Global Steel Trade; Structural Problems and Future Solutions

Opportunity for Change in Buoyant Russian Economy
Recent economic growth gives Russia breathing room to pursue reforms. The Russian economy is
performing better than at any time since the breakup of the Soviet Union. In 1999, economic growth was
up over 3 percent. Russia’s industrial sector grew by 8 percent in 1999 and more than 10 percent in the
first quarter of 2000. 2 Economywide growth is expected to be up to 5 percent in 2000. 3 Domestic steel
consumption rose 10 percent in 1999 and was up approximately 15 percent during the first five months of
2000. 4
Tax receipts are up too and, due to the government’s insistence, so is the percentage of taxes collected in
cash. Some barter payments for regional taxes remain, but at a reduced level. 5 Wage arrears are down
throughout the economy. 6 Reportedly, the three largest steel companies are current on both their wage and
tax bills, and the rest of the industry appears to be current on their wages. Steps have even been taken to
address the issue of input pricing; although utility rates remain below world levels, gas rates were raised in
February 2000, and electricity rates in May 2000. 7
The extent of bartering in the overall economy has dropped from 54 percent to 36 percent. 8 In January
2000, cash payments to the natural monopolies (the gas, electric, and railroad companies) rose to 63
percent, from 46 percent the previous year. In the steel industry, the numbers are even better. Overall,
the latest industry estimate is that barter has dropped to 15 percent of domestic steel sales; two
companies have even reported barter sales have been eliminated. 9 The 1998 ruble depreciation caused
export-oriented industries such as steel to suddenly become highly profitable. While costs (mostly
ruble-denominated) dropped dramatically, revenue (mostly dollar-denominated) increased markedly.
The sudden infusion of hard currency has made barter transactions less attractive, at least
temporarily. 10
With the domestic economy doing well and domestic demand for steel on the rise, Russian steel producers
have a chance to improve their profits and, perhaps, decrease their dependence on exports. 11 In fact, two of
the largest Russian steel companies are currently reporting a slight decline in exports due to the strong
domestic economy. 12
The government is forecasting that domestic demand for steel will increase nearly 50 percent by 2005.
Demand for steel from the power generation, transport and heavy engineering sectors is expected to
propel demand, increasing by 70 percent. The defense and automobile industries are expected to increase
their need for steel by 65 percent and 45 percent, respectively. As a result, production of rolled steel
products is expected to increase 30 percent by 2005. Exports of Russian steel are expected to increase
slightly. 13
Over the longer term, Russian steel industry and government representatives emphasize that when the
Russian economy gets back on its feet, domestic demand for steel will increase significantly. For instance,
industry and government officials point out that many of Russia’s 120,000 kilometers of rail lines and
400,000 kilometers of pipeline will need to be replaced. 14 These two undertakings alone will require several
million tons of steel. 15 If increased domestic demand leads to higher profits, the Russian steel industry has
the opportunity to invest these profits in becoming a world class steel producer and a fair trader on the
global steel market.
Hopes for the Future
Not only is the economy doing well, there are encouraging signs that Russia’s new leadership has a grasp
of Russia’s economic problems and the will to go forward with significant economic reforms. President
Putin has described the problems of the Russian economy as follows:
122 Global Steel Trade: Structural Problems and Future Solutions