ARussian government ministry decided last week to offer part of the state shareholding in leading steelmaker Magnitogorsk Metal Combine in a privatization auction next year.

The move, which appears to have been approved by the Kremlin and the Cabinet, faces resistance in the State Duma, which must vote to accept a deal that is likely to be the single-largest privatization slated for 2002. Until now, according to a statement by President Vladimir Putin, who visited the steelmaker early in the year, the sale of any state shares in Magnitogorsk would not be permitted.

Company management suspects the sale is part of a hostile takeover attempt being orchestrated by copper and coal magnate Iskander Makhmudov and the EvrazHolding group that controls Kuznetsk, Zapsib and Nizhny Tagil steel mills.

Magnitogorsk has immediately reacted with the announcement that it still has the backing of Putin, his regional representative Pyotr Latyshev and Chelyabinsk Gov. Pyotr Sumin to block any change in shareholding that would disturb the balance of power on the Magnitogorsk board.

According to the Ministry for State Property Relations, it is proposing to offer a 17 percent bloc of shares of Magnitogorsk. The government approved the ministry plan last week, and a list of the proposed privatizations for next year is likely to be released later this month.

The Russian state owns a total of 23.76 percent of shares in the steelmaker. According to a statement by the Property Ministry, the reason for the latest decision is that the government wants "to try and maximize the state's revenues in the course of privatization." The ministry added that it may change its mind on whether to increase or reduce the volume of shares it aims to sell.

Magnitogorsk's shares are not traded and, without a share price as a benchmark, the market capitalization of the company cannot be estimated reliably. Moscow investment bankers estimate that it is around $220 million at the moment.

The steelmaker produced 10.5 million tons of crude steel last year, and 9.5 million tons of rolled products. Roughly 55 percent of the total is exported. Details of the sales revenues for 2000 are not available.

The biggest of the current shareholders are: A-Capital, with 29.73 percent; the State Property Ministry, with 23.76 percent; Remek, with 10.22 percent; and Fullwell Investment Limited of Cyprus, with about 14 percent. MEKOM owns 2.26 percent of the common and 15.6 percent of the preferred shares and is a trustee of an additional 8.84 percent (common) and 31.12 percent (preferred).

Rumors in the Russian press suggest that federal government officials may be the beneficiaries of some of these shares. Whether that is true, and whether they are backing the sale to the Makhmudov group, is not yet known.

Makhmudov told The Russia Journal he is the rightful owner of the A-Capital shares, having paid a former Magnitogorsk chief executive for them. According to Makhmudov, he bought the stake in 1998 from Rashid Sharipov. Makhmudov said he expects a Russian court ruling will soon award the shares to him.

He also said he expects to win majority control of Magnitogorsk when the Russian government releases its stake. The fact that the government proposes to sell only 17 percent suggests Makhmudov already has a small bloc of shares under his control, which when added to the A-Capital bloc and the state bloc would give him 51 percent.

Magnitogorsk acknowledged that Makhmudov is moving against the company, but expresses confidence it can defeat his bid.

Alexander Proskurov told The Russia Journal that "all large blocs of shares have remained in the same hands, in spite of the efforts of companies close to Iskander Makhmudov to buy into Magnitogorsk."

Proskurov said Makhmudov's companies are limited to having to buy shares from steelworkers and other individual shareholders of Magnitogorsk. They comprise just 5 percent of the share float, he claimed. Workers at the company are exceptionally loyal and unlikely to sell, he added.

"The Property Ministry has repeatedly proposed to sell the state shares, but they have never been offered for sale," a company statement said. Company management hopes this time the president and the government will not allow the sale of state shares in this large Russian industrial company."