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Russia: Swords Cross In Big Steel Fight

  • John Helmer



Moscow, 16 June 1997 (RFE/RL) -- Investors and attorneys from the United States are locked in a fresh battle for stakes in Russia's controversial big steelmaker, Novolipetsk Metal Kombinat, only this time the foreigners are fighting among themselves.

The contest this time focuses on whether the Russian government will stick to the law on privatization, and hold an open, unrigged auction for a 15 per cent stake in the company; or deliver the shares for a fraction of the bid price to Russian insiders with close connections to the architect of Russian privatization, First Deputy Prime Minister Anatoly Chubais.

Last month, Salomon Brothers, the New York investment banker which has been advising Cambridge Capital Management Limited, a Caribbean hedge fund, won a Russian court ruling that orders the election of shareholder representatives to the Novolipetsk board. The current board, which is dominated by the Novolipetsk management and nominees of Trans World Metals, the London-based trader, had tried blocking directors from Cambridge, which claims 17 per cent of the shares; Renaissance Capital, a Moscow investment unit directed by U.S. executive Boris Jordan, which claims 9 per cent; and the Moscow bank, International Financial Company (MFK), which obtained 15 per cent of the shares in a loan transaction with the Russian government in 1995.

Vladimir Lisin, a director representing the Trans World Metals interests, has accused Cambridge, Renaissance, and MFK of trying to speculate in the steelmakers' shares, without any commitment to its long-term profitability. But Lisin has also said he favours seating directors of the minority shareholders.

Renaissance Capital officials have said their fight is a simple case of shareholder rights, and of enforcing Russian laws to protect foreign investors. Since last month's court ruling, they have again accused the Novolipetsk management of stalling on the representation issue. No election of directors is on the agenda of the annual general meeting of shareholders that has been called for July 12.

Without revealing its hand, Trans World Metals moved to claim protection of the law also, attacking MFK's position by lodging a bid to buy its shareholding for roughly three times the $ 31 million price MFK paid the government for the shares eighteen months ago.

In a letter to Russia's prime minister and other officials, dated June 3, the Chicago law firm of Mayer Brown and Platt offered $ 96 million to buy MFK's shares. The bid was made on behalf of Trade Finance Bank and Trust Limited. "If that's a bank," a European bank source said, "it hasn't been around for long. It isn't well-known."

Trans World Metals official Mel Wilde refused to answer questions, but sources in Moscow have confirmed that Trade Finance Bank is "acting on behalf of Trans World interests."

Mayer Brown and Platt claim the bid is not hostile to MFK's holding. According to their letter proposal, the government should do no more than hold a "well publicised public auction so that a full and fair price is achieved."

Mayer Brown and Platt warn that "if our client's offer is declined or if the auction is carried out without widespread publicity, the sale price achieved may be significantly less than our client's offer, with the result that the Russian Federation could stand to lose up to $ 65 million."

According to the rules of the loan-for-shares agreement in December 1995, MFK acquired the state-held shareholding in Novolipetsk as security for a loan to the government of just over $ 30 million. Because the government has failed to redeem the loan, these shares must now be auctioned. Any profit achieved between the auction price and the original loan value should be divided between the government and MFK.

Critics of this and other loans-for-shares transactions suspect auction rigging. The critics have included the State Duma, and Russia's independent government auditor, the Accounting Chamber. In a report last year, the Chamber charged the entire scheme of loans for shares was unlawful. Several bidders for valuable blocs of state-owned shares in other prize companies have gone to court, claiming the auctions in which they participated unsuccessfully were manipulated, and bids rigged to benefit favorites of government ministers.

Last week, the powerful Uneximbank said it is going to court to challenge the May auction of 51 per cent of the Sibneft oil group, which went to a little-known company reportedly fronting for another Russian bank or government insider. Favouritism is also suspected in the privatization of shares of Russia's big telephone concern, Svyazinvest, which are to be auctioned shortly.

In the Novolipetsk case, the tables are being turned by Trans World Metals, also against Uneximbank, which has links to both MFK and to Renaissance Capital. Andrei Vavilov, MFK's newly appointed chief executive, has beena leading figure in the Russian Finance Ministry, and a well-known reformer.

Trans World Metals has been allied with the Novolipetsk management in defending the big steelmaker from takeover by the Salomon-backed investor group. By challenging an insider like Vavilov, the majority shareholders of Novolipetsk hope to put off elections to the new board until after the new auction is held. They are also testing the announced goal of the Kremlin's privatization campaign to raise desperately needed funds for the budget, and to draw foreign investment into industry sectors that are starving for capital.
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