capital's Sputnik Funds, which is a 10-percent shareholder. They have the support of the funds run by Russia's Uneximbank, which has a 15--percent stake. Together, the investors own more than 40 percent of Novolipetsk.

Dannis said the investors are ready to use all legal means to secure their rights to proportional representation on the company's management board. He said they want to fill four seats on the nine-member board of directors.

As Dannis put it: "The investors have a simple and clear objective: to increase the value of the company by implementing better management and financial policies and by increasing investment. It is the only way the shareholders can build value for their investment."

Novolipetsk, located about 400 kilometers south of Moscow, employs 40,000 workers and is the largest steel producer in Europe. According to the investors, the company produced six million tons of steel in 1995 and sales were more than $ 2,000 billion. They say, however, that investment in the plant last year was slashed by more than half.

Industry experts say Novolipetsk relies heavily on the London-based TransWorld metals trading company for supplies of raw materials.

The company suffers from a problem that has beset many factories in Russia following the collapse of the Soviet command economy. Accustomed to a centralized supply-system organized by the government, the plant was left in the lurch in the transition to a market economy. It had a difficult time ensuring a steady supply of raw materials to process, a situation which caused both production and revenues to fall.

But then TransWorld stepped in, offering to supply Novolipetsk with raw materials which the Russian company could pay for later with finished steel. In this situation, TransWorld has the upper hand, setting a price for the finished product that is well below the market rate. In the end, Novolipetsk loses crucial profits that could be reinvested in the company. It is also beholden to one supplier.

Russian media reports say that TransWorld has a 35-percent stake in Novolipetsk and supports the claims of the Western investors. The media has also speculated that TransWorld's Russian subsidiary (TransCis) was involved in criminal activity to acquire a stake in another plant --Krasnoyarsk aluminum-- which was implicated in several murders.

The investors, however, say they have had no contact with TransWorld. They also refused to speculate on the reasons why Novolipetsk management keeps turning them away.

This is not the first time their demand for a say in management of the company has been turned down. Last spring, the investors' request to nominate candidates was thrown out on a technicality.

Now, however, the investors believe they have the law on their side. They have hired a high-profile Russian lawyer to handle the possible court battle, which they say they will first fight at the local level. Under a Russian federal law passed about a year ago, shareholders have the right to put forward candidates to the board. But the law has not been tested, and rule of law in Russia is shaky at best.

The investors also have some heavy-weight figures and institutions on their side; Harvard University's endowment and philanthropist George Soros each have a stake in Novolipetsk through the Sputnik Funds.

The investors say that the dispute with Novolipetsk management comes at a time of growing investor confidence in Russia. But, as a representative of Sputnik put it, "this flies in the face of Soros' enthusiasm for the reform process."

Indeed, Western money has been flowing into the Russian stock market since the start of the year, causing the fledgling bourse to skyrocket to record highs --despite concerns over Russian President Boris Yeltsin's health. But the investors say their case, if not resolved in their favor, could cause the funds to dry up.

As Dannis puts it: "Many investors that poured money into the Russian stock market thought this (kind of management practice) was a thing of the past. But this is a blatant violation of shareholders rights. We view this as a litmus test for the Russian government's policy toward foreign investment in the Russian economy."