Breathing Life Into Kazakh Smelters

PAVLODAR, Kazakhstan -- Reviving one of the giant Soviet-era metal smelters from a coma takes some basic business skills, lots of cash and, most of all, a strict ban on barter deals.

When runaway inflation and the breakup of the Soviet Union wreaked havoc on communist-style production planning, most of the region's state-owned factories and mines fell into a downward spiral of debt and falling production.

Barter seemed the obvious medicine, but it proved almost fatal.

"We didn't know what the real prices were," said Bulat Svyatov, commercial director of the Pavlodar Alumina Plant in northeastern Kazakhstan. "All our contracts were improvised. There was a lot of barter. We had to get rid of our product just so we could keep producing."

But barter also lent itself well to grandiose kickback schemes with local suppliers and Western customers, always at the factory's expense.

Viktor Pirogov, the new general director of the Aksu ferro-alloy smelter, found 1994 barter contracts for the purchase of diesel at four times the going rate, in exchange for undervalued ferrochrome.

"There was no owner," Pirogov said. "If there is no owner you can sell or buy high or low, it does not really matter to you."

Many factories cut work weeks and reduced production, which only raised the cost per ton. Salaries at Aksu were paid in boots and cans of Herbalife, a popular weight-loss product. And when that ran out, the factory printed its own money.

In late 1994 and 1995, three offshore companies financed mostly by the Trans-World Group, a London-based metal producer with major investments in Russia, took on management contracts for some of Kazakhstan's largest metal plants -- Pavlodar, an iron ore mine with a processing plant, and a conglomerate of ferro-alloy mines and smelters that includes Aksu.

In return for a share of revenues, Trans-World pledged to invest and revive production. Within months, the group exercised its contract option to buy majority stakes in all these plants and mines for a total of $143 million.

Kazakh opposition leaders alleged that Kazakh officials were selling cheap because they were silent partners in the offshore companies; the companies deny the allegation but will not say who the local shareholders are.

More importantly for Kazakhstan though, the company said it had already lent the plants more than $500 million to replenish supplies and pay off debts and overdue salaries at each of the enterprises.

It pledged to invest in new production lines and bought nearby power plants and part of a large coal mine to ensure stable electricity supplies. These investments have brought money back into an economy starved for cash by more than $11 billion in enterprise arrears.

Trans-World also fired the top management at all plants and banned barter deals. With Trans-World cash in hand, the new managers could bargain for prompt supplies, at 30 percent discounts from even the more honest barter deals. Within two years, Pavlodar had cut production cost by 62 percent thanks to Trans-World's cash and management improvements.

Trans-World's greatest challenge was to find customers with cash. It pledged to buy and market the whole production at each of its enterprises. Trans-World's aluminum smelters in Russia need 3 million tons of alumina per year, thrice Pavlodar's production.

But the pellet plant and the conglomerate of chrome mines and smelters lack Pavlodar's guaranteed outlet; world market prices of ferro-chrome plunged shortly after Trans-World took over and aluminum and steel prices were weak as well. Committed to buying, Trans-World stockpiled 200,000 tons of ferro-alloys in Rotterdam alone, cut back production in 1996 and sold from stock.

"We owned the highest mountains in the Netherlands," joked Hans Rubin, a Trans-World appointee as Pavlodar's president.

Production at Pavlodar is back at capacity, but the ferro-alloy smelters run at less then 40 percent, the iron ore mill at 66 percent. Unlike earlier years, however, salaries are still paid and whatever is produced is sold for cash.

Trans-World has grand plans for its factories in Kazakhstan, including a second $450-million alumina plant and management or partial ownership of the Kazakh railroads, power network and gas pipelines. To attract financing, the company is gradually shedding the secrecy that made it suspect to many.

"The reception of the Western banks up to now was rather negative," Rubin said. "They used to call us the Russian mafia and all that nonsense. Now banks are much more receptive to our proposals and ideas than they were before. We can prove that our companies can make a profit."