***MB SPECIAL REPORT: Big Guns — Key plants change ownership as RusSpetsStal files for bankruptcy

On August 13 RusSpetsStal filed for bankruptcy at the Moscow arbitration court.

On August 13 RusSpetsStal filed for bankruptcy at the Moscow arbitration court.

In the preceding months a string of the company’s creditors, including Gazprombank and state-supported Vneshtorgbank (VTB), had initiated insolvency proceedings against it.

But the company placed into receivership was just a shell.

In a deft manoeuvre, ownership of RusSpetsStal’s key assets had been transferred to another government-controlled holding company, sources with knowledge of the situation told MB.

RusSpetsStal wasn’t just any steel company – the firm’s specialty steelmaking facilities are vital national assets.

The company was established in 2006 by government-owned trading company RosOboronExport, which also owns automobile manufacturer Avtovaz and aerospace holding company and helicopter producer Oboronprom.

Guernsey-registered Midland Group, owned by private investors Eduard Shifrin and Alex Schneider, also took a share in RusSpetsStal.

Its purpose was to assemble a group of specialty and alloy steelmakers to supply the growing demand for higher-end metallurgical products from the engineering and technology industries.

These operations included steel forger Stupino Metallurgical Company and a stake in weapons systems manufacturer Barrikadi.

RusSpetsStal went on to take control of the Red October steelworks at Volgograd in 2007, when Shifrin and Schenider decided to sell out.

The company’s founders planned to consolidate these complementary producers, restructure the assets to optimize costs and invest in developing their output of value-added products.

These businesses are now important suppliers to Russia’s defence sector, providing many of the materials vital to the assembly of armaments used by the country’s forces.

But the strategy to improve these assets through unification and investment didn’t quite go to plan.

The synergies between the different plants were few and far between, industry insiders say, telling MB the holding company pursued big ambitions it “didn’t have the funds for”.

In order to grow and operate successfully, RusSpetsStal’s assets, and Red October in particular, needed investment. That investment was not forthcoming.
“Red October relies on 1920s technologies, employs nearly 20,000 people and only produces 200,000 tpy,” one industry analyst with inside knowledge of the plant said.

RusSpetsStal’s two year management of Red October ended with the steelworks owing 2 billion roubles ($65 million) to Gazprom, Russia’s largest commercial bank, sources said.

The plant owed another 2 billion roubles to VTB, a source with knowledge of the situation said.

“Since late 2009 VTB never received the regular interest payment from the debtor and, and as a result, initiated the insolvency proceeding,” the source told MB.

For the main stakeholders in RusSpetsStal’s plants and the consumers of their products, this was bad news.

“The government would not want Red October to end up in the wrong hands as it produces weapons-grade steel,” the source continued. “[The company is] very strategic for the Russian defence department.”

Rostechnologii, RosOboronExport’s 100% parent company, began to take measures designed to protect its interests in RusSpetsStal’s steel plants.

“Sometime in the spring of 2010 another holding company was formed,” an industry insider told MB.

Over several months, this company — RT Metallurgy — took control of the shares owned by RusSpetsStal, the source said.
“Then, the old shell was of no use and was liquidated,” he continued.

Production at the plants will now continue unabated, according to Spetsstal, Russia’s stainless and special steel association.

But Red October, Stupino and Barrikadi will face more challenges. Large ones, in fact. The plants still require investment to make them more efficient and enable them to produce higher grades of steel.

“Russia deserves a good special steelmaker,” another industry source told MB. “Unfortunately, I think it would be easier to start from scratch.”