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. Last Updated: 07/27/2016

Urals Steel Giant Restructures to Survive

YEKATERINBURG, Ural Mountains -- Lights are out at the Verkh-Isetsky Metallurgical Factory.

The steelmaker has not called it quits or gone bankrupt. The factory's dark corridors and gloomy interior -- so murky it is hard for a visitor to find the way around the huge plant -- are just part of a massive cost-cutting plan that has helped to revive the company, said technical director Mikhail Zuyev.

"When watching television at home, we switch off lights in the kitchen, don't we?" he said. "By turning off the factory's lights we're trying to do the same thing."

It's a far cry from the good old days at this two-kilometer-long steel factory, which produces about 192,000 tons of steel annually. Gone, with the thousands of watts of lighting, are the specially kept shops, with their freshly painted walls and sparkling clean floors, that were once used to impress party officials.

Also gone are many of VIZ's customers, workers and much of its annual output.

But unlike many companies facing economic problems that have gone looking for a bailout from the Russian government, VIZ's management made some tough decisions: it fired 30 percent of its 5,280-plus employees and shifted some of the remainder into sales and marketing, doubling those staffs, Zuyev said.

It also shed its Soviet-style social programs, turning over its kindergartens, hospitals and housing fund to municipal authorities. VIZ did keep a profitable rest house and sports palace, Zuyev said.

The changes brought results: steel production has leveled off after steadily sinking over the last five years, Zuyev said. The company is now trying to increase its export potential and foreign investors are showing an interest.VIZ is not the only steel company suffering from the tricky problems of privatization. The vast Magnitorgskaya Stal, the world's biggest steel plant, has seen its production drop by 3.2 million tons since 1989. Nationwide, steel output has dropped 12 percent this year, said Gennady Shamanov, a steel expert with the State Metallurgical Committee.

Founded in 1726, VIZ went private in 1992. It has been a bumpy transition. Crippled by a crisis over payments by debtors and the loss of half of its customers in the former Soviet republics who have turned elsewhere for steel products, the company was forced to shut down for the first quarter of 1994.

The new efficiency, born of necessity, did not come easy. Scared by the layoffs and attracted to other, better-paying companies -- the nearby Konfi Chocolate factory is paying unskilled workers almost double VIZ's 290,000 rubles (almost $100) a month -- many of the company's most skilled employees left.

"The lumber we wanted to purge ourselves of remained," Zuyev said. "Qualified workers quit."

In 1994, the company exported 70 percent of its electrical-technical steel, which is used to make transformers. It hopes to increase this metal's production to 180,000 tons annually. Problems with delivery and transport, however, have eaten away about 15 percent of VIZ's export profits.

The factory has embarked on a $100 million reconstruction program, hoping to increase steel output to the CIS to 250,000 tons over the next five years, Zuyev said.

The reforms going on at VIZ and throughout the region, have caught some westerners' eyes. Deloitte & Touche examined VIZ's books and officials of the British accounting firm said they like what they have seen.

"We have chosen VIZ for our program because they do have an extremely good approach," said Nikola Ramsden, head of the Braxton Associates division of Deloitte & Touche. "They have the kind of attitude that will help foreign investors to work with them."

Dmitry Krukov, head of CS First Boston's analytical department, recently toured several metallurgical factories in the Urals. He believes the region's metallurgical sector is "attractive."

"The factories there are capable of producing high-quality metal," he said. "At the same time foreign companies can buy shares of enterprises at a cheap price."

VIZ is looking for a foreign investor and hopes to find a buyer for the state's 10 percent stake in the company by the end of the year. VIZ already successfully sold off 38 percent of the company at a voucher auction. The company's remaining 49 percent belongs to the workers.

"We must prove that we have come to the foreign market forever," Zuyev said. "In the upcoming five years we are in for great deeds."