20 3(10
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24 MEASURED RISK
The credit rating landscape is
changing drastically in Russia
66 SCIENCE IS EASY
Sketches by Nobel laureates at an
exhibition in Moscow
2
AT THE CROSSROADS
OF HISTORY
RUSSIAN INDUSTRY NEEDS TO BE
RESTRUCTURED WITH AN EMPHASIS
ON PROCESSING
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IRON MAGAZINE
№3(10)
2015
1
№3(10) 2015
Founder:
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Editorial office:
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COVER STORY
INTERNATIONAL PRACTICES
2 | At the Crossroads of History
20 | Rush towards Integration
Russian industry needs to be restructured
with an emphasis on processing. Russian
companies are already changing their
priorities
Where vertical integration came from and
how it developed
BUSINESS ENVIRONMENT
24 | Measured Risk
FOCUS GROUP
8 | Not the Time for Experiments
The credit rating landscape is changing
drastically in Russia
Iron Magazine interviewed experts in order
to understand which public programmes
might produce quick results
SPORT
BUSINESS PLAN
10 | Investing in Growth
E-sports are becoming more and more
popular. Will Russia join the elite nations of
e-sports?
Three promising projects for increased
processing
MANAGEMENT
28| Game of Agile Minds
30 | Million-Dollar Idea
PERSPECTIVE
16 | Stages of Development
An overview of promising developments for
the major commodity industries in Russia
How to inspire creativity and innovation
among employees: past and modern
practices
PERSONNEL
32 | A Country of Skilled
Professionals
Russia joined the WorldSkills global hub for
skilled professionals and is preparing to
host the ‘Skills Olympics’
34| Summary
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2 COVER STORY
IRON MAGAZINE
At the Crossroads
of History
Olga
Mikhailova
A global commodity supercycle is now complete, but we cannot expect a new one
to begin for the next few years, since we have not even reached the bottom yet.
Russia, like any other country dependent on export of its raw materials, needs to
redirect its industry with an emphasis on processing and manufacturing. Therefore,
Russian companies are changing their priorities.
№3(10)
2015
3
I
n mid-November, the Bloomberg
Commodity Index tracked 22 types of
commodities by taking into account
not only the change in prices, but
also the results of futures contracts.
It showed a so-called ‘anti-record’ of
the last three five-year periods, by
collapsing to lows last seen in 1999.
There are various reasons for the
plummeting costs of raw materials.
The energy sector has suffered the
most – oil prices are under pressure
amid continuing news about reserves
rising. Thanks to a good harvest, prices
for agricultural products fell too. Low
prices for ferrous and non-ferrous
metals relate to disappointing figures
coming from China, which slowed down
its development pace, and from Europe,
preoccupied with its own problems. Gold
is waiting for its final verdict from the
Federal Reserve at the end of a period of
ultra-low interest rates.
All of these are pieces of a single
puzzle, of course. But it seems that
businesses have also developed a
general tendency towards reductions.
Goldman Sachs’ analysts alleged that
prices of various commodities may
drop again in 2016 and the price of oil
will land at $20 per barrel. This is at the
lower end of the scale, but a trajectory
change is unlikely. “We are at the stage
of surrender”, said the founder of
Galtere Hedge Fund, Renee Haugerud
in an interview with Bloomberg. She
also expressed her hope that “the global
economy will endure.”
But none of this is surprising.
Experts have long reasoned that the
commodity supercycle is over, and that
a new growth wave is not to be expected
for a few more years. The question worth
asking is: how can commodity exporters
put this time to the best use?
RIDING THE COMMODITY
ROLLERCOASTER
Since the late eighteenth century, there
have been seven or eight booms in
commodity prices, relative to the price of
manufactured goods; the exact number
depends on how peaks and troughs are
defined. There is also no agreement
on the average period of the cycle. The
4 COVER STORY
booms typically lasted seven or eight
years, though the one that started at
the beginning of the 1930s spanned
almost two decades. This exception
was sustained by some unusual
circumstances – World War II, followed
by the lengthy reconstruction period.
According to a November article in
the Project Syndicate by Professor of
the International Financial System at
Harvard University’s Kennedy School of
Government, Carmen Reinhart, the most
recent boom began in 2004 and ended
in 2011. After all, the markets reversed
at that particular point. The name of her
article – The Commodity Rollercoaster –
accurately conveys the essence of what
is happening at the moment. According
to the professor, commodity price
declines usually last as long as the
periods of their rises. So at best, we are
currently only at the middle of the cycle.
Fortunately, situations differ in their
characteristics. While rising prices bring
great income to commodity exporters,
they also force importers to innovate
and improve their efficiency. During
downturns this trend reverses, with
the only difference being that exporters
then start to think about the strategic
emphasis on elaboration as a way to
produce value-added goods. The most
sagacious among them begin to act well
in advance. However, the transition from
one stage to another is, of course, a time
of anxiety for both national economies
and individual companies. Just how
much the falls in commodity prices
can hurt them largely depends on their
behaviour during these difficult times.
Often, the burden of accumulated
debt bestows the most serious threat on
businesses. It was no coincidence that
the previous long-lasting commodity
price drop between the end of the 1970s
and 1992 coincided with a wave of debt
crises in many countries. It is known
as the most difficult period of its kind in
history. Constructed of several stages,
it was initially triggered by a recession
in the United States of America and the
commodity market glut, followed by
issues within the Soviet Union.
Currently experts are watching
China and awaiting news on its economy
IRON MAGAZINE
The extent of the damage to
producers from the collapse
in commodity prices largely
depends on their actions during
the good years
in order to map out the depth and
duration of a new downturn. This is due
to the fact that China was previously
a major driver of the commodity price
boom. However, analysts are suggesting
that this will no longer be the case. A
Citi Velocity report, Beyond China: The
Future of the Global Natural Recourses
Economy, published in spring, suggests
that the old structure based on the
Chinese economic development will
undergo fundamental changes. The
situation with China as the world’s
factory on one side, and the rest of the
world as the consumer market for its
services on the other, will no longer
suffice. Instead, manufacturing and
consumption will spread across the
world more equally.
A PERFECT STORM
At the beginning of November, during
her address to the Russian Government
(State Duma), the Head of the Bank
of Russia, Elvira Nabiullina noted that
commodity prices may stay low for the
foreseeable future. She said, “We are
facing a structured transition of the
market. Many people are talking about
the end of the commodity supercycle.”
Considering the current structure of the
Russian economy, the main question
is about the cost of energy. According
to the Russian Minister of Economic
Development Alexey Ulyukayev, a
conservative prediction of the oil price
next year would be $40 per barrel.
However, The Central Bank of Russia is
looking at a more pessimistic forecast,
although it is not clear how close it
would be to the $20 per barrel predicted
by Goldman Sachs. The government’s
former Chief Forecaster and now Deputy
Chairman of Vnesheconombank, Andrey
Klepach, believes this is unlikely. He
estimates that oil prices will stay at the
$55-per-barrel mark or even higher,
which is far removed from the most
recent estimates.
However, the current state of the
commodities market and especially that
of fossil fuels is not the only contributor
to the Russian situation. The picture
deteriorates against a background of
geopolitics aggravated by the crisis in
Ukraine, which resulted in economic
sanctions. Another point of uncertainty
relates to the Syrian crisis. On the one
hand, Russia and NATO disagree on
how to deal with the situation but on
the other hand, they have a common
goal – to fight against terrorism. This
could be an opportunity to establish
contact and improve partnerships. In
addition, stopping the flow of oil from
areas in Syria controlled by Islamists
could have a positive impact on the
market for fossil fuels.
During economic downturns,
specialists consider serious debt
levels to be the main risk for a country.
Thankfully, Russia managed to escape
this fate. It also managed to hold on to
the safety funds allocated at the time
and kept in the Central Bank of Russia
and the National Welfare Fund reserves.
The same goes for some flagship
manufacturing industries in the country.
“Despite challenging global market
conditions, we have kept the company’s
debt level under control, specifically – at
№3(10)
2015
THREE RISKS
During her address to the State
Duma in November, the Head of the
Bank of Russia, Elvira Nabiullina,
talked about three external risk
factors that represent the most
serious threats to the Russian
economy: the current drop in raw
material prices, a slowdown in
Chinese growth, and an increase
in interest rates by the US Federal
Reserve.
two times net debt to EBITDA. In July we
signed several important capital markets
agreements for a total of approximately
$900 million. This and positive cash
flow allowed us to refinance part of our
loans ahead of schedule,”– says Pavel
Mitrofanov, CFO of Metalloinvest.
Experts increasingly agree that the
issue is not in surviving the period of
collapsing commodity prices by hoping
for a new supercycle, but instead in
trying to restore the economy both
nationally and at company level. This
can protect companies from similar
inevitable shocks in the future.
21ST CENTURY ECONOMIC
REVOLUTION
In September Russian Prime Minister
Dmitry Medvedev published an article in
Rossiyskaya Gazeta entitled ”The New
Reality: Challenges in Russia and the
5
World”. He wrote that we should pay
more attention to current changes in the
global economy, since transition to a new
model has already begun. But what place
will Russia assume in these changing
circumstances?
The problems Russia faces
are well known. Medvedev points
out in his article, “based on various
socio-economic criteria, in terms
of development of human capital
and culture, Russia is undoubtedly a
developed country. However, the Russian
economy remains largely ineffective
and is several times less productive
than the leading countries in this area.
This is not a new phenomenon – it has
not come about just in recent years
or even decades. In spite of all the
sacrifices made, neither the centralised
economy with absolute governmental
control, nor the inertial resource
model, which followed shortly after,
could overcome the deficit.” The Prime
Minister continues to stress that Russia
requires serious transformation to
facilitate “greater competitiveness”. “We
must become better and faster. This is
the only way to achieve our goals in the
ever-changing world. Another matter is
that a delicate and precise approach is
needed to reform our resource-based
economy at a time when commodity
prices have fallen so low,” concluded
Prime Minister.
According to Medvedev,
macroeconomic stability should be the
foundation of the successful changes
that the Russian government is striving
6 COVER STORY
IRON MAGAZINE
for. The key interest rate should be set
to support low inflation: the goal is to
achieve 4% over the next three years
despite the fact that it is expected to be
12.2% in 2015. This is “a condition for the
increased wellbeing of our citizens, for
ensuring business access to credit, and
for greater certainty in the economy.” He
also states that is important to preserve
‘the greatest achievements’ of recent
years, like a well-balanced budget and
low debt levels.
However, it will take more than
macroeconomic stability to aid the
Russian recovery. “We need to establish
contemporary mechanisms to finance
economic growth and modernisation,
which are always essential, but
especially at the moment. Russia is
dealing with both the loss of many
external sources of financing and falling
oil prices. To be on the safe side, we
should prepare ourselves for low or
extremely low oil price over an extended
period of time,” comments Medvedev.
Government investments can play a key
role here by utilising specialised sources
of funding, including the National
Welfare Fund, the Development Fund for
Industry, project financing by the Central
Bank and others. But the government
should avoid turning into a money
machine. The author is understandably
sceptical about similar experiences
in the United States of America and
Europe, because “this kind of assistance
became a serious problem without a
solution”. Nor should the government
substantially increase its stake in the
economy, since state-owned companies
often have “costs that rise faster than in
the private sector.” Creating favourable
conditions for the growth of both
Russian and foreign private investments
should be prioritised at all levels of
government.
Over the last year, the new ‘import
substitution’ policy has garnered a lot
of attention and has been frequently
discussed by the government and the
expert community alike. In this regard,
the Russian Ministry for Industry and
Trade estimates the total value of
announced projects at 2.5 trillion roubles.
But Medvedev emphasises that the
phenomenon should be more than a
one-off exercise. There should be a focus
on developing industries, which can
produce goods that are competitive both
in Russia and internationally. Obviously,
this would require serious restructuring
of existing industries.
Catchy slogans vs. reality
In May EY conducted a study on the popular topic of import substitution. The heads of major
companies from various industries, including consumer goods, oil and gas, metals and
mining, as well as transport and technologies, participated in the study. 96% of respondents
intended to switch to Russian counterparts and increase their share in production, and 54%
saw new opportunities. Previously, according to EY, 75% of companies said that over 40% of
their production costs were associated with imports. “Currently businesses are facing new
challenges. The key areas to explore include searching for new supply chains, joint ventures
and modernisation of existing facilities,” commented Alexander Ivlev, EY Managing Partner in
Russia. However, he added that examples of successful international practices show that import
substitution will take years and should be accompanied by serious structural modifications.
RESPONDING TO CHALLENGES
The question is, considering all these
elements of domestic business, how can
businesses operate more efficiently?
Sergey Tsukhlo, Head of Surveying at the
Gaidar Institute, shared his opinion with
Iron Magazine that “instead of focusing
on commodity projects, we should turn
to the projects whose output offers
ready-to-sell value-added produce.”
Oleg Solntsev, a leading researcher
at the Centre for Macroeconomic
Analysis and Short-Term Forecasting
agrees, “Currently, specifically the
raw materials sector of our economy
has great potential to increase its
processing efficiency. This trend is
already paying off – based on the Rosstat
report published in September, not only
the extractive industries but also the
processing sectors managed to exceed
the minimum production point. Some
of them are already showing signs of
growth.”
Since Russia introduced its ‘food
anti-sanctions’ last year, the agriculture
and food industry has been the main
priority. Although experts warn of
many unresolved issues related to the
traditional problem of attracting foreign
investment and the need for imported
components, Oleg Solntsev also
№3(10)
2015
mentions that petrochemistry has seen
an “almost 10% increase in production”
in the last two months, making it a
rather promising emerging industry. He
adds, “Coincidently some major fuel and
energy companies companies (Gazprom,
LUKOIL and Rosneft) are also prioritising
petrochemical projects. This is due to
the fact that producing value-added
products instead of selling raw materials
is becoming more and more profitable.
Especially since the domestic market for
these products is quite stable – demand
for Russian petrochemical produce has
significantly increased as foreign steel
producers became more expensive
due to the devaluation of the rouble. We
have enough capacity to produce the
same polymers to successfully compete
domestically and internationally.”
Steel production is another
important industry for Russia. “Instead
of selling ore, it is now more profitable
to sell ore value-added products. These
products are mainly required by the
energy and mechanical engineering
sectors, the former of which has started
to grow. Perhaps due to this, steel
manufacturing is also starting to show
signs of recovery. However, mechanical
engineering is yet to see the peak of
its decrease, which is expected to
happen in the coming months. I believe
that as soon as the industry goes into
black, steel projects will gain a second
wind. They too will have an incentive to
increase efficiency in production of raw
materials,” reasons Oleg Solntsev.
Here are some examples of such
value-added projects. At Pellet Plant
#3 at Mikhailovsky GOK, Metalloinvest
introduced a new system, which
increased pellet production by 10%. It
is characterised by technology never
before applied in Russia. For instance, its
7
flue system is designed to use recycled
gas, making it more efficient in terms
of production and sustainability. “This
innovative machine is the first of its
kind in Russia. It significantly increases
manufacturing of our ore value-added
products, which are in demand among
our own factories and internationally,”
Dmitry Medvedev confirmed at the
opening ceremony.
Traditionally it is financial
constraints that always force business
to look for new ways to increase their
liquidity. According to Anatoly Bosenko,
Professor at the Stary Oskol Technology
Institute of National University of Science
and Technology ‘MISiS’, “Clearly such
production efficiency is not feasible
without some large-scale R&D projects,
technological and administrative
innovations, and investments in design
and research. Though only large holdings
can afford all of these, the returns from
efficient production make it all worth it.”
In recent boom years many
commodity exporters around the world
initiated investment projects to expand
production. “As these investments bear
fruit, the increased supply will sustain
downward pressure on commodity
prices. And many emerging economy
governments are understandably
averse to running substantial and
persistent current account deficits,”
writes Dr Carmen Reinhart. The
professor believes that this commodity
price rollercoaster cycle is probably
not over yet. She warns that, “while we
cannot know for sure what will happen,
it would be prudent to brace ourselves
for another drop – and do what we can
to avoid a crash.” Therefore, drives
to increase the amount of processed
raw materials seem to fall into this
category.
To reform the resource-based
economy when commodity
prices are low, one needs a
targeted approach
8 FOCUS GROUP
IRON MAGAZINE
Not the Time for
Experiments
Nataliya
Shpynova
There has long been talk about
Russia dropping its dependency on
raw materials and oil prices. Obviously, this painful process requires
a strong push towards innovative
industries, solid foundations for R&D
and national innovation. Objectively
speaking, however, some of the
breakthrough areas will only bear
fruit years from now. Iron Magazine
interviewed experts in order to understand which public programmes
might produce quick results.
ALEXANDER OVANESOV,
MANAGING PARTNER,
STRATEGY PARTNERS
GROUP:
We should begin by creating
conditions for greater mobility
and additional professional
training throughout the
country. Russia largely
consists of single-industry
towns and vertically integrated
companies where innovations and new technologies are
rarely implemented because of unofficial bans of layoffs.
People are scared of losing their jobs and cannot imagine
moving cities, although it is common practice in other
countries. We need to open centres of excellence that,
like at higher education institutions, are close to places of
employment. We could go even further and also promote
digital skills in an age of new technologies.
The lack of access to finance is another major problem in
Russia. It especially affects small and medium-sized entities,
which in a crisis, as international experience shows, can help
drive the economy. The Ministry of Industry established the
Fund of Industrial Development, which could become a onestop-shop addressing various financing challenges. I hope
this decision will be approved.
The third important issue is about setting up clusters,
applying examples from Tatarstan, the Kaluga region and
the Far East. All successes need to be replicated across the
country and this is up to our government.
None of the above overrides the need to support both
Russian industries and individual companies. However, it is
important to consider the level of exposure to the crisis and
a multiplier effect for the economy triggered by support for
the development of any industry.
№3(10)
2015
ALEXANDER IVLEV,
MANAGING PARTNER,
EY RUSSIA:
We need to stimulate
domestic demand through
investments in large-scale
infrastructure projects.
The construction of new
highways, universities,
healthcare institutions
and telecommunications
infrastructure all stimulate domestic demand,
regardless of industry.
Regarding direct support, there is nothing new
to say. Industries now need tax incentives, growing
GLEB NIKITIN,
RUSSIAN DEPUTY
MINISTER OF
INDUSTRY AND
TRADE:
Quick results
are possible in
industries with wellestablished grounds
for technological
development. But it is wiser to consider specific
projects rather than entire industries.
The Ministry has developed 20 import
substitution programmes for industry. We plan to
support over 2,000 of the most promising projects
in various sectors. We based our choices on two
main criteria: application of R&D and a good
return on investment. And the latter cannot be
underestimated since, at the moment we cannot
afford to back experimental projects. We also
considered export potential and competitiveness,
as it is vital to us that we support projects that have
broad appeal beyond just their founders. According
to our estimates, all selected projects should
provide a return on investment by 2020, with
localised production of more than 50%.
In my opinion, we should be sensible and
targeted in our approach to import substitution right
now. It mainly applies to industries that require high
levels of R&D, including mechanical engineering,
electronics, and pharmaceuticals. Each project
is unique. So, in some cases it is useful to import
some technologies and develop them, whilst in
others to establish our own R&D work.
9
demand for their products and regulation with the
help of public procurement, etc. But the government
should only back projects with proven efficacy. Now
is not the time to invest blindly, nor the time to
experiment.
During times of crisis, technological advancements
tend to accelerate. Thus, by supporting one company,
we can hurt its industry competition. This helps
during times of extreme economic struggle. It is
more practical to grade companies based on their
performance: strong (with good pre-crisis indicators),
medium (volatile success rate) and outsiders.
Then offer support only to the strong and medium
companies, helping the outsiders to withdraw from
the race, in order to avoid negative added value on
the market, which damages the more promising
companies.
ALEXANDER RYBAK,
VICE PRESIDENT
OF THE RUSSIAN CHAMBER
OF COMMERCE:
I think that the scale of the
commodities catastrophe has
been exaggerated, and that oil and
gas will continue to support our
economy for a long time. With the
collapse of fossil fuel prices, 50% of
our budget now comes from oil and
gas sales. But we must understand that raw materials will not
accelerate our development.
There can be other real drivers of our economy: first
of all, investments, followed by the development of our
manufacturing industries such as mechanical engendering,
petrochemistry, i.e. industries generating value-added
products through a higher degree of processing. For example,
one major engineering company just introduced vertical import
substitution, planning to move 80% of its production to Russia.
We are talking about the entire manufacturing process: from
the moulding of the parts to vehicle assembly. I do not see why
we should not look at such projects and offer them our support
should they be successful.
There are other industries that could drive the country forward.
Recently, much has been said about the food industry, but, in my
opinion, it progressed due to the closure of some foreign markets,
that is, by restriction of imports. I also do not think this helped
the export potential of our food produce. Narrowing the field of
competition often liberates producers too much, leaving them
less competitive. It would have been better if the government had
invested in the technological side of our food production.
10 BUSINESS PLAN
IRON MAGAZINE
Investing in
Growth
Olga
Mikhailova
Increased processing of natural resources and the manufacturing of higher valueadded products are possible in Russia.
Experts interviewed by Iron Magazine named
three promising areas for development.
№3(10)
2015
11
12 BUSINESS PLAN
STEEL AND MINING
Over the past decade, the global steel
market has changed dramatically.
According to Deloitte, in 1980, 716
million tonnes of steel were produced
and the Soviet Union stood the top of
the chart with a 21% market share.
However, last year steel production
reached 1.665 billion tonnes and China
was securely in first place with a 60%
market share. Today, Russia is one of
the top five largest steel manufacturers,
but with a market share of only 5%.
The market is now mainly driven
by the leading player, China, since it
is both the world-leading producer
and consumer of steel. But amid the
deceleration of the Chinese economy,
the market has entered a period of
anxiety characterised by a decrease in
prices and demand.
Russian steel manufacturers, on
the one hand, have not fared too badly,
because most of their products are
exported, but the costs are incurred
in roubles. Therefore, due to the
devaluation of the Russian currency,
they have become more competitive.
IRON MAGAZINE
Moreover, many companies began to
cut costs before the crisis hit. However,
the lack of tangible opportunities for
growth in consumption in the domestic
market and increased competition
abroad have forced them to find new
solutions, one of the most profitable
of which is to manufacture more
products with higher added value.
This summer, Alisher Usmanov,
the head of USM Holdings, held
a working meeting with Vladimir
Putin, during which he said that
in recent years Metalloinvest
had created “the world’s largest
company that processes iron ore
into the final product using the most
environmentally-friendly technology in
steel production.”
The company relies on HBI and
DRI production. The low content
of harmful impurities allows it to
produce high-quality steel, which is
a determining factor for a number
of high-tech industries, including
automotive and engineering. Plus,
this strategic decision was made
in advance, so now, when import
substitution is in force, the company
is already bearing fruit from its
preparatory work. This includes
creating the opportunity to develop the
production processes that use these
products, including steel producers
and all of their end buyers.
Having opened its production in
the early noughties, Metalloinvest’s
Lebedinsky GOK is now the only
domestic supplier of HBI in Russia
and the CIS. The enterprise’s current
annual capacity is 2.4 million tonnes
of steel, but another 1.8 million
tonnes will be added when the third
unit currently under construction
is completed. The company also
continues to implement development
programmes for existing facilities.
For instance, in October, thanks
to an upgrade of the first plant, its
production capacity increased by
22,000 tonnes per year. Also, due to
the acquisition of new equipment for
the briquette presses, the percentage
of premium HBI products went up.
Another project mentioned by
experts for its increased processing
is implemented by the Magnitogorsk
Mining and Steel Works (MMK). “MMK
has increased its production of
galvanised products, cold rolled
products and high value added
products (fourth level of processing).
This is due primarily to the change in
construction market conditions. The
factory shifted its attention to the
domestic market”, says Director of
Science of the Nuclear Technology
Cluster at Skolkovo, Alexander
Fertman.
MMK now works with international
car manufacturers with localised
assembly in Russia. The plant has
mastered the production of more than
50 different steel brands meeting
EU standards, a large proportion of
which consists of ultra low carbon IF
steel varying in strength. Their high
ductility helps to optimise the design
of the vehicle body and to enlarge the
parts thanks to more effective and
complex stamping technology.
The company also plans to
introduce new products for other
industries. According to an October
№3(10)
2015
13
Lebedinsky GOK is the only
domestic supplier of HBI in
Russia and the CIS
interview with Metal Supply and
Sales Magazine, Director of Business
Development and Performance
Management at MMK, Maxim Lapin,
said “MMK is in the process of
building a new unit for continuous hot
dip galvanising for the construction
industry, which aims to increase
the output of high-yielding products.
There is also a running cast iron
desulphurisation project based on its
own fluidised lime production, which
will reduce the cost of steel.”
In fact, this tendency to make
more technologically sophisticated
high-quality products is typical of
metal consumers, the most prominent
of which are pipe manufacturers. At
the Innoprom exhibition this year, TMK
shared a proposal for one of its major
customers – Gazprom – introducing
columns bolted from casing and
pumping and compression pipes with
premium thread connections. These
are suitable for the development
of deposits in difficult conditions
on the continent and on the shelf:
Chayandinskoye field in Yakutia, the
Kovykta field in the Irkutsk region and
Yuzhno-Kirinskoye field in the Sea of
Okhotsk near Sakhalin.
PROCESSING OF FOSSIL FUELS
Everyone knows that Russia is one of
the largest suppliers of oil and gas in
the world. The negative situation on
the oil market has hurt the Russian
budget, which significantly depends
upon the export of raw materials.
However, the decline in prices is not
the only problem. After all, the excess
of supply over demand escalates
competition.
Saudi Arabia is now especially
active. It has regained the title of
largest oil-producing country for
the first time since 2003, taking
first place for the production of
black gold. Recently, one of the
largest Scandinavian oil refining
companies, Swedish Preem, resumed
purchases of Saudi oil after a 20-year
break. According to China’s General
Administration of Customs, at the end
of October Saudi Arabia became the
largest oil supplier to China, leaving
Angola and Russia in second and third
places respectively.
Experts warn that, in these
circumstances, the most reasonable
way out is to increase the processing
of fossil fuels within the country.
This process involves not only the
production of premium oil products,
like Euro-5 eco-petrol, but also a
more efficient use of resources. For
example, for many years in Russia
oil manufacturers have burned oilassociated gas, whereas it can be
used in the production of liquefied
petroleum gas – a primary product for
the petrochemical industry and fuel for
transportation and utilities.
“Waste-free production is the
key to high-tech development. The
production efficiency of oil and gas
in Russia is at the 70% mark, while
in the United States of America it is
95%. Recently the USA has become
more cautious with natural resources
due to decreasing oil resources, which
are a good incentive for increased
processing. Falling oil prices could
be Russia’s chance to maximise the
use of its raw materials and work on
high value added production,” says
Anatoly Bosenko, Professor of STI
at NUST ‘MISiS’. As an example,
he cites the South Priobsky Gas
Processing Plant (GPP) in the KhantyMansiysk Autonomous District, a
joint venture between Gazprom
Neft and SIBUR, completed in early
September. Its capacity is 900 million
m3 of oil-associated gas per year.
After processing, its products go to
petrochemical plants. According to
Basenko, “The efficiency of the GEA is
95.3%. Unfortunately, such figures are
the exception rather than the rule. This
experience must, therefore, be broadly
replicated.”
A lack of funding currently causes
a lot of problems in the petrochemicals
industry. Major projects in Strategy
2030, approved by the Ministry of
14 BUSINESS PLAN
Industry and Energy, are now under
review. TAIF Group announced possible
capacity reduction of the new unit at
Nizhnekamskneftekhim, and LUKOIL
is rethinking the future of its Caspian
Pipeline Consortium. However, a lot
of other projects were also brought
forward during the crisis.
Ever since Soviet times, there
have been plans to develop the
petrochemical industry in the Far East.
But the plans were left on paper and
their probability of success seemed
very low even to the industry experts.
Recently, however, Gazprom
started the construction of the Amur
Gas Processing Plant (GPP), built
next to the Power of Siberia pipeline
section. “The plant will be processing
49 billion m3 of gas per year. Purified
methane will facilitate gas supply and
gasification of Eastern Siberia and
the Far East. It will also be exported
to China. Additionally, the Amur gas
chemical complex (SIBUR) will utilise
valuable chemicals excavated at the
Amur GPP,” said the CEO of Gazprom,
Alexey Miller. However SIBUR is yet to
confirm its final decision on the project.
The company is in the midst of building
ZapSibNeftehim, another large plant
near Tobolsk.
The Russian petrochemical
industry has enormous potential.
Broader application of polymers in
housing utilities (mainly plastic pipes)
similar to the average European
usage could increase demand by
7 kg per year per capita (figures from
industry strategy). Given the country’s
population, this could mean a yearly
increase of about 1 million tonnes.
Yet RUPEC analysts have given more
modest estimates of 675,000 tonnes
per year, but even this number is
impressive. Besides, this concerns
only one industry, while polymers are
also widely used in packaging, parts,
textiles, building materials and more.
According to Stas Marketing,
Russia’s share of global production of
plastics in primary forms is about 2%,
while China’s is over 20%. Why? This
is primarily due to the disintegration
of the market in the 1990s and its
Ever since Soviet times, there have
been discussions regarding the
development of the petrochemical
industry in the Far East
ensuing saturation by imports. It was
precisely at this time that the world
was going through an industrial
boom (in the period of 1980-2010,
the consumption of plastics in the
world more than quadrupled). But in
Russia the picture started to improve
only in the last few years. Thus, many
major industrial projects with external
investors are in the petrochemical
industry.
For example, apart from
SIBUR, which continues to work
with Belgium’s Solvay and build
partnerships with China’s Sinopec,
Rosneft has rejuvenated the longdiscussed East Petrochemical
Company project in Primorsky Krai in
cooperation with ChemChina.
Experts have also mentioned
another project that focuses on the
efficient processing of raw materials:
Taneco Complex by Tatneft. “In my
opinion, the project is successful. It
is largely thanks to this project that
Tatarstan has become one of Russia’s
leading oil refining regions. It has
major contracts with mining and steel
and construction industries, providing
thousands of jobs and raising tax
revenues. But, most importantly, the
project is focused on the production of
high-tech and highly liquid products,
raising oil-refining efficiency up to
95%. This complex is designed to work
with Russian companies, providing a
push towards processing oil and selling
petroleum products as products with
high added value,” says Alexander
Fertman.
AGRICULTURE AND FOOD
INDUSTRY
Those who still remember the Soviet
food shortages in the 1980-1990s often
proclaim, “Russia should feed itself”.
Now, with the food embargo against the
West in response to economic sanctions,
this catchphrase has re-emerged. But it
undermines the fact that Russia largely
does feed itself. There are difficulties,
though some agricultural sectors
manage better than others; for instance,
grain production.
Last year’s harvest hit a new
record with 105 million tonnes of
IRON MAGAZINE
№3(10)
2015
grain. This year has collected a little
less, but still over 100 million tonnes.
As Agriculture Minister Alexander
Tkachev announced in September
at a meeting on the development
of agriculture, “The country’s food
security is an astonishing 142%.”
However, a closer look reveals
that there is still a lot of work to do to
increase grain collection and handling
efficiency. Back in February, at the
traditional All-Russian Agronomy
Meeting Director of the Department
of Plant Agriculture Petr Chekmarev
underlined that “Russia has a
comfortable amount of grain”, which,
in fact, is about 120 million tonnes. He
added, “Out of these, about 12 million
tonnes will be reused for seeding,
leaving 22 million for food production.
The demand for grain for livestock
is growing, requiring at an absolute
minimum 40 million tonnes. About
15 million tonnes will be used as rolling
stock.” Let us not forget another
30 million tonnes are needed for export,
because “we cannot leave the global
market completely, otherwise others will
take our place.”
Alexander Tkachev has promised
that Russia will reach 130 million
tonnes by 2020, but only if there are
new agricultural plots, upgraded
machinery and increased use of
fertilisers. Therefore, reaching a
comfort zone for harvesting is a
promising, albeit challenging, goal. In
addition to the larger harvest, import
substitution brings up questions of
implementing agricultural technology
for increased grain processing.
Similar ideas have been floated
since the mid-2000s, when Russia
re-joined the global market as a major
exporter. In theory, this process has
many advantages: it creates a new
high-tech industry that produces a
wide range of popular products. In
addition to flour, grain can also be
used to produce gluten, glucose,
various starches, syrups, acids, lysine
and other biomaterials. Some of them
are in high demand in agriculture
(lysine is an amino acid needed in
livestock feed), and some in other
industries, including manufacturing of
biopolymers and biofuels.
In autumn Alexander Tkachev
opened the first lysine sulphate
production plant in the CIS. This
plant had been under construction in
Belgorod since 2012 and cost 12 billion
roubles. Backed by Sberbank, the
project was realised by Prioskolie,
which specialises in poultry and will
help to replace imported feed additives.
15
Previously, this market was practically
monopolised by China with about 80%
of the market.
“It’s an outstanding production
facility, the only one in Russia. There
were factories producing lysine in
Soviet Russia but they lacked such
advanced technologies and had
much lower production efficiency. As
an important protein, lysine plays a
key role in feed production because,
without it, there can be no costeffective meat production,” says
Alexander Tkachev. The new facility
will process 205,000 tonnes of wheat
a year. According to Tkachev, in order
to meet the requirements of import
substitution, Russia needs a few more
of such factories.
Russia has not implemented many
of these projects. At the moment this
is the only example. The problem is
that they are very costly. Recently, for
example, the construction of the plant in
value-added production of raw materials
in biotechnopark Koltsovo, Novosibirsk
Ovlast, was cancelled. It was supposed
to produce gluten, ethanol and bran.
“We understand that the investor is no
longer interested in this project, as its
economic opportunities and prospects
have changed,” explained Vladimir
Gorodetsky, Governor of Novosibirsk
Ovlast. The project worth 6.5 billion
roubles had been under negotiation
since 2008, but its deadlines kept being
postponed.
Nevertheless, it is rather difficult
to sell large amounts of grain when the
supply is at its peak, especially since
transport costs in Russia seriously
reduce profitability. Most of the ports
used to export grain are located in the
Azov-Black Sea basin and they are
extremely difficult to reach from, say,
Siberia. This adds to the argument
for increased processing in remote
areas where grain is harvested.
Unfortunately, no action has yet been
taken in this area, although the topic
has been discussed a lot. However,
now the country has an opportunity to
reverse this, thanks to greater demand
for value-added products in the
domestic market.
16 PERSPECTIVE
IRON MAGAZINE
Stages of
Development
Ignat
Vyugin
I
What does the future hold for Russian industry?
Iron Magazine presents an overview of promising
developments for the major commodities industries.
n 2015, the Bloomberg Global
Innovation Ranking put Russia
four places above its previous
position and it was ranked 14th
out of 50, overtaking Norway,
Switzerland, Italy, China, Malaysia
and Hong Kong. However, the rating
assesses a number of areas, including
education, which ensured such a strong
performance for Russia.
Experts were impressed with how
many Russians have degrees. According
to Bloomberg’s report, “The Russian
system of education is widely known for
its traditions in teaching science and
mathematics, but innovation was not a
strong point here”. It turns out that the
country’s great potential is underused.
In the Industry segment of the report,
for example, Russia came in 37th place.
However, qualified human capital is an
important resource for future growth.
The authorities now say that the
situation needs to change. In December
in his annual address to the Federal
Assembly, President Vladimir Putin said
that while the Russian economy has
shown some positive signs of recovery, it
does not mean, “businesses should relax
and wait for miraculous changes or an
increase in oil prices. This approach is
unacceptable.”
Putin noted that it is mainly the
commodities and mining industries
that have competitive production. “Only
by changing this structure of the
economy can we solve major security
and social development issues to create
modern jobs and improve the quality
and standard of living of millions of
our people”, added Vladimir Putin. To
effect such an upheaval, there are
proposals to create an Agency for
Technological Development, which
will be established to help businesses
acquire domestic and international
patents and licenses.
Iron Magazine offers an overview
of existing and new solutions in the
processing of raw materials in Russia’s
major industries.
IRON ORE: EFFECTIVE
TECHNOLOGIES
In late November Moscow hosted
Sberbank CIB’s first “Steel and Mining:
Production of Fertilizers” conference.
According to Sberbank’s Senior VP
Alexander Bazarov, the steel and
mining industry has experienced an
extraordinary supercycle and now, amid
slowing demand in China – the largest
consumer in the world – it is facing a
collapse in prices and overcapacity.
In Russia the steel and mining
industry has been side-lined in recent
years by the oil market, as extremely
high oil prices kept the Russian
rouble strong at a time when prices
for iron ore and steel had decreased.
Naturally, this affected steel companies’
competitiveness. This resulted in them
learning to implement solutions to
improve efficiency. These are not just a
nod to current times, but a successful
strategy that is long-proven and already
showing results.
Speaking at the conference,
Executive Director of Russian Steel
Alex Senturin stressed that it was
important for Russian steel and mining
businesses to retain their current market
position domestically and internationally,
maintaining a balance between the
complexities of supply and demand and
the need to optimise capacity utilisation.
A significant drop in the price of iron
ore (compare the peak price of about
$160 per tonne in 2013 to the current
price of about $40 per tonne) shook up
producers with high production costs
worldwide. For example, just last year,
facilities producing a total of 200 million
tonnes had to be shut down. Also on the
agenda: an increase in world demand
for raw materials with an iron content
that satisfies modern production and
economic needs.
In this situation, as a major global
manufacturer of HBI and a major
supplier of iron and metallised products,
Metalloinvest is focussing on increased
processing. It is expanding its production
of HBI and pellets with high levels of iron.
Specifically, Lebedinsky GOK, the
largest facility for mining and iron ore
beneficiation in Russia and the CIS, is
carrying our renovation works at one
of the concentrate enrichment units as
part of the construction of HBI-3 Plant. It
has installed fine screening equipment
№3(10)
2015
17
it does not require coke or sinter, which
further reduces energy consumption and
greenhouse gas emissions.
THE RE-EMERGENCE OF
OIL AND GAS
Last year the National Institute of Oil and
Gas Partnership non-profit published an
analytical report on New Technologies in
the Extraction and Application of Fossil
Fuels. It provides a good overview of the
general situation in this area, starting
by Derrick, an American company, one
of the world’s leading manufacturers
of this technical equipment. This
should increase the iron content in the
concentrate to at least 70%. When the
work is completed, the plant will be able
to produce up to 16 million tonnes of
beneficiated concentrate per year.
Lebedinsky GOK’s pellets with high
iron content have successfully passed
pilot tests, meaning that they can be
used in the production of pig iron at
Ural Steel, one of the company’s other
enterprises. This kind of raw material
increases the amount of iron in the iron
ore blast mixture, helping to reduce
the specific consumption of coke and
increase equipment productivity. In the
run up to 2025, Metalloinvest plans to
ship to customers up to 57% of pellets
and concentrate from Lebedinsky GOK
with a higher iron content. The company
will be able to produce the remaining
amount of pellets with a higher or
standard level of iron, depending on
market conditions. In the future virtually
all its pellet plants’ produce will be raw
material for HBI, the most popular type
of metallised raw material in steel and
mining today.
HBI-3 Plant is being built in order
to secure an increase in HBI production.
Today there is a trend towards using HBI
in high quality steel brands, which are
necessary for engineering, for example
(including one of the most technologically
advanced of its segments – automotive
engineering).
HBI has many advantages, including
stable homogeneity of its chemical
structure and low levels of harmful
impurities such as phosphorus and
sulphur. It is also much easier and
cheaper to transport, thanks to its
compactness and resistance to a
damaging external environment. HBI
has a high bulk density (about 5 grams
per cm3), decreasing the amount of
steel recharging. This enables higher
efficiency in arc furnaces. What’s more,
Changing the
structure of the
economy has become
a key objective
18 PERSPECTIVE
from the beginning of the decade when
the prices of crude oil and natural gas
grew steadily. The first 433 pages of the
report are devoted to various solutions
in the exploration, extraction and
transportation of raw materials, and only
the last 19 relate to actual processing.
At the same time, the report underlines
that it is a conservative industry, and
therefore there have not been any
particular breakthroughs.
There are innovations, of course,
but by and large they have unique
applications. So if Russia wishes to
increase its processing efficiency
and speed up the development of
petrochemical fossil fuels, it should
intensify research and development,
especially since the country has a
strong scientific base from Soviet
times and there is now growing
demand for innovative solutions. For
instance, as we open up the Arctic, the
report emphasises the need “to use
technological advancements to get fuel
in its cold climate”. Attempts to establish
such production are undertaken in the
factories of Surgutneftegas in Kirishi and
Rosneft in Tuapse.
There are other successful examples.
At the Chemical Physics Institute, the
Russian Academy of Sciences and
a number of industry organisations
completed a large amount of scientific
and applied research in turning selective
ethylene oligomerization into butene
(essential for complex petrochemical
production). The technology was
successfully tested by TAIF Group and
LUKOIL facilities at Kazannefteorgsintez
and Stavrolen respectively. The process
is original and copyright protected in
all major developed countries. Many
international companies bought patents,
in particular, the French Institute of
Petroleum (FIP).
And in 2015, the government
awarded prizes in science and
technology to the joint work of
the Voronezh branch of NIISK,
Voronezhsintezkauchuk (Sibur),
Nizhnekamskneftekhim (TAIF Group)
and D. Mendeleev University of
Chemical Technology of Russia for
their comprehensive solution for
anionic polymerization rubbers that
improved their physical and mechanical
properties. This research, as well as
the industrial application of new types
of rubber, started in 2002. This resulted
in a major achievement – production
of polybutadiene and solution styrenebutadiene rubber (SBR), which are as
good as their international competition.
This resulted in the production of
new materials, including high-impact
polystyrene, ABS, and environmentally
friendly tyres. The mixtures produced
using high quality SBR have increased
adhesion to the road surface, the high
rolling resistance, and low tread wear.
These properties make this product ecofriendly: these tyres not only last longer,
but also reduce vehicle fuel consumption
and, accordingly, emissions.
COAL: A QUESTION OF SURVIVAL
The situation on the coal market, like
on other commodity markets, is far
from ideal. Over the past few years, the
overall picture has been complicated
by Western environmental campaigns
Overproduction of Kuzbass coal
already amounts to 150 million
tonnes
against coal fuel, and a sharp decline
in coal consumption in China – the
global leader of production with
more than 1.8 billion tonnes per year.
Therefore, the crisis in the sector is
unlikely to end soon.
Meanwhile, overproduction of coal
in Russia in the Kuzbass region alone
already amounts to approximately
150 million tonnes, with overall annual
production in the country amounting
to 365 million tonnes and domestic
consumption of 200 million tonnes. “This
is surplus coal – nobody wants it. Frankly,
I have never seen a situation as bad as
this. Do you remember the 2008 crisis?
It was nothing compared with this. Coal
prices have almost dropped to 2003
levels. So what we have is that the
industry’s equipment and spare parts
get more expensive, but the coal price
drops,” said Aman Tuleyev, Governor of
the Kemerovo region, in his November
budget address.
He sees two solutions: coal
processing and coal chemistry. According
to Tuleyev, refined coal is worth “at
least two and a half times more than
unrefined coal”. Now in Russia, according
to experts, nearly half of all coal is refined.
The largest coal producer in Russia,
Siberian Coal Energy Company, refines
45% of its coal.
Aman Tuleyev believes that the
next step is “to manufacture products
that cost tens or even hundreds of
times more than the average cost of
fuel”. Last summer, the Federal Agency
for Scientific Organisations signed an
order to establish the Kuzbass Research
Centre for Coal and Coal Chemistry,
IRON MAGAZINE
№3(10)
which will focus on issues related to
import substitution.
Today, over 30 different kinds of coal
products, from agricultural fertilizers to
medicines, are produced in the world.
Russia buys most of these goods from
abroad. “It is ridiculous. We get coal
tar, sell it to Western Europe where it is
processed into final coal products, which
we then buy for a lot of money,” says the
Head of the Kemerovo Scientific Centre,
Alexey Kontorovich. To remedy the
situation, the Research Centre for Coal
and Coal Chemistry will develop their own
pilot production. Work has already begun
to launch a plant for the processing of
brown coal. The following step is to build
the centre for the production of sorbents.
A lot has been said about coal
chemistry in Russia, often using Dmitry
Mendelev’s, the father of the periodic
table, alleged quote “to burn oil and coal
is the same as to make fire with money”.
However, so far the industry has seen
little success; coal chemistry mainly
exists on the sidelines of the cokechemical and energy industries.
One example is a project to process
ash waste at coal-fired power plants into
fine hollow fillers and other products,
implemented by the Siberian Coal
Energy Company and an international
team at Omega Minerals in Kemerovo
region. This ash waste is used in various
industries, such as when drilling wells,
at foundries, in the production of fireresistant materials and paints, syntactic
foams, and lightweight concrete. The
planned capacity of the plant’s pilot unit
is 10,000 tonnes of finished products per
year, with the possibility of increasing
it to 18,000 tonnes per year. As Vice
Governor of Kuzbass Dmitry Islamov
stated in a recent interview with Expert
Magazine, 30% of output is exported,
while 70% is sold in Russia.
becomes waste timber. Valuable cellulose
fibers have very limited use outside of
the paper industry, according to recent
monitoring of global technological trends
by the Institute of Statistical Studies and
Economics of Knowledge of the Higher
School of Economics. They estimate that
full utilisation of Russian wood waste
could save up to 150 billion rubles per
year.
This problem can be solved by
utilising technology that makes greater
use of wood. For example, burning wood
waste, including forest residues, provides
the same amount of energy as 3 million
tonnes of diesel fuel, or nearly 10% of
total fuel consumed by the entire country.
This is what Gazprom Teploenergo
is currently trying to do. It recently
announced a new wood-processing
cluster in the Arkhangelsk region. In
collaboration with the Dutch group
A.Hak Renewable Energy, the company
wants to create bio-coal production of
pellets – an alternative to traditional fuel.
This is a modern innovative technology,
based on eco wood torrefaction – the
process that converts wood into a
uniform heterogeneous biofuel. High
calorific value, which makes it possible
to use boiler rooms without significant
restructuring, is one of the biggest
FORESTRY: NOT THE TIME FOR
SPENDING
Russia has 16% of the world’s forest
resources, which are currently used
inefficiently. The country harvests up
to 200 million m3 of wood per year. But
according to various estimates, 30-50%
of forest biomass is left on the ground or
2015
19
advantages of bio-coal pellets. This
is an important project for Gazprom
Teploenergo, because in the Arkhangelsk
region alone the company has five
boilers using biofuels, so it needs its own
resources.
Sibles Proekt has initiated another
innovative project in the forestry
sector. This year, the company’s
production facilities in the Yenisei
region of Krasnoyarsk region received
a Vnesheconombank Development
Award at the St. Petersburg International
Economic Forum for efficient processing
of timber. The company uses mainly
imported equipment: a Timbermatic
sorting line and a drying plant with
WS VALUTEC (Finland) cameras and a
USNR (USA) sawmill block. However,
Sibles uses Russian company Lesintekh
for processing wood waste produced
during sawing into pellets. According to
their contract, it will supply equipment
for wood pelleting capable of producing
10 tonnes of pellets per hour. Lesintekh
offers a full cycle of technological
services: engineering, procurement of
equipment and launch of production.
Although Lesintekh uses both original
and imported equipment, this is one of
the few such projects involving a local
Russian company.
20 INTERNATIONAL
PRACTICES
IRON MAGAZINE
№3(10)
2015
as the costs of property and labour
were high, and there was also a
lot of reeking waste, recycling of
which did not appeal to anybody at
the time. Transportation technology
was necessary to make the most
of the ready goods available in
countryside market places, where
production was more efficient, and to
guarantee freshness. Swift came up
with the extremely successful idea
of using a refrigerated wagon. His
sales network grew rapidly: by the
1890s, G.F. Swift & Co had already
made a solid 45 million dollars,
and in 1904 their takings reached
200 million.
Swift used to say, “I wanted to
cut out the dozens of middlemen
involved in the deeply flawed process
of acquiring livestock.” The Scotsman
Andrew Carnegie, who created a
steel manufacturing empire, used
similar logic. He earned the initial
capital working on the construction
of the Pennsylvanian Railway.
Realising that the development of
a new means of transport would
lead to growing demand for steel,
Carnegie laid the first stone of his
factory near Pittsburgh in 1872. The
business’ success lay in its use of
the Bessemer process, the first
inexpensive industrial process for
21
Rush towards
Integration
Yakov
Utin
T
Proximity to the end consumer has long been
one of the aims of business. It is hardly surprising,
therefore, when producers of raw materials buy up
processing facilities. The question is: how effective is their strategy?
he process began in
the 19th century, with
the industrialists
Gustavus Swift and
Andrew Carnegie held
up as pioneers. They
were the first men to
realise that building long chains of
production could help to keep costs
down. The strategies they came up
with are still used by businesses
the world over.
BUSINESSMEN AND
INNOVATORS
Gustavus Swift said, “I use every
part of the pig except the squeal.” He
created a major meat corporation.
Henry Ford himself borrowed the
idea of uninterrupted production
lines from Swift’s plant. Swift was
the first industrialist in the meat
industry to supplement his output
with additional products made from
parts of the pig, such as soap, glue
and fertiliser.
He began building his business
after the American Civil War, when
the foundations of many enterprises
had collapsed. At that time meat
tended to be brought into big towns
still alive, so that livestock could
be slaughtered and their carcasses
divided up right there in the town
itself. This was an expensive process,
the mass production of steel, which
passes compressed air through
molten pig iron. This process allowed
Carnegie’s company to improve the
quality of its products, while keeping
costs low.
But Carnegie did not stop at
these innovations. He also focused
on all aspects of production,
including ore extraction, the
transportation of raw materials
and the output of finished products.
When, in 1901, Carnegie decided
to retire at the age of 66, he sold
his steel and mining empire for
480 million dollars to John Pierpont
Morgan. The banker continued
22 INTERNATIONAL
EXPERIENCE
IRON MAGAZINE
PEACE PALACE OF STEEL
Andrew Carnegie had a very bright
and multi-faceted personality. He
often donated to charity and to
projects that he considered to have
an important impact on the whole
world. As a result, profits from
Carnegie Steel went towards the
Peace Palace in The Hague.
the business and in a short time
acquired several more producers,
together forming U.S. Steel – the
first company in the world with a
market capitalisation of over a billion
dollars.
complete control of either the
production of primary materials and
components, or of higher value-add
production further along the line,
or even of both at once. It leads to
more control over prices and the
volume of production, which in turn
gives the business a competitive
edge. However, according to experts,
whilst there are obvious advantages
to vertical integration, having no
concrete strategy can be risky. It is an
FOUR REASONS TO
VERTICALLY INTEGRATE
Since then, vertical integration has
been considered an effective way
to expand a business. It requires
TOTAL INCOME INDEX OF VARIOUS
GROUPS OF SHAREHOLDERS OF
STEEL COMPANIES
-79
162
-21
-73
93
-15
-73
79
-4
2100
1800
Significant mining
-79
Some mining
-73
Steel only
-73
1500
1200
900
600
300
00
01
02
03
04
05
06
mergers and acquisitions in the
steel and mining industry. There
were, however, some instances of
organic development. A particularly
successful example is the National
Mineral Development Corporation,
the only producer of iron ore in India,
which recently began to build a steel
plant, with an overall capacity of
3 million tonnes a year, from scratch.
Despite these examples,
vertical integration is still relatively
underdeveloped in the steel and
mining industry. According to
McKinsey, today only 20% of hot
rolled steel is produced from ore
mined by the same company, and
8% from company-produced coking
coal. By contrast, in the aluminium
industry, 30% of raw materials and
half of all semi-finished materials
are produced through an integrated
system.
07
08
09
10
11
12
13
Источник: McKinsey, Learnings from upstream integration of steelmakers, 12/2014
14
PROBLEMS WITH VERTICAL
INTEGRATION
expensive process, from which it is
difficult to turn back.
McKinsey outlines the four
reasons for integration as: high
transactional risk in regards to
suppliers and customers; having less
market power than the companies
in adjacent stages of the industry;
the opportunity to raise barriers for
those wishing to join the market, or
for price discrimination; the need
to develop a growing market or
streamline the current one.
Over the next several decades,
vertical integration won out as
the most common motive for
One of the pioneers in this field
was Alcoa, which opted for vertical
integration early on in its history. In
1886, the American Charles Martin
Hall discovered a cheap way to smelt
aluminium in his laboratory at home.
The patent for this method had not
yet been issued, when the founder of
the Pittsburgh Reduction Company
approached him to discuss acquiring
the rights to the technology and
№3(10)
2015
23
EBITDA DISTRIBUTION IN STEEL INDUSTRY BY LEVELS OF THE
PRODUCTION CHAIN FROM 1995 (%);
TOTAL EBITDA IS INDICATED IN BILLION US DOLLARS
54
23
125
101
136
241
80
200
302
229
207
8
15
17
21
18
26
36
41
44
33
38
24
14
11
7
22
10
22
39
27
24
30
81
78
61
57
72
35
36
34
26
43
48
1995
00
2005
06
07
08
09
10
11
12
2013
Steel making
(HRC)
Coking
coal
Iron ore
Источник: McKinsey, Learnings from upstream integration of steelmakers, 12/2014
decided to invest in the experimental
production.
In 1907, the business acquired
its current name, Alcoa. The patent
right up until 1909 protected its
position in the domestic market. Not
wasting any time, Alcoa acquired a
significant number of raw material
assets. Furthermore, aiming to be
closer to the end buyer, the company
began to use its own independently
produced wire and strips. This
presented the company with an
opportunity to engage in what was
considered to be price discrimination.
This meant, for example, that
producers of aeroplanes, who had no
alternative to aluminium, would have
to buy products for a higher price.
In 1938, the U.S. Ministry of Justice
accused Alcoa of monopolisation
and demanded that the business be
disbanded. Court authorities failed
to resolve the matter until 1950,
when it was closed on account of no
violation. At the time Alan Greenspan,
Carnegie was not satisfied with
just innovations. He also made
a strategic bet on controlling all
aspects of production
ex-Head of the Federal Reserve,
criticised the authorities’ treatment
of the company: “Alcoa was subjected
to an investigation because it was
too successful, too efficient and too
dangerous for its competitors.”
24 BUSINESS
ENVIRONMENT
IRON MAGAZINE
№3(10)
2015
25
Measured
Risk
Yakov
Utin
O
In coming years the credit scoring landscape will
change dramatically in Russia, including through
the development of a national rating system. Reform is still in its infancy, but the market position of
the western Big Three – Fitch, Moody’s and S&P –
is not as strong as before. Russian businesses
are expecting not only a reputable local player to
join the market, but also to grow their cooperation
with Asian agencies.
ver their centurylong history, rating
agencies have, without
exaggeration, become
an integral part of the
financial market. The
solvency rating given
by these agencies is the first thing
that investors look at when making
decisions on shares in state-owned
companies and private corporations.
Accordingly, evaluations by rating
agencies directly affect the cost of
attracting funds from the market.
However, the current credit rating
system is rather problematic. Think of
high profile issues of the 2000s, which
were not predicted by the ratings of
major Western agencies, including the
American mortgage crisis, the debt
crisis in the European Union, corporate
humiliations at Enron, WorldCom and
Parmalat. In addition, the world has
long been brewing discontent with
the fact that the global credit ratings
market is highly monopolised, where
over 90% belongs to the Big Three.
This is criticised in different parts of
the world, not only in the East, which
is trying to establish its own rating
services, but also in the West, where
the system of credit ratings originated.
Thus, today there is little doubt that
reform is long overdue. Most likely it will
bring a broader multi-power system
driven by many countries, including
China and Russia.
Due to sanctions there is
an urgency to start a new
quality rating system
IMPORT SUBSTITUTION OF
RANKING SYSTEMS
After the global crisis at the end of the
noughties, the United States of America,
the European Union, Canada, Japan
and many other countries introduced
and tightened licensing rules and
information disclosure practices on
conflicts of interest for the rating
agencies. Now, Russia has joined the
fight against the hegemony of the Big
Three. In November, Moscow hosted
the founding meeting of shareholders
of the national Analytical Credit Rating
Agency (ACRA), created by nearly thirty
leading local financial institutions and
companies, including the Bank of
Russia.
At the beginning of 2015, against a
backdrop of hostility between Moscow
and the West, the Big Three drastically
lowered the sovereign rating of Russia,
which sparked accusations. Russian
Prime Minister Dmitry Medvedev
openly called this “obvious political
manipulation”. A law on the activities of
credit rating agencies, giving the green
light to a national ranking system, was
adopted in record time. It came into
force in the summer and began work
on forming the ACRA.
It is noteworthy that in Russia
at that time there were already
several local rating agencies such as
Rus-Rating, Expert RA, the National
Rating Agency and AK&M. Some of
them have been servicing the market
for many years, for instance AK&M’s
business rating unit first assessed
companies’ stability in 1994. However,
it was decided that a new structure
The current credit rating system
is problematic
should be formed. Deputy Finance
Minister Alexey Moiseev told Lenta.
ru that the new rating law imposes
“serious and costly demands” on
the agencies. And so far none of
the current players are fulfilling
these properly. He stressed, “Due to
sanctions there is an urgency to start
a new quality rating system. This is
why we created a new agency.”
ACRA will initially operate in the
Russian market but there are plans
to expand its influence, primarily
towards the Eurasian Economic
Union. The new system will receive a
total of 3 billion roubles, while experts
with experience in the Big Three will
form its leadership. Vice President of
Gazprombank, Ekaterina Trofimova will
head ACRA. She was director of the
group of financial institutions ratings in
developing countries at S&P for about
ten years.
It is expected that the Agency
will begin its work in December 2015,
upon its official registration and
signing off of internal documents,
like the Code of Ethics, for example.
“This fundamental document was
compiled on the basis of the latest
European regulations, which are
yet to be applied by the Big Three,”
says Ekaterina Trofimova. However,
she promised that the methodology
for assigning ratings (planned for
next year) would be completely new,
“without borrowing, the scale will be
fundamentally different from that of
international agencies.»
For the first three years, ACRA
will operate as a non-public joint stock
company and then it will be able to
join the stock exchange. By and large,
this is all that is known about the new
structure. But this new assessment tool,
independent of the authorities of other
countries, both directly and indirectly,
inspires a lot of hope.
26 BUSINESS
ENVIRONMENT
IRON MAGAZINE
№3(10)
2015
27
DIFFERENT STROKES
THEORY AND PRACTICE
The credit rating is, in theory, an
independent evaluation of the ability
and willingness of the issuer to fulfill
its obligations on time and in full,
and is an indirect assessment of the
probability of default. Usually, the
borrowing organisation requests
and finances the rating. The analysts
base their opinion on figures that
characterise a business’s dependence
on key counterparties, its vulnerability
to changes in economic conditions, as
well as the amount of leverage, liquidity,
balance sheet structure, and more.
They evaluate the expected impact
of various factors on the financial
situation of the borrower using factual
and historical information, including
the dynamics of industry indicators at
different stages of the economic cycle.
Calculations are based on both publicly
available information and confidential
information provided on request.
Analysts also examine the features of
corporate governance and ownership
structure. However, they always use
their own methodology, and thus
the subjectivity of such evaluations
remains at play.
“Despite the fact that Moody’s
has a Russian subsidiary, and Fitch
Ratings and S&P have branches, the
actual assignment of ratings is carried
out in their headquarters. This gave
Russia reason to suspect the Big Three
of bias in their evaluations based on
the aggravation of Russia’s relations
with the West,” says Valery Weisberg,
Director of the Analytical Department
of the Region Group. A sovereign credit
rating – a measure of the affluence
of the country where the borrower
receives a large part of its income –
sets the top bar for the company under
evaluation. Accordingly, any revision of
the sovereign rating, just like circles on
the water, disperses throughout the
entire business environment, the expert
said.
A reduced credit rating affects not only
the borrower, but also the financial
market as a whole. Thus, according to
the Basel Accord, credit providers are
obliged to assess any risks for their
own funds. Whilst there is no need
to create reserves for government
bonds with a rating between AA- and
AAA, ratings between BBB- and
BBB+ have a 50% credit risk, which
requires reserves. In terms of corporate
borrowers the rules are even more
stringent, requiring reassurance at 20%
and 100%, respectively. This means that,
if the borrower’s rating changes, banks
have to either reduce their lending or
raise new capital. When credit ratings
change across the country, for example,
There is no global common approach
to the definition of sovereign ratings.
Moody’s analysts prefer to use generic
categories such as ‘economic stability’
and ‘ability to adapt to shocks’. Current
budgetary and economic performance
is a secondary criterion; and long-term
prospects are assessed qualitatively.
S&P uses more detailed specifications,
analysing the decisions and actions that
determine the value of key indicators.
Finally, Fitch relies primarily on
quantitative indicators, using data from
international organisations to assess the
quality of institutions.
A borrower’s rating is also affected by its
industry. For example, the steel industry,
according to S&P, has a moderately high
risk characterised by the reoccurrence
of cycles, average competition, and
threats to growth. The competitiveness of
companies is determined by cost structure,
operational efficiency, and market and
product diversification. The world average
for the steel industry is considered to be
the profitability (by EBITDA) in the range
of 8-12%. Taking into account additional
indicators: EBITDA per tonne of product,
return on equity (average of 5-9%).
due to a deteriorating sovereign rating,
the banks are more likely to reduce
their lending.
Certain features of the current
system of bank refinancing exacerbate
the potential risks for manipulating
credit ratings. The Lombard credit
list – a list of securities that the central
bank accepts as collateral – is the
system’s main tool. Until recently, an
international rating was a key criterion
for joining this list. In late 2014, the
Bank of Russia allowed refinancing with
securities of non-financial institutions
that have not been evaluated. However,
this is an exception: at the beginning of
October 2015 up to 96% of securities
involved in repos (sale and repurchase)
had BB ratings and above. Banks’ debt
to the Central Bank on such deals is
around 1 trillion roubles.
Whilst developing new approaches
to ratings regulation, the Bank of
Russia first insisted that foreign
agencies must create subsidiaries in
Russia. But during the law discussions
this requirement was relaxed and now
applies only to ratings given nationally.
However, many market analysts
say that the cessation of work with
Western agencies is highly undesirable.
They advise the authorities to act
simultaneously in several directions:
developing their own rating system
and attracting new partners, while
maintaining the already tried and tested
relationships.
TURNING TO ASIA
While Russian lawmakers prepared
reforms to regulate rating agencies,
local businesses faced the need to seek
new sources of investment. Due to the
Ukrainian conflict, the United States of
America, Europe and Japan imposed
sanctions against Russia, which cut
opportunities to attract financing for
big business. So they started to turn
towards China with its developed
domestic financial market. Local rating
agencies are needed in order to take
advantage of this market.
Today China has more than 70
rating agencies, of which Dagong,
Golden Credit, Pengyuan, Shanghai
Brilliance, China Chengxin and Lianhe
have national status and regulated
accreditation. The last two are joint
ventures with Moody’s and Fitch,
respectively. The development of
the rating system in China began in
the 1980s, when the PBOC allowed
companies to place bonds on the
domestic market. Initially, issuers
used the agencies voluntarily, but from
1992 the ratings became obligatory.
Foreign companies in this case
were not allowed to evaluate issuers,
which placed bonds on the domestic
market. The new requirements have
contributed to the rapid growth of the
market but, due to weak supervision,
the boom turned into a chain of
painful defaults. In response, since
1997, the People’s Bank of China has
consistently tightened the regulation
of rating agencies, gradually restoring
confidence in the market.
Russian companies usually work
with one of the leading players in China
- Dagong Rating. The agency, founded
in 1994, has 600 staff and a wide
international network. It has long been
interested in Russia. In 2012, Dagong
and Rus-Rating formed a joint venture
with a view to win 30% of the domestic
ratings market in the next ten years.
In November 2015, Metalloinvest
received an investment rating of BBB+
with ‘stable’ forecast from the Chinese
agency. It had already been rated by
Moody’s at BA2 and stable; by Fitch
at BB and stable; and S&P at BB and
negative. The company is not going to
stop working with the Big Three, but is
looking to build relations with China as
an addition.
In fact, aside from Metalloinvest,
Dagong also rated Russia at A,
Features of the current
system of bank refinancing
exacerbate the potential risks
for manipulating credit ratings
Gazprom at AAA, Gazprombank at A
and Gazprom Oil at AA. According to
Pavel Mitrofanov, CFO of Metalloinvest,
“Metalloinvest was the first Russian nonstate company to announce a rating
from Dagong. A careful analysis of all
aspects of our business, including visits
to our factories, allowed the team of
analysts from Dagong to appropriately
value our assets and provide a more
balanced evaluation of our debt
management capacity.” He is confident
that the Dagong rating lays “a solid
foundation for expanding cooperation
with Chinese banks and investment
funds.”
In the press release, Dagong
credit analysts wrote that, due to
diversified funding, Western sanctions
against Russian companies have not
restricted Metalloinvest’s access to
external capital markets. The agency
believes that the company’s ability
to create cash flow can be improved
with a moderate appreciation of the
rouble, as well as through an optimised
product line and tight control over costs.
Dagong’s position is that different
sources of financing of the company’s
debt repayment can ensure timely
fulfillment of its obligations to creditors.
Thus, the conclusions made by
Dagong largely coincide with the
Big Three verdict: that expanding
interaction with various institutions is
the most effective strategy.
28 SPORT
IRON MAGAZINE
№3(10)
2015
29
Game for
Agile Minds
Matvey
Volodin
The number of e-sports fans can
already be counted in the millions.
Could Russia join the elite nations in
this hi-tech sport?
I
nteresting fact: Russia was
the first country to officially
recognise e-sports as a sport.
It happened in the summer of
2001 but the decision was then
reversed, which slowed down
the development of the sport
in the country. According to Anton
Cherepennikov, Co-Owner and
Managing Partner of Virtus.pro, the
largest Russian e-sports project, “In
Russia, e-sports are still in their
infancy. We have a number of highlevel teams, but they are still waiting
for all the necessary infrastructure to
be put into place.”
The situation varies from country
to country. For example, South Korea
is the world leader and e-sports have
actually overtaken traditional kinds of
sport, whilst in America the number
of attendees at cyber tournaments
recently exceeded the crowds at the
NBA Finals.
However, Cyber.Sports.ru’s
creator Jaroslav Komkov says that
20% of all Dota2 players, which is
one of the main competitions, are
from former Soviet Union countries.
Russian players have already a lot
on the international stage. The first
success was M19 team’s victory at the
World Cyber Games 2002 in Counter-
Strike. Russian teams subsequently
won more prizes in these so-called
Cyber-Olympics, including their wins
in Quake, StarCraft, WarCraft, FIFA,
Carbon and ProStreet. In fact, Alan
Enileev, who carried the Olympic flag
at the Opening Ceremony in Sochi in
2014, is also a champion of Need for
Speed racing.
The largest prize winnings in the
history of Russian e-sports amounted
to $1,193,884, collected by the Virtus.
Pro team in the Dota 2 championship
at ‘The International 2015’, an
American tournament. Incidentally,
in 2007-2008, the computer giant
Intel sponsored Virtus.Pro and this
summer it was announced that USM
Holdings had invested in the group.
“E-sports is a unique phenomenon,
combining principles of sport, the
media business, and the internet.
It is a fast-growing market that
has already won a huge audience
throughout the world. Virtus.pro
is the e-sports leader in Russia. I
am confident that the support from
USM Holdings will drive the further
development of the cyber community
and enable it to reach the next
level,” comments Ivan Streshinsky, a
member of the Board of Directors of
USM Holdings.
“E-sports clubs have their own
financial resources that allow them
to earn money, such as broadcasting
studios, web-based platforms, and
tournaments. Compared to football,
we are an all in one outfit: a football
team (like FC Spartak Moscow), a TV
channel (like TV-Match), a newspaper
(like Sovetsky Sport) and the UEFA
Cup. Therefore, unlike in football,
investors’ money mainly goes towards
the team’s infrastructure and not into
purchasing star players. This helps
to control a significant market share
in the CIS with prospects to fight on
an equal footing with European and
American clubs. Monetisation occurs,
as in professional sport, through
advertising sales,” says Anton
Cherepennikov. This kind of income
is noticeably higher in America and
Europe than in Russia. However
domestic advertisers may change
their conservative attitude from
one day to the next, as is happening
around the world.
In September, Newzoo published
a study according to which the total
income of e-sports companies in 2018
will amount to $765 million. Half of
the funds will come from advertising
and the rest will come from ticket
and merchandise sales, as well as
from revenues from tournaments
and publishing. There are currently
116 million e-sports fans around the
world but over the next three years
the number is estimated to grow to
165 million. This year’s World Cup
finals for Dota2 were screened live
to over 4.6 million viewers. This, of
course, is far from the big football
matches. For example, last year’s
World Cup in Brazil was watched
by almost 3 billion people. However
e-sports is rather new, unlike a game
with a leather ball that, as evidenced
by archaeological findings, existed
even in Ancient Greece.
30 MANAGEMENT
IRON MAGAZINE
Million-Dollar Idea
Maria
Khlopotina
I
Innovation has deep roots in Russia, although
interest in it among various employers fell during
the good years. However, the current economic
situation is forcing companies to reconsider this
approach.
n the autumn, Open Government,
the Ministry of Economic
Development and the Russian
Venture Company jointly published
a draft of the first National Report
on Innovation. The purpose of
this document, presented to the
expert community for analysis and
discussion, is to offer a foundation
for “managerial decision making,
and development of innovation and
economic policies”. But the figures
are unsettling. According to the
report, the total share of innovative
products in Russia adds up to 8-9%,
in comparison to the UK, France and
Germany, where the shares are 14%,
13.5% and 13%, respectively. Russian
businesses show little interest in
developing their own innovations and
integrating them into their production
processes, which means that many
solutions are brought in from abroad.
REAL CAPITAL
This approach was popular during the
more prosperous pre-crisis years, but
now it is clear that this must change,
especially since there is still hope.
There are plenty of brilliant ideas in
the country. For instance in summer,
MonoCrystal showcased a 300kg
synthetic sapphire grown using its own
state-of-the-art technology.
But the word ‘innovation’ is not
always followed by ‘in tech’. A good
example comes from a Kursk
company – RubEx Group – whose
factory developed a simple process for
reducing the wear-and-tear of conveyer
belts used during transportation of
dry particulate materials. For years
experts hoped to find a solution to
this problem by increasing the level of
temperature resistance in the rubber,
but they never succeeded. But the
RubEx Group specialists introduced
conveyer belts with basalt fibre, known
for its durability. Now their products
offer healthy international competition
to giants like DuPont.
Experts agree that Russian
companies often struggle to find
applicable solutions ‘on the side’,
excluding imported innovations. This
is due to a number of reasons, from
issues in R&D and education, to a
lack of real incentives. Director of
Innovation and Development at NPO
Saturn, Dmitry Ivanov, highlighted, “We
travelled around 20 cities in Russia
in search of interesting projects. We
gave talks at universities explaining the
№3(10)
2015
31
needs of modern manufacturing. I was
shocked to see how many people are
not aware of the actual needs of the
industries.” This clearly indicates that
in order to achieve true advancement,
companies should turn to local
developers more often.
POINT OF CONTACT
Human Capital Media’s report on
HR and Innovations concluded that
nearly 60% of employees believe that
the most important and vital task for
the employers at the moment is to
involve them in the process. However,
unlocking the key to employee
engagement is not so simple. “The
reality of motivation is determined
by how accurately incentives match
expectations. In Japan, for instance,
management often use the country’s
love for travel to successfully motivate
their staff”, explains Andrey Prikhach,
Professor at the Department of
Management of Labour and Social
Processes at the St. Petersburg State
University of Economics. He adds
that nobody is completely incapable
of innovation; there is only inadequate
motivation.
Many companies make the mistake
of refusing to reward their employees.
Internet forums for HR specialists
regularly focus on this issue. “Often,
staff ideas are interesting, but the costs
involved exceed the impact. However,
even if such ideas are not implemented,
employees should still receive a reward,
however small,” believes Managing
Director of the Kursk Electro Hardware
Factory (KEAZ), Yaroslav Ivanov.
Psychologists call it a
‘psychological contract’, when an
employer and an employee fully
understand their expectations from one
another. Transparency in motivational
incentives provides a level of comfort
and security – the main conditions for
innovation. Such practices are gaining
interest around the world, but they are
still new to many managers. It is hard
to imagine a Russian chief executive
giving away his or her personal
contact details to his or her employees,
following Richard Branson’s (Virgin
Group) example.
MIND GAMES
Nowadays, many large companies
turn the selection of the best ideas
into competitions, which have other
important goals, such as raising
awareness about corporate values
and increasing staff engagement.
Metalloinvest is a good example of
how these competitions result in
real financial gains. Last spring, the
company finalised its competition
for the best innovation in energy
conservation and efficiency. At Ural
Steel, first place went to an idea for
improving the steelmaking process that
saved the company over 100 million
roubles per year.
Big companies turn selection
of the best ideas into contests,
which increases employee
engagement
Lots of motivational incentives now
integrate elements of games. Only a
few years ago, corporate currency used
to be considered quite a novelty, but
today is successfully implemented in
dozens of major companies. The most
successful and creative employees use
this currency to buy things in corporate
shops – from t-shirts to various
gadgets. The Imperiya Kadrov Research
Centre reports that 90% of managers
find the gamification of motivation to
be effective. For instance, the Gazprom
Oil project for information management
and innovation is based on this idea.
When a member of staff updates his or
her status and reaches a new level, he
or she is rewarded with virtual currency
known as ‘barrels’.
However, gamification does not
work everywhere. “Improper or false
motivation, insufficient rewards or
inadequate mechanisms can get in the
way of the desired level of motivation,
and in some cases, lead to negative
results,” clarifies Steve Sims, Vice
President of a supplier of gamification
platforms to Badgeville. Moreover, we
cannot force everybody to play by the
same rules. For motivational incentives
to stimulate growth they should
always come tailor made for specific
businesses and their particular needs.
And then and only then will they help
companies to achieve more creativity
at executive level, which, as a result,
should inspire employees to innovate.
32 PERSONNEL
IRON MAGAZINE
№3(10)
2015
A Country
of Skilled
Professionals
Ignat
Vjugin
FROM THE PAST INTO
THE FUTURE
Russia has joined the WorldSkills global hub
for skilled professionals and is preparing to
host the ‘Skills Olympics’. These professional
competitions have been gaining in popularity
in Russia for several years now.
H
eadHunter, a recruiting
portal, interviewed 8,000
Russians and found
that 81% of them are
considering switching
profession. And greater
financial rewards are not
the only reason; 30% said they are not in
the right role, while 25% have become
disappointed with their profession.
When young people determine
their own future by applying to college,
they are not always ready to rationally
evaluate their carrier choice. In
November, a Ministry of Labour online
forum called Work in Russia advertised
fewer than 500 vacancies in law and
over 15,000 metal worker jobs. Whilst
the former is very popular among young
people, the latter is often overlooked.
However, the goal is not only to get
more young people interested in bluecollar jobs, but also to ensure that their
qualifications meet the requirements of
the time.
SKILLS OLYMPICS
Russia joined WorldSkills, which
was established in Spain right after
World War II, recently when, two
years ago, its team took part in the
WorldSkills championship in Leipzig
for the first time. However, Russia
has serious ambitions and Kazan will
host the WorldSkills International 2019
championship.
“We have to develop a proper
system for national skills competitions.
We could call it ‘Young skilled
professionals’,” said Vladimir Putin in
his address to the Federal Assembly.
He noted growing interest in hightech jobs among the young, which
has resulted in greater competition
33
to get into professional colleges. In
addition, Russia was the first to hold
Junior Skills competitions for children.
According to the head of WorldSkills
Russia, Robert Urazov, “Early
development of transferable skills is
a core part of creating an effective
system to prepare skilled professionals
for the future.” The end goal is to
establish a system of skilled education
from school to the workplace.
This year, over 500 contestants
competed at the third WorldSkills
Russia Competition in Kazan, and
220 contestants competed at the
WorldSkills Hi-Tech Competition in
Yekaterinburg this autumn. Despite the
fact that most of the participants were
very young, the tasks were suitable
for experienced professionals and the
contestants’ ages were not taken into
account during grading. For example,
the prototyping competition required
participants to write a computer
programme and print the result on a
3D printer.
One of the advantages of such
events is that, in addition to raising
the prestige of blue-collar professions,
they help to develop the content of
educational programmes. When Russia
first participated in the WorldSkills
Championship in 2013, it came last,
taking 41st place. This year, however,
it came 14th. This breakthrough
demonstrated Russia’s aspiration to
adopt current best practices.
The WorldSkills Championship
tests 45 professional
competencies grouped into six
areas:
• Construction technologies
• Creativity and Design
• Information and Communication
Technologies
• Manufacturing and Engineering
Technology
• Customer service
• Public transport maintenance
Prime Minister Dmitry Medvedev
has signed a decree, according to which
WorldSkills Russia formed a basic
training centre for skilled professionals.
It plans to organise training for
700 teachers in 50 different professions,
including many of the most promising
professions, such as drone operations
and mobile robotics.
Contests for skilled professionals
are an effective motivation tool
For a long time, workers’ competitions
in Russia were negatively associated
with the country’s Soviet past. In
December 1917, Pravda newspaper
published an article by Lenin headlined
How to organise competitions. The
key idea was to imitate real market
competition.
In 1929, the miners of Donbass
initiated a competition, which then
turned into an all-Soviet struggle for
productivity and lower production
costs in manufacturing industries.
The authorities supported this
initiative by ordering factories to
establish bonus funds of 40% of the
savings made during the competition.
Sadly, this initiative later turned
into bureaucratic turmoil as the
best ideas became buried under
paper awards.
In the early years of modern
Russia, Soviet practices were often
brushed aside too quickly, and interest
in professional competitive events had
slowly evaporated in many companies.
But recently, the situation has started
to reverse. For example, Metalloinvest
has been holding competitions for
its employees since 2011, hoping to
build a good reputation for blue-collar
work, increase employee engagement,
and to establish good traditions and
continuity of generations. The rule
of thumb for these events is to get
experienced and young workers to
compete together.
This year’s final took place at
Ural Steel. In September, about 70
winners from other units of the
company joined the event. “Every
year, based on experience, we adjust
the competition, aiming to showcase
main jobs and related professions,”
says Deputy CEO for Organisational
Development and HR at Metalloinvest,
Marina Novikova. According to her,
the company now plans to raise
the status of the competition. After
all, participation in international
competitions is not only an honour for
the employees, but is also good for
the company’s image.
34 SUMMARY
DAS KAPITAL BACK IN VOGUE
Yakov Utin
The majority of Karl Marx’s
contemporaries considered his work to
be of little value. And yet, it has not been
forgotten to this day.
In 1999, on the eve of the new
millennium, the BBC conducted a
survey to find the greatest thinker of
the millennium. Public opinion put
Marx in first place, ahead of Albert
Einstein, Charles Darwin and Isaac
Newton. During the 2008 economic
crisis, the German philosopher’s major
work, Capital, gained popularity among
intellectuals once again. Could Marx ever
have imagined that a public reading of his
MARX’S DAS KAPITAL –
BESTSELLER
At the end of the nineteenth century Karl
Marx and Friedrich Engels’s archive fell
under the management of the German
Social-Democrat Johann Heinrich Wilhelm
Dietz, who in 1881 founded the Stuttgart
publishing house JHW Dietz. After World
War II, the Karl Dietz Verlag company, its
successor, continued to publish Marx’s
works to this day. With regard to the first
edition of Das Kapital, one of the books
was sold at an online second-hand book
auction of abeBooks.com for €40,000 in 2014,
becoming the second most expensive sale
of the year. To put this into perspective, in
Europe today, the average retail price of Das
Kapital is €24.90.
IRON MAGAZINE
work would be the key event at the Venice
Art Biennale? Because that’s exactly what
happened this year. For a very long time,
Marx was held to be more of a politician
than a philosopher. Only a few people
were able to discern and examine the
academic side of his work separately.
But in recent years, a re-evaluation has
begun.
Marx posited that the value of goods
should depend on the amount of labour
involved in their production, and that
surplus value is the amount added on top
of this labour cost. Thus, it is created by
minimizing production costs rather than
by selling more units. In Marx’s words,
the normalisation of surplus value was
‘an exact expression for the degree of
exploitation of labour-power by capital.’
Herein lies the unique political element of
Marx’s theory.
Marx’s major work, Capital, was
published in 1867, but it took five years
to sell the thousand copies produced for
the first print-run. The work was largely
ignored by the press, or at least it did
not receive the same kind of attention
given to leading economists of the time.
Aside from the Soviet bloc’s political
interpretation of his work, Marx had
to wait a long time for praise from his
academic colleagues. This came only in
1951 with a positive critique by the AustroAmerican academic Joseph Schumpeter
in his book “Ten Great Economists: From
Marx To Keynes”.
From then on, scholars began to
analyse Capital in depth. In 1962, the
Anglo-American economist and historian
Mark Blaug wrote in “Economic Theory in
Retrospect”: “Whatever one may think of
the ultimate validity of Marxism, it is a dull
mind that fails to be inspired by Marx’s
heroic attempt to project a systematic
general account of ‘the laws of motion’
of capitalism.” Prompted by the wave
of political and social transformations
taking place in Eastern Europe in the
1980s, academics everywhere began to
talk not of the ‘crisis of Marxism’ but of
the ‘crisis of misunderstanding Marxism.’
One of the more consistent supporters
of this point of view was the Argentinian
philosopher Enrique Dussel, who wrote:
“Now Marx’s critical thinking will belong to
all of humanity; it will be just as much a
part of capitalism as it is of socialism.”
“Capital in the 21st Century”, which
was recently published in France, once
again reignited the discussion. Its author
was Thomas Piketty, a professor at the
Paris School of Economics. In his work he
sheds light on the problem of inequality,
essentially starting from the same point
as Marx. Piketty’s basic idea is that
whenever there is fast economic growth,
capital plays a less important role, and
vice versa - deceleration of growth has
the reverse effect, and leads to increasing
inequality. He believes that in the modern
world the rate of return on capital
always exceeds the rate of economic
growth. That is to say that what actually
happens is that the formula ‘commodity
– money – commodity’ is replaced with a
chain, alienated from production: ‘money
– money – money.’ This is the latent,
inherent problem with the model.
Piketty’s work may have provoked a
lot of opposing arguments, but left very
few indifferent. Furthermore, both his
supporters and his critics acknowledge
that his book has re-opened the debate
on Marx. It is as if the author of “Capital
in the 21st Century” suggests we
travel back a century and try to draw
new conclusions in light of all of the
cataclysmic changes humanity has
undergone in that time.
№3(10)
2015
35
TRAFFIC ON AUTOPILOT
Maria Yakovleva
To glimpse into the future, one can
simply look more closely at the concepts behind road transport
Global automakers are ploughing a
lot of labour and resources into developing systems that allow cars to move
independently: to accelerate, brake,
manoeuvre, etc. A couple of years ago,
for example, Ford announced its Traffic
Jam Assist, which allows a car to drive
itself on autopilot even in heavy traffic.
The driver does not need to steer or
use the foot brake. Similar systems
have been developed and tested by
Audi, BMW and Mercedes Benz. Engineers at Toyota, Nissan and Volvo are
busy with the same ideas.
The time when cars drive themselves is still far off, although such
car models already exist. For example,
Google has built a car without steering,
brake pedals and other features that
are usually needed for driving. At the
end of last year, a completely autonomous Audi A7 drove itself 700 km to
the exhibition centre for the Consumer
Electronics Show in Las Vegas. Experts estimate that by 2025 our roads
will be populated by over 600,000 fully
automated cars.
In the future, electric engines
will power most cars. This will require very powerful batteries. Thus,
the electric Tesla Model S can drive
400 km without recharging. But this
is not enough. A breakthrough may
be coming from the University of
Cambridge labs, where scientists
have developed a prototype Lithium-Air battery capable of storing
five times more energy than modern Li-Ion batteries.
Modern cars now resemble
computers. A couple of years ago,
General Motors announced that
new software will allow car owners
to add new programmes and functions to their cars after purchasing
their vehicle. What’s more, they also
will be able to change the colour of
their cars: Toyota has developed a
concept car Fun-Vii, whose frame
is built of many LCD touch panels.
Thanks to this, car owners can
change their car’s colour and even
draw or run animations on their
cars.