18.12.2023 - Photonics & Smart materials, Technology

Marcegaglia salvages Russia’s sanctioned EU business

Russia’s full-scale invasion of Ukraine in February 2022 has redefined its business relations with the EU. European firms have made headlines by exiting the country, while the European Commission is forging ahead with plans to use the €200bn in Russian funds frozen in the bloc to fund Ukraine’s reconstruction. What has received less attention, however, is the fate of European businesses that have been paralysed due to being majority-owned or controlled by Russian-sanctioned individuals or entities.

The best known examples have been resolved through unorthodox measures. Last year, the UK government issued a special licence to Chelsea Football Club to allow it to continue operating while its blacklisted owner Roman Abramovich sold the club. Germany’s government has nationalised a local gas business backed by Russian state-owned Gazprom. But an unsung example in Latvia saw the country of 1.9 million people turn frozen assets into an opportunity to attract multinational steel group Marcegaglia, which the government says is one its biggest foreign investors in recent years.

‘This deal won’t go through’

Italy-headquartered Marcegaglia began exploring the acquisition of Russian steelmaker Severstal’s EU business in the first half of 2022. Severstal’s service centre in Riga, which was the biggest steel processing facility in the Baltics, and trading posts in Poland and Ukraine had stopped operating in February when controlling shareholder Alexei Mordashov was sanctioned by the EU. 

Severstal’s business was “very important” to Riga’s economy, says Ivi Anna Buce, director of the investment project department at the Investment and Development Agency of Latvia. Its closure led the majority of its 300 workers to leave, after their salaries went unpaid, or be made redundant. Ms Buce says it also created problems for small and medium-sized customers, which struggled to find another local supplier. 

Drawn by potential synergies with its Polish operations, the prospect of a foothold in the Baltics and stronger coverage of the Nordics, Marcegaglia negotiated its acquisition of the business with Severstal. Then in August 2022, Marcegaglia had to convince Latvia’s government that it was worth jumping through the regulatory hoops to get the deal approved under stringent EU sanction rules. Edmunds Valantis, state secretary of Latvia’s ministry of economics, says the prospect of the business being resurrected by Marcegaglia, with its annual turnover of €8.6bn and operations in four continents, was a compelling enough reason. 

“There was interest from a foreign company, heavily involved in export operations [and] servicing other EU countries, to unfreeze frozen assets,” he says. “For us it was very important to use the opportunity.”

In line with EU sanction rules, the sales proceeds (of an undisclosed value) remain in an escrow account that Severstal cannot access until its sanctions are lifted. When asked why it sold the business, a Severstal spokesperson said via email: “It’s important for us that our colleagues … keep their jobs and that the assets we have developed over many years continue to operate.” Getting the deal over the line required two deadline extensions by the European Council, two extraordinary meetings of the Latvian cabinet of ministers, and close co-operation between the country’s ministries, embassy in Rome, security authorities and prime minister’s office. “There were definitely moments when we thought this deal won’t go through,” recalls Ms Buce. In April 2023, those fears were put to rest when the European Commission gave its approval. 

A €10m turnaround

When Marcegaglia took over the Riga plant in June, it had been idle for more than a year. Antonio Marcegaglia, the group’s chairman and CEO, says it is “taking a slow approach to restarting” because it wants to upgrade the equipment. “The plant’s style is a little old, in that it is not fully automated and productivity oriented,” he explains. Its ambition is to return the Latvian business to its operational peak of generating €300m in revenues and processing 300,000 tonnes of steel annually, and having close to 300 workers. “Our mission is to reestablish the decent presence that was there before the war and sanctions hit the company,” says Mr Marcegaglia. 

The group intends to invest around €10m in the business over the next year, he says, noting that a service centre like Riga’s which is focused on steel finishing does not require huge amounts of capital. “However, in the long term we plan to grow further,” he adds. In addition to investment and jobs, Marcegaglia’s presence will increase business for Riga’s port and avoid creating an abandoned industrial site. “Not doing this would have degraded the territory, with a huge amount of rusted steel,” says Ms Buce. From an investment perspective, a new global player in Latvia is already having a knock-on effect. “We are on totally different terms now talking with Italian companies,” she says. “We feel we have more interest from potential Italian investors.”

Collateral damage

The rescue of Severstal’s Latvian business has highlighted the unseen collateral damage of sanctions. Daniel Martin, partner at law firm HFW, notes that blacklisted entities and individuals’ assets abroad often include facilities which individuals rely on for employment. “Assets being essentially mothballed” also creates operational and environmental concerns, he adds.

The only other known example of an EU firm salvaging sanctioned Russian assets is French shipping group CMA CGM. In April 2022, it acquired automotive logistics compatriot Gefco which was previously 75% owned by sanctioned Russian Railways. Yet Transcrime, a research centre at the Università Cattolica in Milan, has investigated Russian entities and individuals on EU and US sanction lists and found they have links with at least 9866 companies across Europe. While the number of these links that amount to controlling interests, and therefore warrant asset freezes, is likely much smaller, it suggests Marcegaglia’s turnaround story can be an example for other businesses suffering from Russia’s invasion. 

“This is a way that we can normalise a situation so that companies and enterprises that are not operational can produce value again,” says Ms Buce.

Author: Danielle Myles (www.fdiintelligence.com)

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