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. Last Updated: 07/27/2016

Severstal, VFP Fight for Arctic Ore

A battle is raging for control of the Olkon iron ore plant, which supports the one-company Arctic town of Olenogorsk in the Murmansk region.

As in many disputes, the feuding sides -- in this case metals giant Severstal and the Your Financial Adviser, or VFP, brokerage -- insist that the very future of the plant is at stake.

Their warning is all too correct: Olkon's open pits will run dry in five to seven years at current rates of mining, and developing new underground mines will cost millions of dollars.

But depending on who is talking, neither Severstal nor VFP care.

VFP chairman Vasily Boiko is accusing Severstal of violating VFP's rights as a minority shareholder by stripping Olkon of ore and profits and withholding investments. Over the past year, VFP has filed several suits -- to have an independent audit and to replace the board's audit committee -- after failing to get enough votes at shareholders meetings. None have been successful.

Severstal is accusing VFP of greenmail, trying to force Severstal to buy its stake.

VFP, which owns 31.2 percent in Olkon, claimed control over the plant after electing its representatives to the board of directors at a stormy shareholders meeting last week. Bailiffs interrupted the meeting and presented court orders blocking three Cyprus-registered companies that together hold Severstal's 50.93 percent stake in Olkon from voting.

Olkon general director Viktor Vasin and the previous board were stripped of their posts, and additional orders forbade the plant's registrar, Partner, from counting ballots at the meeting or making any changes to the shareholder list.

Andrei Kashubsky, Severstal's representative on Olkon's previous board of directors, declared the meeting over after the bailiffs arrived. But VFP said he had no right to do so and elected its representatives to the board, which appointed 26-year-old VFP employee Vladimir Maslov as Olkon's general director.

The court orders were based on suits brought by individual shareholders. Neither VFP nor Severstal could explain the basis for the suits. Kashubsky said the suits may have been orchestrated by VFP. Severstal plans to sue Boiko.

The results of the shareholders meeting were invalidated Monday by an Olenogorsk court, said local prosecutor Yelena Smirnova. "We expect more from their side, more decisions from other courts," she said. "It's an endless story, and the loser is the plant."

Boiko said VFP is feeling out new customers for the plant.

Severstal's Kashubsky said this is VFP's latest attempt to get money from Severstal. "Their only reason is to blackmail Severstal [into buying its shares]," Kashubsky said in a telephone interview. "VFP is not an operating company, and they can't ship the ore to anyone else because of high railway tariffs."

Kashubsky said Severstal will not buy VFP's stake, adding that his company prefers to work with Olkon because of their 46-year history together but the plant is not vital to Severstal's well being.

VFP has no interest in selling its stake, Boiko said. VFP offered the stake to Severstal when it first bought into Olkon in early 2001, he said.

VFP will try to raise $30 million to develop underground mining at Olkon to prolong the plant's life, Boiko said.

Severstal has been searching for the past two years for a way to develop underground mines, but the projects are too expensive to be profitable, company spokeswoman Olga Yezhova said. The alternative is to gradually lower production -- and the number of employees -- over the next 14 years, she said.

VFP's independent consultant, Dmitry Yefimov, formerly of the Investor Protection Association, said Severstal was not paying market prices for Olkon's ore, pushing the company into the red. When Severstal bought less ore from the plant, resulting in further losses, VFP offered to buy up the difference at the same price as Severstal, but received no answer, he said.

Yezhova said Olkon's ore is the second most expensive that Severstal buys.

Each side says the other is hurting the investment climate in Russia.

"When a financial company hurts real business, it is scary for foreigners," Kashubsky said a telephone interview Wednesday. "In Russia, we are mostly used to it. But foreigners may not cross the border when they hear of such things."

"We think Severstal's actions are extremely damaging to the investment climate. Their actions mean: 'If I've grabbed 51 percent, I don't see the other shareholders and I'll put all the company's profits in my pocket," Boiko said.