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Steel

Early in 1994, Sovereign accumulated a strategic shareholding of 15% in Novolipetsk Metallurgical Kombinat ('NLMK') - a holding which increased to 25% with subsequent purchases. Corruption undermines Competitiveness Whilst NLMK was one of Russia's leading exporters and its specialisation in high-end products was recognised, the achievements of the company were undermined by corruption in the mid 1990s. NLMK's USD 2 billion revenues came overwhelmingly from exports, leaving it vulnerable to transfer-pricing or 'tolling'. It became clear that this was a real risk at NLMK, when profits collapsed between 1995 and 1996 from USD 480 million to just USD 40 million. No plausible explanation was given for this 90% evaporation of profits - especially against the backdrop of strengthening steel prices. There was an urgent need for international standards of best practice to be adopted if the capital invested in NLMK's infrastructure was to create prosperity for its shareholders, employees and the community. Calling for Accountability Sovereign led a group of shareholders in a protracted legal battle against the management of NLMK for the enforcement of shareholder property rights, transparency of its operations and accountability for its disappearing profits. Sovereign's actions broadened domestic and international awareness of the need for sweeping corporate governance reform in Russia. Fulfilling its Potential Once NLMK was completely owned by its management, profits miraculously appeared and the company was listed on the London Stock Exchange in December 2005 for USD 8.69 billion. In 2005, exports accounted for 65% of sales revenue as NLMK's products were exported to 65 countries in Europe, North America, Asia, Africa and the Middle East, as well as to a range of industrial sectors in Russia.

Background: NLMK - A Jewel in the Crown NLMK is widely regarded as Russia's leading modern steel mill. In 1994, NLMK had a 41,000 strong workforce, revenues of USD 2 billion and steel production of 7 million tons per annum. Situated 400 km south of Moscow, the plant is next to the enormous Kursk magnetic anomaly, which supplies the mill with generous quantities of low cost iron ore. NLMK has a diverse range of products including hot and cold-rolled steel and a variety of value added products, such as cold-rolled steel sheet, electrical steel and other speciality flat products.