Biden Targeting Ukrainian Oligarch May Help ArcelorMittal
May 09, 2021 6:11 PM ETArcelorMittal (AMSYF), MT5 Comments 3 Likes
Summary
-ArcelorMittal for months has been facing relentless pressure from Ukrainian oligarchs, regulators, and security service officials.
-The security service raided ArcelorMittal’s operation six times, once even shutting down a $150 million steel casting project.
-Authorities slapped the company with $300 million additional tax assessment bill, while a state agency ordered ArcelorMittal to stop work on its crucial tailings project.
-President Biden’s recent phone call with President Zelensky, and sanctions imposed against a powerful Ukrainian oligarch, may help ease the pressure on the company.
-President Zelensky met Lakshmi Mittal on April 14 to discuss ArcelorMittal’s plans to invest $1 billion into cleaner steelmaking, and the company is now expecting “a lot of good news”.
-ArcelorMittal Merger Creates Major Steel Company
Photo by Mark Renders/Getty Images News via Getty Images
The Biden Administration has taken less than two months after assuming office to declare sanctions against one of Ukraine’s most powerful and notorious oligarchs.
The message from Washington is clear: epic corruption, which has plagued the country for most of the past three decades, will no longer be tolerated.
This is good news for ArcelorMittal (MT), the largest foreign investor in Ukraine, as the company has been recently facing increasing pressure from oligarchs, regulators, and even security service officials.
The security service raided ArcelorMittal’s Ukrainian subsidiary six times over the past 20 months, at one point bringing in a special radiological team and shutting down a $150 million steel casting project.
An attempt by the prime minister to stop the security service from deploying the intimidation tactic may have cost him the job - a secret recording of a high-level meeting was used to topple the Cabinet. This allowed the oligarchs to reestablish control over the government, and to resume the pressure on ArcelorMittal.
These developments underscore grave challenges faced by ArcelorMittal at one of its most important steel and mining operations worldwide. This also shows why the Biden Administration’s steps to rein in the oligarchs and to reestablish the rule of law in Ukraine are so important.
‘Significant Corruption’
Antony Blinken, the Secretary of State, on March 5 issued a statement designating Ihor Kolomoisky, the oligarch, as ineligible to enter the United States for his involvement in "significant corruption." Blinken also expressed concern about Kolomoisky’s “current and ongoing efforts to undermine Ukraine’s democratic processes and institutions, which pose a serious threat to its future.”
Kolomoisky is widely regarded as one of the strongest backers of Ukrainian President Volodymyr Zelensky, a former comedian whose show has been running on a television channel controlled by the oligarch.
Not a single investor was laughing though in August 2019 when Kolomoisky had openly called on the government to nationalize ArcelorMittal’s Ukrainian operation, known as ArcelorMittal Kryviy Rih.
A forceful nationalization of a successful private business in any country would send a negative signal to global investors, but in Ukraine such move would be even more sinister.
Here is why: Ukrainian oligarchs gained their wealth and power not via private enterprise, but rather through exploiting state-owned assets. They use political connections to appoint loyal managers at state-owned companies, make company books opaque, and channel earnings to a myriad of anonymous offshore accounts.
Kolomoisky, via his loyal managers, for decades controlled the country’s largest oil producer, Ukrnafta, which is majority owned by the state. In the same way, he controlled for years Ukrtransnafta, the 100% state-owned oil shipping monopoly among other assets.
Any potential nationalization of ArcelorMittal’s lucrative Ukrainian subsidiary would make even the wealthiest Ukrainian oligarchs salivate in anticipation of future profits.
This would also be a huge red flag for investors as the subsidiary is ArcelorMittal’s second-largest mining operation in the world and is simply too important for the company, contributing strongly to its impressive performance over the past six months.
Raiding Operation
Ukraine, which accounts for about a fifth of ArcelorMittal’s annual iron ore production, harbors the company’s second-largest mining operation after Canada. ArcelorMittal has invested $10 billion in its Ukrainian business over the past 15 years.
ArcelorMittal Kryviy Rih increased production of iron ore, mostly concentrate, to 10.7 million metric tons in 2020, up from 9.8 million mt in 2019. Its steel output dropped to 4.7 million mt from 5.3 million mt due to the pandemic, while rolled steel production fell to 4.3 million mt from 4.7 million mt.
A watershed moment for the company occurred on July 20, 2019, when 18 security service agents, armed with radiation measuring devices, had entered its facilities. After the 14-hour raid, the agents concluded that radiation levels were too high and ordered managers to immediately shut down work on its brand new $150 million billet continuous casting machine.
Eighteen days later, after realizing the agents may have made a measuring mistake, the security service allowed the managers to resume the work.
The calm lasted less than two months. On September 3, 2019, a squad of 11 security agents raided the company again, this time inspecting its coke-producing facilities for as long as 19 hours.
The next day, in what appears to be a concerted effort, the authorities had slapped ArcelorMittal Kryviy Rih with a bill for additional tax assessment worth $300 million. This basically equals the amount the operation pays in taxes annually. The authorities admitted the bill was prepared after an input from the security service.
ArcelorMittal is currently fighting the tax bill in court.
The scope of the security service investigation ranges from the company’s alleged impact on the environment to ‘financing of terrorism,’ a charge that even Ukrainian authorities themselves struggle to explain. By law, such accusation is the only way for the security service specifically to get involved in an active investigation of a company.
The raids, investigations, and regulatory pressure have been a serious distraction for ArcelorMittal Kryviy Rih, draining company resources and putting exhausting pressure on its personnel.
The new tax bill would have a direct financial impact on ArcelorMittal and force the company to scale back its capital investments, reduce production and exports, and may potentially trigger massive layoffs.
Wiretapping Scandal
The attacks on ArcelorMittal began three months after Zelensky’s election to office, perhaps offering some clues to the sudden change of hearts now affecting the company in Ukraine.
Ivan Bakanov, Zelensky’s childhood friend, is now head of the security service that leads the investigation. Before his appointment, Bakanov was head of Zelensky’s comedy show.