Global Steel Trade; Structural Problems and Future Solutions

Under the conditions of introducing free prices for coal, electric power carriers and transport
services and raising them to world market levels, certain metallurgical industry enterprises are
becoming noncompetitive and unprofitable. 59
Although the Russian steel producers have complained about the prices charged by the natural monopolies,
which have risen sharply since 1991, input pricing was “a key source of indirect subsidization of the
enterprise sector.” 60 As one expert put it: “The Russian economy remains a hyper-industrialized system
composed of enterprises that would not be viable in a market economy, supported by transfers from energy
and raw materials sectors”(emphasis added). 61 This indirect subsidization has contributed to the
exportation of steel. One analyst of the Russian economy called Russian steel exports “embodied energy.” 62
Another analyst said that when Russia exports steel, it is really exporting “cheap gas and electricity.” 63
According to remarks by Russian President Vladimir Putin, electricity prices in Russia are three to five
times cheaper than world prices. 64
The below-market price structure for inputs was another holdover from the Soviet period. The Soviet
economy set domestic prices separate and apart from world market prices and shifted the price balance in
favor of the defense and heavy industries, which included steel. It underpriced energy and raw material
inputs so that high-priority sectors would appear to have lower costs of production and higher productivity.
This Soviet price structure was the norm for the government, suppliers, and especially the industries that
consumed the undervalued inputs, including the steel industry.
The sharp growth of input prices in the early 1990s was widely viewed in Russia as the government’s
failure to effectively control the pricing of the so-called “three fat boys” (tri tolstyaka): 65 Gazprom, the
natural gas monopoly; RAO UES, the electric energy monopoly; and MPS, the railroad company. As
detailed below, many of the input prices were kept below world market prices (i.e., natural gas) or have
been preferentially provided to the steel industry (i.e., freight).
Gas and Electricity. In August of 1998, the government provided 50 percent discounts on natural gas
and electricity bills paid in cash. 66 While designed to shift enterprises from barter to cash payments,
this also meant that the price of natural gas in Russia was 15–25 percent of the price in the United
States. 67
A financial analysis of the regional electric suppliers in Russia indicates that profitability has not been the
primary concern; instead, the sector was “increasingly used as [a] source of subsidies to inefficient
industries” whose role “remains that of supporting the federal government’s industrial and anti-inflationary
policy rather than maximizing its own earnings and asset values.” Specifically (according to the same
report), effective cash rates on electricity have been much lower than the published tariffs for Russian
energos (regional electricity suppliers) and those of international counterparts. 68
Freight. In 1998, the Russian railroads lowered freight tariffs by an average 18 percent. According to
Nikolai Aksenenko, the Rail Minister, some metal companies, including steel producers, received
“exclusive tariffs which enabled them to cut their costs.” Despite this rate cut, the steel producers sought
(but did not receive) an additional 40 percent discount for metal products. 69 Moreover, it has been reported
that special rates are in place for certain steel exports. 70 As noted earlier, due to the poor location of many
of the Russian steel producers, such as Magnitogorsk, low freight rates are vital if many Russian steel
companies are to be competitive in world markets.
Coal. In 1998, the pricing of coal in Russia may have also been preferential. In the beginning of the
reforms, the government heavily subsidized the coal industry to keep prices down and restructure the
industry. The coal sector has been the second largest recipient (after agriculture) of direct budget subsidies
in the country. 71
Chapter 3: Behind the Crisis—Russia 49