Russian authorities to dictate investment in metals sector

By bne IntelliNews January 26, 2012

bne -

The Russian government is considering a hands-on approach to modernisation in the metals sector, which would see companies forced to agree fixed investment programmes that would leave no room for manoeuvre.

Various media sources have reported the results of a meeting on investment programmes in the sector held on January 25. The discussion featured metals producers and government regulators - primarily the Russian Technical Supervisory Authority (Rostechnadzor), Federal Service for the Supervision of Natural Resources, and the Federal Antimonopoly Service (FAS).

According to Vedomosti, the authorities plan to force metals producers to specify detailed modernisation programmes to FAS, including the objects to be modernised and the terms for doing so.

Once the programmes are agreed with the regulators, metallurgical companies will not be able to sell, pledge or lease assets named. There are no preferences for metallurgical companies specified and force majeure will not be taken into account, claims Vedomosti, which says it has seen a document outlining the policy.

Regulators say that the goal is to push metals producers to modernise and update their production facilities more intensively, but the government is apparently offering no incentives or stimulus measures in return.

Companies will be closely monitored to make sure they modernise the assets within the scheduled timeframe. Regulators will receive additional powers to control the progress, including direct access to the assets and the ability to penalize companies or stop production at the assets if the programme is violated.

Some analysts suggest the measures are a response by Rostechnadzor to proposals by the metals companies to disband the regulator, which already imposes intensive inspections on them. "Some of the measures look alarming," write VTB analysts. "First, this project could significantly increase the level of regulatory activity, which creates certain risks in the short term. The regulators gain the right to suspend operations if modernisation plans have not been pursued in line with the agreed schedule. The agreements also broaden the state anti-monopoly watchdog's remit."

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Uralsib calls the initiative strange, "as Russian names already have significant investment programs and have in recent years been investing actively in updating and modernization production facilities. As the metals and mining industry is highly cyclical, it is usual for companies to continually amend their investment programs."

Alfa also notes, "The agreement may also reduce the borrowing potential of highly leveraged companies as they will not be able to use the assets as collateral."

Analysts see the main negative implications for companies with intensive investment programs and high leverage, such as Mechel, Evraz and Rusal. In addition, smaller operators still to launch modernisation programmes will now be forced to do so.

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