The governor of Russia's southern Siberian region of Kemerovo, Aman Tuleyev, issued a warning July 10 to steel giant ArcelorMittal that its assets will be seized if it does not increase production in its coal mines. In a letter to the steel giant's CEO, Lakshmi Mittal, Tuleyev stated that if output of the company's facilities — which has fallen to about half their production capacity — does not stabilize, then "we propose that you hand them over without compensation."
The ongoing economic recession has hit the steel industry particularly hard. This is because the industries that are the most dependent on steel, such as construction and automobiles, are at or near the top of the economic sectors that have suffered the most as a result of the downturn, causing demand for new cars and homes to plummet and for production to virtually grind to a halt.
This general trend is exacerbated in Russia, which is home to a large number of industrial or "one-plant" cities where nearly the entire population is employed or relies on one large industrial complex. The Kemerovo region, which is rich in natural resources and contains over 70 percent of Russia's coking coal (a primary ingredient used for making steel), has many such towns. While these industrial cities thrive in the economic boom that Russia witnessed in the middle of the decade, they are completely devastated when their resources are no longer in demand during a recession. As plants begin to decrease their operations, workers are no longer needed, and unemployment has an overwhelming effect on these towns.
As a sign of the graveness of the situation, Russian Prime Minister Vladimir Putin has been touring such industrial cities and has even forced Oleg Deripaska, one of the leading metal oligarchs, to restart operations at several of his factories after workers protested about not getting paid. Despite the reality that operating such facilities at full capacity would leave excess steel and other materials sitting idly, maintaining social stability is key for Putin, since such plant cities are prime targets for social destabilization (though political consolidation and the tight grip of security forces in Russia means that social destabilization is not as big of a problem in Russia as in many other states during the recession).
Now the regional government (whose shots are ultimately called by Moscow) has specifically targeted ArcelorMittal — one of the few foreign companies competing in the steel production market in Russia — to increase production. ArcelorMittal currently operates three coal mines in the region, which it acquired in 2008 from Russian metals major Severstal, and is in talks with local officials on the transfer of one of the mines, but has stated that it does not wish to negotiate over ownership of the other two mines.
The Russians — particularly the Kremlin — are not especially friendly to ArcelorMittal, whom they see as an interloper in a strategic sector. It does not help that the Arcelor portion of ArcelorMittal nearly came under Severstal's ownership a few years ago, and that the company is perhaps the biggest competitor to Russian steel magnates throughout the entire former Soviet Union. While STRATFOR presently has no information indicating that the Kremlin has been involved in the Kemerovo dispute, Moscow presumably is looking upon the local government's threats with favor.
Ultimately, these developments fit into Russia's recent nationalization process in response to the economic downturn. The Kremlin has been consolidating businesses for years, and the financial crisis has actually facilitated its moves to merge and acquire assets cheaply, from banking to energy to minerals. While it is too soon to tell how the ArcelorMittal situation will play out, it serves as another example of the shuffling of strategic assets in Russia, one that STRATFOR will continue to watch closely.
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