Putin’s Ukraine Deal Seen Frustrating Russian Steelmakers

Russian steelmakers may be frustrated by an agreement between President Vladimir Putin and his Ukrainian counterpart Viktor Yanukovych to strengthen ties, according to BCS Financial Group and Deutsche Bank AG.

“Domestic producers may face a little bit of disappointment” because the rapprochement means Ukrainian competitors won’t face limits on shipping steel to Russia, said Kirill Chuyko, head of equity research at BCS in Moscow.

Ukraine, situated between Europe and Russia, rejected a trade accord with the European Union last month as it sought to repair relations with its eastern neighbor instead. Russia agreed to buy Ukrainian debt and cut the price it charges for natural gas, helping the former Soviet republic emerge from its third recession since 2008.

The deal stymies Ukraine’s trade and integration talks with the EU, which had been opposed by Putin. An EU accord would probably have hurt Ukrainian steel shipments to Russia: Putin said in October he would protect the domestic market against Ukrainian products should an agreement with Europe be signed.

“Russian steelmakers were expecting that the domestic market would be closed to Ukrainian steel imports once its neighbor joined a trade accord with Europe,” George Buzhenitsa, an analyst at Deutsche Bank, said today by phone from Moscow.

A construction boom has driven steel consumption in Russia. In some central regions, Ukrainian steelmakers have reached a market share of as much as 30 percent, according to Buzhenitsa.

New Mills

In an effort to meet local demand, Russia’s OAO Novolipetsk Steel opened a steel mill in Kaluga in July to produce 900,000 metric tons a year for construction, and OAO Severstal plans to open a similar plant in Saratov region in 2014.

“While Russian companies have lower production costs than Ukrainian producers, they will still need to fight for market share,” BCS’s Chuyko said today by phone. “Ukraine is an important player on Russia’s construction-steel market with a share of about 11 percent.”

Ukrainian steel-pipe producers may also benefit from closer ties with Russia. A quota system had allowed Ukraine’s Interpipe Group tax-free imports into Russia until it expired this year.

Russia has agreed to reinstate quotas for pipe imports, Ukraine’s Industrial Policy Minister Mykhaylo Korolenko said today, declining to elaborate. He also said Russia agreed to halt an anti-dumping probe into Ukrainian shipments of steel reinforcement bars, or rebar.

Natalya Timakova, a spokeswoman for Russian Prime Minister Dmitry Medvedev, declined to comment on Korolenko’s remarks.

Russian pipe producers OAO TMK and OAO OMK declined to comment, as did the country’s Pipe Industry Development Fund. Severstal and Novolipetsk Steel also declined to comment.

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