The story of how Metinvest became a subsidiary of Russia's Severstal, and how part of Rinat Akhmetov's mining and metallurgical monopoly's liquidity ended up locked up in ISD, a subsidiary of Russia's state-owned Vnesheconombank, only looks like a typical conspiracy theory.
On March 18, a meeting between the Industrial Union of Donbas's creditor banks and the debtor's managers took place in Vienna. This was the first such event in three years, and the immediate trigger was lawsuits filed against IUD's key production assets by its main iron ore supplier.
As a reminder, in February, Metinvest Holding LLC filed two lawsuits against its subsidiary, Metinvest-SMC LLC (a network of metal service centers in Ukraine), and the Alchevsk Iron and Steel Works (IDU's main production asset, currently located in occupied territory) for over UAH 13 billion. Metinvest Holding also filed a lawsuit against Metinvest-SMC and the Dnipro Dzerzhinsky Iron and Steel Works (another IUD production asset, but located in Ukrainian-controlled territory) for over UAH 10,5 billion.
Akhmetov's holding company's claims totaling nearly a billion dollars couldn't leave ISD's creditor banks indifferent. After all, in mid-2013, when the previous All Lenders Meeting took place, then-chairman of the Industrial Union of Donbass's board of directors, Serhiy Taruta, estimated the debt to foreign banks at $2,5 billion. ISD owed another $100 million to local banks.
During a March meeting, ISD management managed to reassure the creditor banks by explaining that Metinvest's lawsuits were nothing more than a show for the creditors of Akhmetov's holding company, who had agreed to hold off on Eurobond payments until May. Clearly, among other things, Metinvest needed to demonstrate vigorous activity in collecting debts from ISD. In practice, however, the freeze imposed on the Alchevsk Iron and Steel Works' accounts at Metinvest Holding's request was promptly lifted, not to mention the fact that iron ore supplies to Dzerzhinka continued uninterrupted. In short, it was a complete idyll.
The reason is simple: it's long been obvious to everyone that ISD is bankrupt. Even in 2013, the pre-war year, the corporation's revenue fell short of the $4 billion that its brainchild Vitaliy Gaiduk and Sergei Taruta owes money to creditor banks, Metinvest, and, in small amounts, to lesser figures.
ISD has effectively been in a state close to "living dead" since the onset of the 2008 global financial crisis. Even then, it was clear that the Donetsk corporation had no realistic options for repaying its bank debt. Nevertheless, one of ISD's key shareholders, Vitaly Gaiduk, managed, as they say, to "jump out of a burning train with a suitcase full of cash." On the eve of the 2010 presidential elections, it was revealed that he had sold his stake (50% plus two shares) to a group of investors led by Alexander Katunin, who was once the founder and shareholder of the Russian holding company Evrazholding.
Over time, Katunin, as a "front figure," disappeared from the business chronicles, and it became clear that the real buyer of ISD was the bank that financed this super deal—the Russian state corporation Vnesheconombank.
Many still believe that the main reason for this purchase was Vladimir Putin's desire to support Yulia Tymoshenko in the 2010 presidential election. Allegedly, of the $1-1,2 billion Gaiduk received from Vnesheconombank, $300-400 million went to Tymoshenko's campaign headquarters.
Iron ore supplies
One way or another, Yulia Vladimirovna lost that election, and Vnesheconombank found itself mired in Ukrainian metallurgy. As Vladimir Dmitriev, now former head of VEB, claimed, the Russian state-owned bank invested $8 billion in this sector of the domestic economy. This figure, which seems rather preposterous to anyone familiar with the situation, nevertheless cost the Russians several billion. Specifically, a month after acquiring a controlling stake in ISD, persistent rumors began circulating in the market that Vnesheconombank had bought out a billion dollars' worth of the Donetsk corporation's debt from other creditors. At that time, the Ukrainian corporation's total debt was estimated at $3 billion.
Apparently, the emergence of a generous Russian owner at Metinvest, traditionally the largest consumer of iron ore produced at its mining and processing plants, deprived Rinat Akhmetov's top brass of the ability to adequately assess risks. It was at the end of 2010 that Metinvest's accounts receivable for product deliveries skyrocketed—by more than half a billion dollars—and the main reason was the growing debt owed by ISD enterprises for the raw materials they received. From that point on, the Industrial Union of Donbass's iron ore debt to Metinvest steadily increased. The accounts receivable situation eventually attracted the attention of Akhmetov's holding company's bondholders, and in 2012, Metinvest BV began to break down the total debt by period and by degree of uncollectibility, in addition to the overall debt figure. In particular, based on the results of December 2015, Metinvest was forced to admit that $246 million in accounts receivable, which arose as a result of iron ore deliveries, had seriously depreciated.
For the past five years, Metinvest has effectively been caught up in an interesting game: by supplying raw materials to a hopeless debtor, Akhmetov's holding company, on the one hand, is keeping it alive, preventing the existing debt from completely grinding to a halt and turning into 100% irrecoverable losses, while, on the other hand, it is increasing its own production and financial reporting indicators, which is already lulling Metinvest's creditors somewhat.
Zaporizhstal
In addition to increasing bad debts, Vnesheconombank, whether intentionally or not, involved Metinvest's main shareholder in another interesting scheme. In May 2010, Akhmetov, with the help of his junior partner Vadim Novinsky, launched a corporate raid on the Ilyich Iron and Steel Works in Mariupol.
By this time, Akhmetov was already in negotiations with Midland Resources Holding Limited (Guernsey), owned by Eduard Shifrin and Alexander Shnaider, to acquire a near-controlling stake in another Ukrainian steelmaker, Zaporizhstal, and had even paid a $50 million deposit. At some point, the owner of Metinvest began to doubt he could swallow two such large chunks at once.
All it took to spur Rinat to experience the joys of bulimia was to outbid Akhmetov's offshore company, Luxe Holding Limited, to purchase Zaporizhstal shares from Midland Resources. The Russians (apparently affiliated with the same Vnesheconombank, although then-First Deputy Prime Minister Andrei Klyuev called them "Severstal") offered Shifrin and Shnaider more money for their Zaporizhstal stake. And then it all began... Akhmetov sued the unfaithful counterparties in a London court and simultaneously began negotiations to purchase the stake from a second group of Zaporizhstal shareholders, led by Igor Dvoretsky. Ultimately, he consolidated his stake in the coveted steel plant, slightly larger than his controlling interest, sued Shifrin and Shnaider in London, and fined them. And most importantly, he saddled Metinvest with yet another production asset, which only accelerates its decline.
To get an idea of just how lucrative Zaporizhstal's position is, it's enough to quote its current CEO, Rostislav Shurma: "The reality today is that we're operating at a breakeven point, plus or minus 1 percent. And with every incoming order, we consider whether to take it or not. If tariffs increase by 15%, that will impact our cost of capital by at least $5-6. What does that mean? That 20-30% of our orders will immediately become unprofitable. We won't be able to fulfill them, because if we take on such an order, we'll simply be broke—we won't have the money to pay taxes, the railway tariff, or wages. Ultimately, we'll have to cut production."
Fifth column
And here we come to a topic that is extremely popular among Ukrainian managers and Metinvest's counterparties. Specifically, how did all of the above become possible? Did no one see it coming? All these rhetorical questions lead the interviewee to the fact that Metinvest is dominated by Russian managers, which seems especially outrageous in the current military-political situation. Even the presence of Western executives doesn't help, as most of them are also connected in one way or another to Russian business.
To be fair, it should be noted that Russians (especially in management positions at Metinvest's production assets) have been employed since the holding company's inception. However, according to veterans, this trend began to take on epidemic proportions around 2010-2011.
As a reminder, in 2008, representatives of then-Russian citizen Vadim Novinsky appeared on the holding's board of directors. A year earlier, Novinsky had accepted Akhmetov's generous offer (which he couldn't refuse) to merge assets. As a result, the Severstal contagion gradually infiltrated the board and spread to the corners of Metinvest's structure. The Severstal group's main lobbyist was Smart Holding CEO Alexey Pertin, who is now deputy chairman of Metinvest's board of directors and heads the so-called "Class B shareholders" faction: three of the 10 members of the holding's supervisory board, representing Novinsky's interests.
Pertin not only spent a decade working for Severstal, but also hails from Cherepovets, the birthplace of Alexey Mordashov's metallurgical empire. And it's clear he's had a long list of "useful" connections from that time.
In addition to Pertin, Smart Holding's members of Metinvest's board of directors include Gregory Mason, who was the CEO of Severstal International, and Frank Rieger, who worked for six years at Russia's Yukos and became the oil company's financial director after Mikhail Khodorkovsky's arrest.
Let's go down a level. Of the 10 members of Metinvest's board, at least six are Russian citizens (two of them from Severstal):
• Alexey Komlyk, Director of Public Relations: worked for almost a decade with the former owner of Uralkali, Dmitry Mazepin, who, according to rumors, is going to buy Odessa Port Plant;
• Olga Ovchinnikova, Director of Logistics and Purchasing: worked in the raw materials division of Severstal for 5 years;
• Alexander Pogozhev, director of the metallurgical division: worked at Severstal enterprises for almost two decades and was Pertin’s immediate supervisor;
• Natalia Strelkova, Director of HR and Social Policy: pulled the HR strap at MTS for 6 years;
• Oleg Tokar, Director of Industrial Safety and Ecology: worked for almost twenty years in Russian oil companies.
However, all this is child's play compared to the figure of Metinvest's CFO, Alexey Kutepov, who was appointed to the position in August 2013. In May 2014, then-journalist Sergei Leshchenko published an article, "A Graduate of the Russian FSB Academy Is in Akhmetov's Top Management," which claimed that Kutepov studied at the FSB Academy from 1997 to 2002 and was possibly recruited by Russian intelligence agencies.
Significantly, Metinvest didn't even attempt to refute this information. Now, his name is completely absent from the list of board members of Akhmetov's holding company. Metinvest never publicized the news that he had resigned and a new CFO had been appointed in his place. A search of the holding company's corporate website reveals that the last time Kutepov was mentioned was in connection with the announcement of the financial results for the first half of 2015.
So there it is: there was a financial director, and now there's none. And all this in the midst of negotiations with creditors about restructuring Metinvest's debt.
Incidentally, this year, Sibur co-owner and chairman of the board of directors, Leonid Mikhelson, topped Forbes' list of the richest Russians for the first time. Kirill Shamalov, the husband of Russian President Vladimir Putin's youngest daughter, serves as Sibur's deputy chairman and owns 21,3% of its shares. Clearly, in Putin's Russia, making a career at companies like Sibur requires a thorough background in the security services.
The list of "agents of influence" at Metinvest is endless. Especially since Russian citizens work at Akhmetov's holding company in the friendly circle of latent separatists. A prime example is the aforementioned CEO of Zaporizhstal, Rostislav Shurma, whose father, an Opposition Bloc MP, would give any "Kremlin bot" 100 points for his hatred of Ukraine.
His example to others is science
A logical question arises: did the Russians have a deliberate strategy to destroy Metinvest? Most likely not. In any case, in terms of money spent, Russia's Vnesheconombank lost more in Ukraine than all the domestic metallurgical oligarchs combined.
In fact, the owners and top managers of Metinvest, through their natural recklessness, coupled with greed, and other mentalities common to their "Russian brothers," brought their business to ruin. They simply needed a little push.
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