Global Steel Trade; Structural Problems and Future Solutions

Metric Tons (millions)
100
80
60
40
20
0
Capacity
1991 1992 1993 1994 1995 1996 1997
Source: WSD Core Report NNN.
Production
Privatization
After price deregulation came privatization. Due to earlier reforms that devolved central authority, the
government had already lost control over companies to their managers, employees, and others. These
groups had to be mollified for any privatization plan to be approved.
The final privatization plan reflected the necessary political compromises needed to win approval. Perhaps
the most important and far-reaching compromise was made on the question of employee ownership.
Originally, the plan was to give workers and managers no more than 25 percent ownership of their plants
free of charge. The remainder would be bought by outside investors who would undertake the restructuring
of the companies. Instead, the majority of the companies were partly given away and partly sold to workers
and managers at significant discounts (up to 30 percent). 35
Under this final plan, privatization did not have the intended effect of attracting strategic investors, Russian or
foreign. In the steel industry, over half of the companies’ shares were retained by employees and management,
with only a small portion going to outside investors or retained by the government. The workers’ shares were, to
a large extent, later purchased by trading companies, other Russian investors, or company management. 36
Because privatization preceded the creation of a proper framework of corporate and bankruptcy law, the
new company owners could abuse the rights of minority shareholders and avoid the payment of bills, taxes,
and wages. As the European Bank for Reconstruction and Development (EBRD) stated,
the consequences of the privatisation strategy adopted in Russia have been highly adverse for the
governance of enterprises and the allocation of resources, not least because of the clear failure to
break the political constraints on restructuring and company closures. 37
Need for Long-Term Restructuring and the Government’s Response
While capacity and production have been cut and new equipment has been installed in the Russian steel
industry, these actions have been insufficient when measured against the scope of the needed changes.
Although the Russian steel industry and government have focused on the installation of new equipment,
uneconomic capacity has been
maintained. Despite the 70
Capacity
Utilization
3-6. Russian Gross Crude Steel Capacity, Production, and Utilization
46 Global Steel Trade: Structural Problems and Future Solutions
100%
90%
80%
70%
60%
50%
Capacity Utilization
percent drop in domestic
demand, neither production nor
capacity has been reduced
commensurately. Between
1991 and 1998, production
declined 43 percent and
capacity was cut by 18 percent
(Chart 3-6). 38 As a result,
capacity utilization is very low,
40 percent of Russia’s crude
steel production capacity has
not been utilized since 1994.
Because of the drop in demand,
the prevalence of obsolete
equipment, and the low level of
productivity, analysts have
been advocating the radical