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. Last Updated: 07/27/2016

Russian Investors To Rescue Steel City

A consortium of Russian banks, car manufacturers and the national gas monopoly have committed nearly $650 million to a groundbreaking investment project to modernize the world's largest steel factory at Magnitogorsk.

The ambitious, home-grown investment project would inject new life into the declining Magnitogorsk plant -- an icon of Soviet-era propaganda representing the grandeur and later obsolescence of Stalin's crash industrial construction program of the 1930s.

Once completed, the centerpiece of the reconstruction -- a $500 million cold-rolled steel plant -- is expected put an end to the need for Russia to import $1 billion annually of high grade steel for its automotive industry.

"It is the first time Russian companies have invested such sums in production without asking for finance Petrovsky said.

Investors in the Magnitogorskaya Stal project include the steel factory itself, the automobile manufacturers AvtoVAZ and ZiL, as well as Inkombank, Tveruniversalbank and several other Russian companies.

AvtoVAZ, ZiL and the other automobile manufacturers are to receive returns on their investments in the form of rolled steel, said Valery Sarychev, technical director at the Magnitogorsky Metallurgichesky Kombinat.

Magnitogorsk, located at the foot of the Ural mountains, was a staple of Soviet propaganda referred to as the "construction of the century" when it was built in 1932. The vast 65,000-worker factory was to have provided the country with steel for its car industry, but Magnitogorsk never managed to make sufficiently high-quality steel.

The new plant is scheduled for completion in two years, after which it should produce 2 million tons of high-quality rolled steel annually, enough to end the need for imports for the automobile industry, Sarychev said.

After the reconstruction, the factory intends to sell its new high quality steel both on foreign and domestic markets, he said.

The German company Schloemann-Siemag, which is to carry out the construction and to supply equipment for the new plant, said in a press release that its share of the investment would be 300 million Deutsche marks ($200 million). But a representative for the firm voiced concern about financing for the project.

"They have been paying so far, but we are afraid problems will arise in the future, as Magnitogorsk's production is declining," Angelika Demmer, a public relations official, said in a telephone interview from D--sseldorf.

Magnitogorsk's output fell from 12.2 million tons in 1989 to 9 million tons in 1993, according to an official with the Magnitogorsk factory's Moscow representation, who declined to be named.

"The project has immense significance for the factory," he said. "It will lead our production to a completely new quality level."In addition to the 2 million tons of new steel production at the end of the first two-year stage of the contract, Demmer of Schloemann-Siemag said a further stage would add another 800,000 tons of production capacity.from the government," said Alexander Petrovsky, deputy head of the development section of the Metallurgical Committee, the former Ministry of Ferrous Metallurgy. "We hope it will set up an example for other companies."

Russian officials have repeatedly complained that large Russian banks and companies have failed to invest in domestic production, preferring to hold their profits in hard currency bank accounts abroad.

The total reconstruction program to upgrade the giant steel complex was finalized last week and is projected to cost $646 million and 2.17 billion rubles ($1.8 million) by the year 2000,