Russians will have to pitch in a ruble for Roman Abramovich

08.09.2011 — Analysis

The government of the Sverdlovsk region has approved the development plan for the Vanady mining and processing facility (Evraz Group) in Kachkanar. This plan will mean a dramatic increase in income for the company's owner, Roman Abramovich, as well as more land being contaminated by industrial sludge. As this columnist for RusBusinessNews has determined, the responsibility of paying for the oligarch's ambitious plans will be borne not only by the residents of Kachkanar and the neighboring towns, but also by Russian taxpayers.

Evraz Group intends to build a second conversion facility for the Nizhniy Tagil Iron and Steel Works by 2020. In order to supply the plant, it was decided to process an additional 23 million tons of iron ore per year (a total of 63 million tons) in the Kachkanar mining and processing facility. An entirely new mining and processing plant is now being designed. The new strategy includes developing a deposit that contains five billion tons of reserves, increasing the ore-processing capacity, and constructing a new 800-hectare sludge disposal site. Forty billion rubles will be invested in building the new processing plant, as well as in reclaiming the land currently being used to impound the tailings.

Experts believe that the project will have significant economic and environmental consequences. Over a thousand people will be involved in this massive building project, including experts and equipment from overseas. All this will require an enormous infusion of resources, which of course will be felt in the wallets of both Evraz Group and its customers. Strictly speaking, the project has already affected the iron ore market - the Kachkanar mining and processing facility steadily increased its prices throughout 2010.

Analysts estimated that in 2010 the price of vanadium sinter went up by 205%, which ensured a 500% increase in net profits for the company in just the first half of the year. Experts from the Federal Antitrust Agency confirm that more than the market was to blame for the increased cost of iron ore. Officials discovered that the Vanady facility, which claims over 65% of the Russian market for sinter and iron pellets, is charging "outsiders" high monopoly prices for its products. For example, the rates they charged the Chusovoy Metallurgical Works were 60%, and at times 100%, more than they demanded from the Nizhniy Tagil Iron and Steel Works, which is a part of Evraz Group. The Federal Antitrust Agency fined them after discovering this violation.

Experts are certain that the suppliers of iron pellets will manipulate the prices in the future because they need to recoup the investments they have made to develop the deposit. Konstantin Lagutin, the vice president of Evraz Group and the head of its ore division, tried to deny this claim, telling a columnist for RusBusinessNews that no one would allow the company to sell raw materials at inflated prices, "Although some people seem to have forgotten this, we do live in a market economy, which demands low prices. And there are many strong players in this market, so we wouldn't be allowed to sell pellets at a price above their market value".

In reality, however, the presence of competitors does not seem to prevent Evraz Group from using a pricing policy not tied to the market. In particular, during the same year of 2010, the Nizhniy Tagil Iron and Steel Works was also fined for charging different prices for the same goods. Experts at the Federal Antitrust Agency determined that the price of their contracts was not affected by the volume of products shipped, the transportation costs, or the expenses incurred by the company. In response to the agency's charges, representatives from the Nizhniy Tagil Iron and Steel Works claimed that they have a policy of providing exclusive rates for some customers. So there can be no doubt that the market will not prevent the mining and processing facility in Kachkanar from making more money than is justified by that market.

The steel company representatives also responded in true Evraz style to questions about the increased risk to the environment posed by a larger sludge disposal site. According to the management of the holding company, the many meters of tailings that remain after processing the ore do not in fact contain any chemicals at all and are therefore completely harmless. But the representatives from the municipal government of the town of Lesnoy, the proposed site of the new sludge disposal site, told reporters that water adjacent to the current disposal site contained sodium nitrates that affect hemoglobin levels when they are converted to nitrites in the human body.

Konstantin Lagutin believes that the new storage site will solve the problem of contaminated water. There the tailings will be converted into a thick slurry in an artificial pond with a sealed floor. The senior manager claims that this new storage technology will prevent contaminated water from seeping into groundwater. Although, unfortunately for him, he had also previously stated that the project would be very expensive and would take at least four years to complete. Meanwhile the mining and processing facility plans to begin developing the deposit in late 2012, despite the environmental consequences this would entail for the town of Lesnoy.

Konstantin Lagutin thinks it will take at least 15 years to reclaim the land currently being used to store the old sludge. Moreover, at a press conference in Ekaterinburg, the senior manager's statements about the project were so vague that one can feel confident that all the industrial waste will still be in Kachkanar a hundred years from now. There is no guarantee that the water from the new impoundment won't contaminate the local rivers, but the public will never know about it. According to Lesnoy city officials, Evraz Group operates its own laboratory in Kachkanar (licensed through the Federal Service for Ecological, Technological and Nuclear Supervision, Rostekhnadzor) and will therefore be monitoring itself.

When it approved the development plan of the processing and mining facility in Kachkanar, the government of the Sverdlovsk region claimed that water supply for Lesnoy and Kachkanar should not be adversely affected. But in fact, these promises are worthless - they simply want the residents of Lesnoy to allow a sludge disposal site to be built there. Aleksandr Petrov, the minister of industry for the Sverdlovsk region believes that there are no alternatives to increasing the production of ore in Kachkanar. Without raw materials the Nizhniy Tagil Iron and Steel Works cannot expand.

Experts have observed that all Russians will have to bear the burden of this project. In return for keeping its sludge there, Evraz Group has promised to include Lesnoy in the federal Clean Water program. In other words, Russian taxpayers will have to cough up the money to solve the holding company's problems and Roman Abramovich will be able to buy himself a little something with the money he saves.

Vladimir Terletsky