By John Helmer in Moscow
Prime Minister Vladimir Putin has been reading his economic history.
He knows that the Smoot-Hawley Tariff Act (named after its sponsors, Congressman Willis Hawley and Senator Reed Smoot) was the American statute enacted on June 17, 1930, which raised US tariff barriers against more than 20,000 imported goods to record levels — over the objections of the then President Herbert Hoover, and most of the US economics profession of the time. After the enactment of Smoot-Hawley, other countries retaliated with their own increased tariffs on US goods, and American exports and imports plunged by more than half. The combined impact on international trade is generally thought to have turned the stock market collapse of 1929 into the Great Depression.
Speaking at Davos, a few days ago, Putin warned against Smoot-Hawley. “We must not revert to isolationism and unrestrained economic egotism. The leaders of the world’s largest economies agreed during the November 2008 G20 summit not to create barriers hindering global trade and capital flows. Russia shares these principles. Although additional protectionism will prove inevitable during the crisis-and we see it today, much to our regret-all of us must display a sense of proportion.”
In the question-and-answer session which followed, the Russian prime minister conceded: “True, we are increasing import duties of certain ready-made equipment to promote Russian manufacturers-but I don’t think we are extremists in this respect. We are also reducing and even abolishing import duties for technical equipment, especially of the kind Russia is not manufacturing, thus promoting Russian industrial advancement.”
What kind of Russian industrial advancement was Putin thinking of when, as chairman of both the government and Vnesheconombank (VEB), the state bailout agency, he recently agreed to make the following loans to the Evraz group, Russia’s largest steelmaker, controlled by Roman Abramovich’s holding, Millhouse? On November 27, one loan of $1,006.6 billion; and then on December 15, a second loan of $800 million. Total — $1,806.6 billion. The company disclosures claim the money is “to refinance the Company’s short-term debt.” In addition, on November 13, Vneshtorgbank (VTB), another state controlled bank, agreed to make two loans totaling Rb10 billion (then $360 million, now worth $278 million). According to Evraz, “the loan proceeds were used for regular tax payments in Russia.”
Total Russian government protection money for the steelmaker — more than $2 billion. But as Asia Times has already reported, most of this cash has been spent to protect Evraz’s non-Russian steelmills — especially those in the United States and Canada — from being forfeit to the foreign banks which loaned Evraz the money to buy them in the first place.
What appears to be happening, therefore, is that Putin’s money for Evraz is being spent by the board of directors and management on reducing steel production in the company’s Russian plants, and raising profit streams in the US and elsewhere, outside Russia. Thus, Russian industry is penalized for the company’s borrowing profligacy, and while offshore profit centres for Abramovich and his associates are protected, beyond the Kremlin’s reach. The only concession the latter have announced is a change in dividend policy, which was announced by Evraz on December 19. Instead of paying out 50% or more of the annual profits in dividends to themselves, as shareholders, some of the cash will be retained. From the final dividend payment of 2008, due soon, not more than 25% of the net income will be distributed.
“Making the world stronger” is the company motto on Evraz’s website. The latest production and sales reports from the company suggest the unmentionable corollary that “Russia gets weaker”.
Fourth quarter and full-year production figures, released this week, show that the group has cut back significantly more sharply on steel output from its Russian mills, compared to units in Europe and North America.
Total crude steel production for the consolidated group was 17.7 million tonnes. This marked a 7.1% increase over the 2007 level. However, Russian crude steel volume dropped 7% to 14 million tonnes. From crude steel, the mills produce a variety of steel products for different industry applications. The group reports that flat-rolled product volume jumped 19% to 2.2 million tonnes in aggregate; the Russian mills, however, produced 325,000 tonnes, 31% less for the year. The only category of steel for which Evraz’s Russian mills report growth in 2008 was railway products, which are bought by the state-owned Russian Railways Company (RZD); volume for 2008 was just under 2 million tonnes, up 10% on the 2007 level.
In percentage terms for the full year, the biggest drivers of growth in output of crude steel for 2008 were Evraz’s newly acquired Ukraine mills, followed by its North American units, and then by its South African mill. The operational results of the Ukrainian assets – Dnepropetrovsk Steel Works and coke chemical plants – were consolidated into the group’s accounts from December 12, 2007; the operational results of Oregon Steel Mills (Oregon and Colorado) were consolidated from January 2007, while those of Claymont Steel (Delaware) were consolidated from January 2008. The results of IPSCO Canada were consolidated into the group from June 12, 2008. Highveld Steel and Vanadium Corporation, in South Africa, has reported in the consolidated format since May 2007.
In the fourth quarter, the group aggregate for crude steel was 3.3 million tonnes, down 34% on the third quarter. Semi-finished steel was cut even more sharply — by 51% to 635,000t. Construction steel totaled 781,000t, down 41%.
Once again, it is clear that Evraz’s management decided to reduce capacity utilization and output at their Russian mills by a larger percentage than they applied elsewhere. Russian crude steel volume fell 39% quarter on quarter to 2.2 million tonnes; construction steel was cut 41% to 625,000t. While output was also reduced at the non-Russian mills, the crude steel volume fell by just 10% in North America to 544,000t; by 17% in Europe to 182,000t; by 21% in South Africa to 171,000t; and by 38% to 149,000t in Ukraine. Construction steel volumes fell by 32% in the Ukraine, and by 28% in South Africa.
The latest company report discloses that sale prices for steel fell dramatically more in the fourth quarter for Evraz’s Russian products than for the comparable products in North America and elsewhere. Russian construction steel fell from an average price of $1,170/t in the third quarter to $518/t in the fourth quarter, amounting to a 56% decline quarter on quarter. In Ukraine, the falloff for construction steel was 51%, from $1,186/t to $587/t. In Europe, construction steel retreated from $1,334/t to $1,118/t in the same period, a decline of 16%; in North America, the price for construction steel fell from $1,331/t to $1,038/t, down 22%. Finally, in South Africa, the same product dropped from $1,174/t to $975/t, a fall of 17%.
Evraz was asked to check this analysis of the reported figures, and explain how the company justifies receiving substantial state financing in Russia, when it has imposed sharper production cuts on its Russian mills than on its non-Russian units. The company has declined to reply.