beyondbrics

Rich oligarch-owned company tries to raise price; strong-armed Kremlin proceeds to knock them down. While the story is as old as Russia’s private sector, yesterday it had a new subject: Evraz, the Russian steelmaker owned by billionaire Roman Abramovich.

At first glance it appeared that the Kremlin might be singling out Evraz in reponse to the fatal explosions at its Raspadaskaya mine two weeks ago. Or that the company was just a sacrificial lamb in a broader move against the mining industry. Today, however, it seems the decision has less to do with the mining sector than Russia’s other industries, which aren’t enjoying as buoyant a recovery

Yesterday the anti-monopoly service announced it had launched a probe against Evraz for raising prices too high-a problem prime minister Vladimir Putin suggested was rampant throughout the entire metallurgical sector. Yet it seems the Kremlin itself is more worried about its industrial manufacturers which the state was forced to pump money into during the crisis.

Analysts say Putin is worried the bailout money will just end up lining the pockets of metals tycoons, like Abramovich. He’s anxious to show government support for state-controlled companies like carmaker Avtovaz and Russian Railways.

On Monday Avtovaz said that its supplier, Severstal, had stopped shipping rolled steel products to the company because of a disagreement over price, though Severstal claimed it had fulfilled its obligations, Reuters reported. The tiff is likely to be more painful for Avtovaz whose spokesman told Reuters it would only have enough supplies for a couple of days.

Also suffering are Russian Railways and Uralvagonzavod, the railway car manufacturer, who were reported to have sent letters to the anti-monopoly service complaining of price hikes.

Judging by the recent back-and-forths between the anti-monopoly service and metals companies, the debate on pricing doesn’t look anywhere close to ending. The anti-monopoly service came out late on Monday saying it could launch probes into other groups in the sector,.

Companies like Rostekhnologii are hitting back, arguing that planned price rises should be no more than 20 per cent and in line with global factors – an argument also echoed by analysts.

The markets have given their view. Today Several, Magnitogorsk and Novolipetsk all fell between 6 and 8 per cent, while in London Evraz shares plunged close to 12 per cent. The country’s Micex index has also now entered bear territory, Bloomberg reported.

For investors the biggest implication of the pricing debate is the concern the state intends to cap profits in industrial sector, Chris Weafer, chief strategist at Uralsib Capital, wrote in a note to investors this morning.

“The risk premium in these sectors, already rising due to global uncertainties, just got bigger in the minds of investors. Whether the perception of risk proves correct or not, for the medium term it will be a drag on share prices in materials industries.”

It is not only the mining companies that would like a bit more clarity on this new, but familiar, Evraz tale.