May/June 1996
The Commonwealth of Independent States is a region rich in recycling opportunities, but one that’s seemingly not quite ready for significant investment by the Western scrap industry.
By Paul Belden
Paul Belden is associate editor of Scrap.
South of Chernobyl, north of the Black Sea, in the heart of Ukrainian steel country, a colossal ridge of black slag winds across the landscape for 20 miles, a dual symbol of the region’s environmental problems and potentials.
It’s just one reminder of the consequences of 70 years of a meet-the-quota, forget-the-cost industrial attitude. But this mountain of slag—described by a Western metal-industry executive who has seen it as “a tremendous fortune of steel”—is also a testament to the vast scrap value available throughout what was once the Soviet Union. The way things are going, however, it will probably be sitting there for years, along with at least 40 more just like it and huge quantities of scrap of all sorts spread out across the Commonwealth of Independent States.
Despite an abundance of recoverable scrap and residues, the C.I.S. scrap industry simply doesn’t have the equipment, the know-how, and the capital to take advantage of these resources, observers say. And Western recyclers, for the most part, remain reluctant to put people and capital at risk in an environment seen as perilous and unstable.
“I really don’t think the time is right for a significant investment of fixed capital there,” says Denis Oliver, CEO of Ireland Alloys Group, a multinational scrap recycler with headquarters in Hamilton, Scotland. “The situation is still too uncertain.”
Filling a Void
This is not to suggest an absence of trade between the Commonwealth and the West. Many Eastern European enterprises are keen for Western hard currency, and with Russia leading the way, the region stands as an important player in the world market for scrap and virgin metals.
“What’s happening now is basically the same thing that’s been happening for 20 years,” says Oliver. “The Russians are selling the family jewels, in a manner of speaking.”
In fact, Russia ranked among the top-10 suppliers of a range of metals processed or consumed in the United States in 1995, including No. 1 and No. 2 heavy melt ferrous scrap, aluminum scrap (including remelt scrap ingot), refined copper and alloy, stainless steel scrap, and slab zinc, according to U.S. Department of Commerce statistics.
Indeed, Oliver’s company is a partner in a joint venture that operates extensive buying operations in Russia. And several other Western companies have set up similar ventures as well as various tolling arrangements with Russian smelters and refiners.
But a shortage of hard currency in C.I.S. countries—plaguing governments as well as private industries—plus the confusing nature of the somewhat-privatized economy and a host of other obstacles, have combined to limit the types of deals being pursued by Western firms.
For instance, although Russia remains a strong metals producer, little in the way of Western scrap or processing equipment is sold there. And the investment of Western capital in an enterprise where the controlling interest is Russian is rare.
Precisely for this reason, the situation presents a real opportunity for Western recyclers, says Robert C. Reiley, director of the Commerce Department’s Office of Metals, Materials, and Chemicals. “The United States has the best recycling technology and management systems in the world. And this is what U.S. recyclers should be selling: their knowledge of the recycling process—how to design it, implement it, install it, use it—all of that,” he says.
But they have to be willing to make sustained investments in the C.I.S. scrap industry, he adds. “If you think you can get on a plane, fly over there, and make a deal, good luck,” Reiley says. “Some guys can. It happens. But what you really need is a systematic approach to that market.”
To help in that regard, various governmental and quasi-governmental agencies administer programs designed to encourage investment in the Commonwealth of Independent States. For instance, the Commerce Department’s Business Information Service for the Newly Independent States describes investment opportunities and provides the names and numbers of business contacts there. The World Bank and Russian government, meanwhile, are setting up a $132-million loan program to help finance projects aimed at recovering “commercially valuable commodities currently being emitted into the environment.” And the Export-Import Bank and the Overseas Private Investment Corp. provide loans or loan guarantees to C.I.S. businesses purchasing American-made equipment.
While these programs have been fairly effective in spurring Western investment in Eastern Europe, they have done little to build private, non-government-backed investment there, says Joseph Filner, president of Project Development International (New York City) and coauthor of a book analyzing C.I.S. economic reforms. “The only funds going into Russia today are backed by the Ex-Im Bank or OPIC. Nobody wants to risk his own money,” Filner says.
Fishing for Extortion
The barriers to investment in the Commonwealth of Independent States are myriad, Westerners say, but one stands out: widespread lawlessness.
“It’s dangerous over there,” says Ron Rosenson, president of Behr Precious Metals Co. Inc. (Rockford, Ill.), who in 1993 and 1994 traveled to Riga, Latvia, to sound out a circuit board deal with a company that manufactured radios for the Russian market. As soon as he arrived, Rosenson was provided a bodyguard who never left his side on the street.
As it turned out, the deal fell through, and it didn’t bother Rosenson at all. “If there’s scrap around, the Mafia tries to get hold of it, and I’ve been in the business too long to be dealing with those guys,” he says. “They’re a rough bunch. I heard an assayer was found dead after he wouldn’t provide them a phony assay.”
According to Filner, “It’s not Mafia in our sense of the word. It’s a whole subsystem of organizations set up to bribe, smuggle, and avoid taxation. They operate by threat and by financial maneuvering, and they’re using the banks.”
The influence of the Russian Mafia is especially strong in Moscow and St. Petersburg, says Oliver. Even in the best Moscow hotels, “you walk into a business conference and the foyer is full of, shall we say, bulging-pocketed gentlemen,” he says.
This influence is so prevalent, says Filner, that in some Moscow business circles, the hiring of only a single bodyguard would be considered reckless. For example, he says, “The president of the Most Bank—the biggest bank in Moscow, one with offices in city hall—is afraid to go into the city, and when he does go, he brings 17 security people with him. And he had to move his wife and daughter out of the country, permanently, for security reasons.”
Recycling executives with experience in C.I.S. countries say the key to safety there in this regard is keeping your head down. “You don’t want to stand out in any way,” says Rosenson. One executive with long experience doing business in Russia says his Moscow employees used to answer the phone by announcing the company name. Now they just say “Hello.” The change in policy was prompted by a call that came in one day from a man who clearly was fishing for extortion opportunities.
“He wanted to know what sort of business we were in, and he said, ‘Oh, I bet there’s some very good money in that.’ Then he started asking all sorts of questions about our operation.”
This executive takes the danger seriously, and for good reason: He knows of instances in which the employees of overseas trading companies with offices in Russia have been murdered.
And the List Goes On
Among the other potential problems Western scrap executives cite with doing business in Eastern Europe is a disintegrating physical infrastructure. There are regions, for instance, where the heat or electricity only comes on for part of the week. Offering an anecdote of this, Rosenson recalls a business luncheon in the executive dining room of a major C.I.S. corporation where, “we all had to sit there with our overcoats on the entire time.”
And, as bad a shape as the power grids are in, the roads are even worse. “In the city, the roads are fine, but you go past the city limits and, boom, they turn to dirt just like that. The infrastructure just hasn’t been improved in God knows how long,” says Rosenson.
The poor quality of the infrastructure is having a serious impact on scrap sales, Filner says. “In northern Siberia, more than a million tons of scrap is just sitting there, unmovable. The rails and roads are in just too bad a shape,” he says.
Concern over inadequate rail systems was, in fact, part of the reason that Birmingham Steel Corp. (Birmingham, Ala.) backed out of a deal with a Ukrainian plant that wanted to supply it with scrap and direct-reduced iron (DRI), says Jim Nuckels, the company’s executive vice president.
“Scrap does move over there, but because of the rail problems, there’s not much coordination,” he says. “Sometimes scrap shows up in port all right, but it’s not enough to fill the boat.” Also problematic for Nuckels was the strange, maze-like quality that the deal took on as negotiations unfolded. “First, before they could do anything, they needed to get coal from Poland. Then, they needed to get gas from somewhere else. It just went on and on. I think it turned into a four-country deal before they could get it done. And they’re cash-poor, so they were looking for up-front money.”
Nuckels was also concerned about the quality of the material he would be getting. He’s heard of several cases in which DRI pellets from C.I.S. countries have spontaneously combusted in the holds of ships—a condition known as “hot hole”—because the pellets had been loaded wet.
Oliver, too, mentions quality—or, more properly, specifications—as a potentially worrisome issue with C.I.S. deals. “You’ve got to have a slightly different attitude when buying materials,” he says. “You’ve got to be extremely specific with suppliers about what you want, when you want it, and in what form you want it. For example, their idea of four feet-by-down is often, ‘Will it fit in a railcar?’ Something that is supposed to measure 4-by-4-by-4-feet could turn out, upon arrival, to be 25 feet long.”
Equally vexing is what Oliver dryly characterizes as the “long-winded” nature of the C.I.S. banking systems. “It’s not that they’re stealing,” he says. “It’s just that things have a habit of getting lost or delayed when funds move through the system.”
Filner is more pungent. “They’ve got 2,000 crazy banks and 600 commodity markets,” he says. “Thievery, executions, crazy high taxation resulting in non-collection of taxes—there’s no stability at all to the monetary system. And all the national ministries are loaded with ‘fee collectors’ for approving any and every action you take,” he says.
Harris Waste Management Group Inc. (Peachtree City, Ga.), which, over the past couple of years, has had crews working in Russia to install its shears for a project based on the scrapping of decommissioned submarines, discovered this lack of banking stability when it first made payroll deposits in a Russian bank. The company quickly learned to tell its people in Russia exactly when funds had been deposited, says R. Dennis O’Loughlin, the company’s business development manager. “Otherwise the bank would go play the market with it, all the time telling you it hadn’t come in,” he says.
A Free-for-All Fire Sale
Notwithstanding its many current problems, the situation in the Commonwealth of Independent States does seem to be improving—at least compared with how things stood immediately after the breakup of the Soviet Union on Jan. 1, 1991.
Then, state and military officials of the former Soviet Union with contacts in the West scoured the countryside for anything of value that could be shipped out and sold for hard currency. It was basically a free-for-all fire sale.
“Total chaos” is how Reiley remembers it. “The state trading system had entirely collapsed. I heard that deals were being done literally at the border, cash for commodity. Essentially, two guys would show up at the border and one would say to the other, ‘You’ve got a truckload of material and I’ve got $50,000 in a briefcase. You take this, I’ll take that, and we’ll both be on our way.’”
This lasted until 1992 or so, when the governments of C.I.S. countries managed to reassert some semblance of control. Besides, the region by then had been largely stripped of stockpiled valuable and easily recoverable scrap. Now what’s left is mostly material that’s more difficult to process—material such as the recoverable steel in a mountain of slag.
Meanwhile, the region’s people are left without a full-fledged recycling industry and countries full of potential environmental disasters. The needed solution, says Reiley, is a working, market-based recycling industry. But that’s not likely to happen without foreign investment, he believes.
Problem is, with all the many problems plaguing the C.I.S. countries, significant foreign investment in the scrap industry there appears to be at least 10 to 15 years away. And, so consequently, does the recovery of a certain 20-mile-long mountain of Ukrainian steel slag. •
The Commonwealth of Independent States is a region rich in recycling opportunities, but one that’s seemingly not quite ready for significant investment by the Western scrap industry.