Who let drug addicts into the Evraz Group’s mines?

09.09.2010 — Analysis

Tragedies in the mines owned by Evraz Group occur with frightening regularity. An electrician and an explosives expert were killed in 2005 and 2007 inside Estyuninskaya, a worker at Magnetitovaya was run over by a train in 2008, dozens of workers were killed by an explosion at Estyuninskaya in 2009, and a worker at the Vysokogorsky mining and processing enterprise was crushed by a piece of ore in June of 2010. And here's the latest death - a mining foreman fell into a stone crusher.

The Russian Union of Miners and Metallurgical Workers is extremely concerned about the situation in the mines owned by Evraz Group. According to Ivan Duryagin, the technical labor inspector for the union's central board, the industry has seen an increase in injuries in the past six months. Analysis of the situation inside the Estyuninskaya mine has shown that these casualties and deaths have several causes. During the economic crisis, many experts were let go and maintenance services were outsourced to organizations where the pay and benefits are significantly worse, which has an effect on the workers' attitudes toward their jobs. But the primary cause of the problems, believes Ivan Duryagin, is the obsolete equipment that the Evraz Group uses and weakened government oversight of hazardous workplaces.

State supervision deteriorated in the 2000's, when inspectors from Rostekhnadzor (the regulatory body responsible for ensuring compliance with all relevant legislation and technical standards) lost their right to halt dangerous production practices at a facility if they discovered gross violations of safety regulations. Then the list of activities requiring a state inspection permit was dramatically shortened. The owners of major Russian holding companies lobbied for this change. They believe that the regulatory framework that requires this technical oversight is an obstacle to the modernization of production, delays returns on investment projects, and increases the costs of production and corruption.

Experts in industrial safety reply that biggest projects in recent years (the Blue Stream pipeline, the Baltic Pipeline System, and the Eastern Siberia - Pacific Ocean oil pipeline) were all completed twice as fast as they would have been during Soviet times. Nor does government oversight hinder the modernization of production. The problem lies elsewhere - Russia spends only 1.2% of its gross domestic product on innovation, which is why industry uses mainly obsolete equipment. Which often breaks down. In the last ten years there have been 477 accidents and 1,125 fatalities involving ordinary hoisting equipment, according to data from the Industrial Safety company group.

Experts think that Russian holding companies like to plead poverty when they complain about the lack of money for new equipment. For example, Evraz Group claimed a net loss of $270 million for the first half of 2010. But according Dmitry Smolin, an analyst at the financial corporation Uralsib, this was mostly due to significant depreciation charges and non-cash losses from asset impairment. The company's revenue rose by 24% and its profitability rose by three points, reaching 18%.

Researchers from the Skolkovo Institute for Emerging Market Studies (SIEMS) argue that Russian companies are growing much faster and are far more profitable than is commonly believed. For example, Evraz Group had a 15% profit rate in 2009, a year that was still deep in the economic crisis. Of course, this cannot be compared to Gazprom's profit rate of 29% or Surgutneftegaz's 34%, but it is still impressive compared to the development of foreign companies.

According to data from experts at SIEMS, average profitability for a major company in the US is 5% and 4.7% in China. These figures are twice as high in Russia. The growth rate for Russian companies is almost four times the rate in the US. That's even ahead of the Chinese, although GDP for 2009 in the Middle Kingdom rose 9%, while falling by 7% in Russia.

It is clear that too much of the Russian economy is "in the shadows," which is why these paradoxes exist. For example, although the Evraz Group enjoys some of the lowest production costs in Russia for metallurgical production (meaning - excellent profits), the company is not trying to modernize and it operates mines in which half of the equipment is obsolete.

It seems that Russian entrepreneurs are not at all troubled by mining accidents. An initiative backed by the Russian Union of Industrialists and Entrepreneurs (which includes the owners of all major holding companies) is against the idea of liberalizing the laws any further. The RUIE is suggesting to President Dmitry Medvedev, first of all, that Rostekhnadzor's requirements for metallurgical and chemical production be limited, and secondly, that government oversight be replaced by independent inspection organizations.

The RUIE's initiative reminded experts of the recent proposal to forego police protection for the building housing the Investigative Committee of the Russian prosecutor general's office and to instead allow private security guards to protect the investigators' safes. There was a very interesting motivation behind this "reform." The police had slept through an armed raid on the prosecutor general's office, during which masked men had opened the safes that hold evidence from criminal investigations. So at that point, obviously, if there is an attack on a detention cell, then we should expect someone to suggest to the Ministry of Justice that the prisoners themselves be used to protect the prisons and detention cells.

The logic behind such initiatives is clear - if Russia's ruling class can just get rid of the state, they will be free to wring the last drops out of the country's industry. Bringing in independent inspectors, who will be under the oligarchs' control will probably lead to yet more accidents at hazardous facilities. A public hearing will probably end up on the wrong track. In fact, that's exactly what's happening today. Instead of informing the public about what may have caused the May accident in the Raspadskaya mine, the Evraz Group has begun to tell journalists that they are going to begin testing their workers for drugs and alcohol. In other words, they want the public to think that drug addicts blew up the mine.

Ruben Badalov, the first deputy chairman of the Coal Miners Union, says that some workers occasionally really did bring cigarettes and even drinks down into the mine. However, one should draw completely different conclusions from this fact than Evraz did. Instead of portraying the miners as lumpenproletariat, the company should be paying more attention to following the rules and procedures for using their equipment. Then they won't have to go through their employees' pockets and accuse drug addicts of blowing up the mine.

Vladimir Terletsky