#10 - JRL 7303
Financial Times (UK)
August 27, 2003
The science of forging a steel empire:
Arkady Ostrovsky looks at Alexander Abramov, a former scientist who became an
industrial magnate without political connections
There are no neon signs, big letters or corporate logos on the facade of the central Moscow headquarters of EvrazHolding, Russia's largest steel producer. Alexander Abramov, who occupies the top office in the five-storey building, keeps an equally low profile.
He does not appear at society parties, does not like meeting journalists and is rarely spotted in the corridors of power. Apart from industry specialists, few have heard of him or his company. But over the past five years he has amassed the largest steel and iron empire in Russia, which employs 125,000 people, controls about 22 per cent of the country's total steel output and has an annual turnover of Dollars 2bn (Pounds 1.3bn).
EvrazHolding is a product of Russia's growth since the 1998 financial crisis and Mr Abramov is representative of the second wave of Russian magnates who went into business after the best assets had been taken.
Unlike the first wave of politically connected "oligarchs", such as Mikhail Khodorkovsky and Vladimir Potanin, Mr Abramov had neither political leverage nor financial resources to help him benefit from Russia's chaotic privatisation of the 1990s: "I did not believe privatisation was irreversible in this country and did not want to be part of it."
But in recent years Evraz-Holding has emerged as one of the most aggressive vertically integrated business groups in Russia. Its assets include three large steel mills, three coalmines and several ore-enriching plants, as well as a large commercial port, Nakhodka, in the east of the country.
Secrecy comes naturally to Mr Abramov, who initially seemed destined to become one of Russia's top scientists. He graduated from the elite Moscow Institute of Physics and Technology - Russia's answer to the Massachusetts Institute of Technology. By the age of 31 he was a deputy head of the Institute of High Temperatures, a research base for Russia's space and defence programme.
But state funding for research institutes dried up. "By 1990, it became clear that there (would) be no money for science in Russia. It was a simple choice - either I had to leave the country as many of my colleagues did, or to go into business," Mr Abramov says.
One option was to sell high technologies created by his institute. But he calculated it would take four to eight years to turn a scientific application into a commercial product: "The country was deteriorating so fast, I simply did not have time."
He used his contacts with Russia's steel mills, which used high-temperature technologies, and offered his services not as a scientist but as a metal trader. "We had good contacts with the directors of those plants. They knew me personally and this helped me to get my first trading contracts."
Trading was a popular and quick way to make money in Russia in the early 1990s. The economy was shrinking, non-payment was a chronic problem and any offer of cash from a trader was welcomed by factories.
"The early 1990s were the years of rich traders and poor factories," says Yakov Pappe, a leading Russian economist and author of a Russian study on oligarchs.
By 1997, trading was less profitable and many trading companies, including Mr Abramov's, were owed large sums by producers. "This was the time when either factories started to buy trading companies, or traders started to buy factories," Mr Pappe says. Mr Abramov chose the latter and swapped debt for equity in the Nizhny Tagil steel mill, while also buying stakes in its rail-producing plant from other shareholders.
While the first wave of Russian oligarchs grabbed whatever assets they could, Mr Abramov acquired them in a much more focused way. He decided to build a monopoly for rail and steel construction products and looked for factories that would give him synergies.
The only other big factories making these products were in the industrial region of Kemerovo, also home to Russia's largest coalmines. Using his old trading contacts with coalmine bosses, Mr Abramov was introduced to Aman Tuleev, populist governor of the region. "In the west these kind of contacts are made in a golf club. In Russia you meet these people at some national day of a steel worker, over a shot of vodka," Mr Abramov says.
The two factories Mr Abramov was interested in were in bankruptcy in 1998. Salaries had not been paid for up to eight months and strikes were breaking out.
Mr Tuleev needed good managers. Mr Abramov needed the two factories. A deal was made. As a state creditor, Mr Tuleev would help appoint external managers loyal to EvrazHolding to run the steel mills. Mr Abramov would pay salaries and taxes, guarantee jobs and support Mr Tuleev's social projects.
This pitched Mr Abramov against Alfa Group, one of the most influential oligarch groups, which controlled one of the factories. "It was a tough battle for control and in the end we won. This was a non-core asset for Alfa and they had bigger fish to fry," he says. While groups such as Alfa were shedding non-core assets, Mr Abramov and his like were building empires. "Abramov managed to build his business from second-rate assets," says Mr Pappe.
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