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. Last Updated: 07/27/2016

Steel Plant Dispute Delays $95M Credit




A power struggle at one of Russia's biggest steel plants, Magnitogorsk, is holding up a multimillion-dollar loan from the European Bank for Reconstruction and Development aimed at modernizing the company's operations.


The Magnitogorsk Metal Plant, or MMK, and the EBRD signed a two-year loan agreement last October for a total of $95 million in working capital. The agreement called for the use of 25 percent of Magnitogorsk's stock as collateral for the loan.


But a dispute over the use of the company's shares as collateral arose last year between MMK's management and the chairman of the mill's board, Rashit Sharipov, who had also served as general director of a local financial-industrial holding company called Magnitogorsk Steel, or MS.


The 25 percent stake at the heart of the dispute was transferred by MMK in 1995 to MS as part of plans to attract investment to the plant, Anatoly Klishin, MMK's chief spokesman, said Tuesday.


But Sharipov refused to transfer the shares to the EBRD as collateral, leading to his dismissal from both posts in January.


The location of the shares is currently not known but a local court has ruled that they cannot be sold or used for voting purposes. Sharipov is trying to reverse the court's ruling and call an extraordinary MMK's shareholders meeting for April 7.


The EBRD has given MMK until April 1 to resolve the dispute, Klishin said.


An EBRD spokesman expressed confidence that MMK's management would resolve the conflict to unlock the loan. "The EBRD has full confidence in the management of MMK as well as in support of the company's current management from the Russian government," the spokesman said.


Besides MS's stake in the plant, which is located about 1,200 kilometers south east of Moscow, the government owns 23 percent of MMK, Trans-World holds 13 percent, Inkombank holds 10 percent and roughly 20 percent is held by workers.


It is still not clear why MMK believes it has the right to pledge MS stake to the EBRD. MMK currently holds a 19 percent stake in MS, not counting the disputed shares, Klishin said. A meeting of MS shareholders is scheduled to take place on March 13.


Sharipov defended his decision not to transfer the shares to the EBRD, claiming it would strengthen some of MMK's shareholders at the expense of others.


"These shares are MS's main assets, and giving them away would be reckless," Sharipov told a news conference in Moscow on Monday. "It will inevitably lead to a redivision of property among other shareholders."


Sharipov also said the loan deal would amount to handing control of the company to outside management.


"The credit will be impossible to repay," he said. "It will only make the plant's financial situation more difficult."


The EBRD's loan was part of a $1 billion investment plan, which included installation of a new cold rolling mill.


Maxim Basov, a metals analyst at MFK-Renaissance, speculated that Sharipov's refusal to hand over the shares probably arose out concerns that MS could lose "some of its influence at the plant."


But he conceded that MMK could have difficulty paying off the loan given stiff competition in the Russian steel industry.


Nevertheless, Basov said MMK had made "giant strides" in restructuring over the past few years, pointing out that the plant had increased its production last year to 7.5 million tons from 6.7 million tons in 1996.


Meanwhile, Sharipov has mounted a legal challenge to his dismissal as chairman of the MMK's board and general director of MS. He said his dismissal from both posts was caused by his appeal to the government to reconsider the credit arranged by the EBRD, not by any wrongdoing.


A regional court in Chelyabinsk was due to rule on his reinstatement suit Tuesday.