Severstal’s Mordashov Speaks in Davos TV Interview (Transcript)

Billionaire Alexey Mordashov, chief executive officer of OAO Severstal, speaks in an interview with Francine Lacqua and Guy Johnson on Bloomberg Television’s “The Pulse” at the World Economic Forum’s annual meeting in Davos, Switzerland.

(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy. Mandatory credit Bloomberg Television)

FULL TRANSCRIPT:

Francine Lacqua (FL): Let’s get straight to Alexey Mordashov. He is the CEO of the steelmaker Seversta. Alexey, thank you so much for joining us here. The presence of Russians in general here is quite extraordinary given everything that you have been through the last six months. Can you first of all just quantify the mood? Is it of defiance? Is this to do business? Give us a sense of the flavour of the mood here amongst Russians in Davos.

Alexey Mordashov (AM): I think that the mood is in general positive. Of course, there is a certain anxiety about the future but I think that what is happening in Russia on one hand of course is there are some worries for the future of Russian economy but I would not be too pessimistic about Russia because what is happening in Russia now is a general market economy correction. [inaudible] Russia has a need for long term. We have experienced [inaudible] this classical one in Russia the last some eight years and now what we are having is correction. Correction, in general, is very helpful for national economy. Of course, we are having it now at the expense of rich and powerful people which is the biggest detriment. In general, it could have very serious positive outcomes. All national producers are becoming more competitive because of the exchange rate. All imports is less competitive. We have financial stability, relatively, of course now many banks are exposed.

FL: I am sorry, and I understand that a lot of Russian CEOs are trying to be optimistic but the pain that you have to go through, since you do the reforms, must be very difficult to deal with.

AM: We have accustomed to it. We have accustomed to reforms the last 20 years. It is not easy. I am not saying everything is fine and easy. No, I am just saying that it is not so dramatic like some people tends to depict.

GJ: Is it going to get worse from here? Do you get a sense that the sanctions are as tight as they are going to be? The Russian ruble has fallen as far as it is going to fall? That the banking sector is beginning to find its feet? Does it get tougher in 2015? Or do you expect that actually toward the back of this year, things will start improving? You have laid out the positive case. I am just wondering in the meantime, does the screw get tightened a little bit more?

AM: Number one, it is difficult to predict the outcome or the prospectives [sic.] of sanctions. It is purely political stuff. I don’t know how to relate it. I hope it will be diminished and there will be some unwinding in sanctions because it is very detrimental for everybody in the world, in Russia, in Europe. If you speak about the specific impact of sanctions on Russian economy, I think it is relatively limited by a couple of sectors like off-shore drilling for oil and gas. Of course banks are much more exposed. But I believe, coming back to the questions, it is a relatively temporarily situation. In 2015, I expect very much, I believe that it is very, very likely to see new equilibrium which will be a new start.

FL: What do you make of the plunge in the ruble? We know that the government has asked exporters to, and this is a quote, ‘to sell currency more rhythmically’. What does this actually mean?

AM: For us, it doesn’t mean much because we deal in [inaudible] foreign currency. We are a large exporter but we believe still that our prime market is a domestic market and our focus should be in Russia and on the Russian market primarily. But the [inaudible] on a regular basis just to finance our needs. We didn’t change our approach on our policy in this respect. But government, yeah, what is really important about it to the government as far as I know is they collect all the information.

FL: But they asked you. One of our representatives was in the meeting with government where they asked you to sell rubbles more rhythmically.

AM: Yes, they, I wouldn’t say ask, but they just remind us about the importance of it for the nation and the economy and the importance for key economic players to act with a good understanding code.

GJ: Would it have a meaningful impact on your company if SNP decided to downgrade the sovereign to junk at the end of this month?

AM: You have a very specific situation in Severstal today, because we have a very good liquidity position. We sold our US operations. We have the debt, net debt, at 0.8 times the EBITDA levels today. And we have more problems in how to place cash properly. Because we are not going to borrow, we are not so much [sic] exposed. We have tried recently to buy [inaudible] bonds, our bonds from the market and this is relatively tough. People trusted our finance and don’t like to give a discount.

GJ: What impact will it have on the country, do you think, more broadly?

AM: Well, difficult to say because the corporate sector has borrowed a lot. We have significant debt on the corporate side. We have very low debt on state and for domestic households. Well, difficult to say. Of course, borrowing will be much more expensive, with all [inaudible]. But, we hear some conscious efforts of the government to provide liquidity to the market and hopefully, reduce the central bank rate, which hopefully will help us in the future, now it’s quite high, all-in-all, it is definitely good for (incremental?) impact. I would not overestimate it as well. Because so far (in credits?), we are not so critical information economy anymore. It is important but I would not overestimate negative [sic]. But, it is difficult. You know, we are now in a situation, you asked me in the beginning, what is the overall mood in Russians who are here. Difficult to say, we see a lot of unpredictability but all what we know or the fundamentals that we see, could bring us to a quite good new equilibrium for growth. Of course, the biggest negative is the decline of the purchasing power of our people. It is the biggest detriment. I hope that we will overcome it.

FL: But when you talk about instability, have you had conversations with the government saying, ‘can you help us with curbing that instability?’ Have you had conversations with other world leaders to try and help with this instability or is this something you just assume that you have to deal with?

AM: First of all, yes, we have to deal with this. Secondly, of course we expect that the governments will contribute in the bringing of more stability, which I think the government is actually doing because all consultations that they have with the business about exchange rate, currency…

FL: But what we are hearing in Ukraine can’t be helping you?

AM: Well, Ukrainians. Well, it is a different story, it’s a new political situation…

FL: But it adds to instability, doesn’t it?

AM: Of course. Yes. But I would not overestimate the importance of sanctions in the Ukrainian situation for economic [inaudible] in Russia. Oil price, trade account, is much more important. We have a free market economy in our country and we have to wait probably a little bit and the new equilibrium will be stabilized to see and to start with.

GJ: Are you planning for the dollar to go up this year? Do you think the dollar is going to get more expensive?

AM: Difficult to say. From what I have heard, probably the new equilibrium at oil price 50, around 50, should be around this current level, 60-65, it is difficult to say. Because it is a free market economy, there is a very significant component of emotions and they also bring instability as you have said. We have a little bit of wait and see.

FL: And Alexey, of course you are a very big exporter, steelmakers in general are the best barometer to actually understand world growth. Are you more concerned about that now than you were two months ago? The IMF had to cut their forecasts. It seems that actually this instability is now starting to filter through the world economy in different ways and more sinister ways than we thought, even at the end of last year?

AM: It is a difficult estimate as usual but I don’t see a dramatic change within the last two months. But, what we see in the world leads to diminished growth. We expected growth, 2% for 2014 and basically, the same for 2015, worldwide still consumption growth. We also see 3.5/3.8 a couple of years before. Yes, all in all, all of these instabilities, including political instabilities, lead to diminished growth.

GJ: One final question of the Russians, how concerned are the people you are talking to about the move on the Swiss Franc? Was that something that really got people talking?

AM: This, I didn’t hear much about.

GJ: You didn’t hear much about it. O.K., that is interesting.

FL: But, you have just arrived so … [Laughs]

AM: I don’t think the Swiss Franc itself is so much important, of course it is important, but it might be the setup of a new trend in the currencies. It’s a very important factor which adds additional component to instability. Probably will have to wait and see when the free market economy forces will come to new equilibrium.

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