Ukrzaliznytsia’s rail procurement and Russian oligarch Usmanov – NV investigation

The Azovstal Iron and Steel Works in Mariupol was the only producer of steel rails in Ukraine. However, the enterprise was destroyed after Russia captured the city. Where does Ukraine’s national rail operator Ukrzaliznytsia get its rails now? Spoiler alert – NV Business discovered some very strange bedfellows in the procurement process.

Ukrzaliznytsia refurbishes hundreds of kilometers of railway tracks every year and buys tens of thousands of tons of rails per year. Previously, the main supplier was Azovstal owned by Ukrainian oligarch Rinat Akhmetov. But the company was destroyed by the Russian siege of now-occupied Mariupol.

NV Business found out who supplies these products to Ukraine, what role Akhmetov has retained, why there are almost no contracts with European manufacturers, and how Russian oligarch Alisher Usmanov is involved in Ukrzaliznytsia’s procurement.

Long rails of the first year of the war

Owned by Akhmetov, Metinvest Group’s press service says that Azovstal produced rails exclusively to order. That’s why no finished products were available in the company’s warehouses when Russia invaded in February 2022. Therefore, Ukrzaliznytsia was forced to look for other suppliers.

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The first major contract with a foreign manufacturer was reported in December 2022. Ukraine and France officially signed the corresponding agreement during Ukrainian PM Denys Shmyhal’s visit to Paris. The agreement provided for the supply of about 20,000 tons of rails from Saarstahl Rail SAS worth EUR 37.6 million ($40.2 million). The entire cost of the supply contract had to be financed by a soft loan from the ministries of Economy and Finance, for a period of 35 years.

It caused some controversy since one ton of rails had to cost Ukrzaliznytsia EUR 1,980 ($2,161), which was almost twice as much as previous contracts with Metinvest. But Ukrzaliznytsia, through complex calculations, proved that in 35 years, “taking into account inflation, the maximum present value will amount to EUR 930 ($1,015).”

However, as NV Business found out, Ukrzaliznytsia has not yet received a single ton of rails under this contract. The company said that all the formalities required for the ratification of the intergovernmental contract have not yet been completed. And last year, the Ukrainian and French governments signed only the Framework Agreement, which entered into force on Aug. 7, 2023.

Ukrzaliznytsia emphasizes that an Application Agreement (Loan Agreement) must be concluded under the Framework Agreement, which determines the terms of loan use and repayment.

“The draft of the Application Agreement is currently being worked out by the Ukrainian and French governments and is expected to be signed in the near future,” says Ukrzaliznytsia.

Transparent Chinese tenders

Theoretically, the main supplier could be companies from the European Union, which is Ukraine’s strategic partner. There are six companies operating on the territory of the European Union, which have eight plants for the production of rails of the size required by Ukrzaliznytsia. But Europeans are almost not interested in tenders from Ukrzaliznytsia.

“In fact, there is no animus here. Ukrzaliznytsia has requirements for delivery terms by the end of the current year. But worldwide, the production and shipment of rails is a long-term project with a planning period of up to three years. That’s why it’s very difficult to get into the production programs of European manufacturers with such requirements,” explains Oleksandr Siryk, CEO and co-owner of Metals Consulting International (Germany).

The situation is similar with Japanese manufacturers, whose rails are considered the best in the world. In addition, there are production limitations, such as hardening of the upper part of the rail is a mandatory requirement, so not all metallurgical companies can produce the required products.

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Ukrzaliznytsia held two large tenders this year. The company confirms that several European suppliers were invited to participate in them, “which is confirmed by video conference protocols, invitation letters, etc.,” while tender documents do not contain discriminatory terms.

They attracted the interest of many traders. Among the European manufacturers, ArcelorMittal came forward and offered rails from its Polish plant. Metinvest took part in the above tenders as two separate legal entities, namely Metinvest-SMC and Metinvest International SA (Switzerland). Ukrainian, Turkish, Chinese, and Azerbaijani traders also submitted their offers.

Almost all of them (including Metinvest enterprises) offered the products of two Chinese manufacturers, i.e., Pangang Group Panzhihua Steel & Vanadium and Inner Mongolia Baotou Steel Union Co.

Dorinvestcapital LLC won four lots of the first auction, which is to supply Ukrzaliznytsia with 22,000 tons of rails worth UAH 1.27 billion ($35.2 million). However, the conclusion of contracts is challenged in court over Ukrzaliznytsia’s claims to the provided documents. In particular, the Pangang Group Panzhihua Steel & Vanadium plant provided a certificate that Dorinvestcapital had no authority to represent them in this purchase.

That’s why Ukrzaliznytsia announced the second tender with a total expected cost of UAH 1.39 billion ($38.5 million). This time, Rinat Akhmetov’s holding represented Pangang’s interests.

“Pangang Group Panzhihua Steel & Vanadium granted METINVEST INTERNATIONAL SA an exclusive right to participate with their products in the tender,” Metinvest emphasizes, adding they have nothing to do with Dorinvestcapital, which won the first tender with the same products, and which is registered in a building located next to the Metinvest Group’s head office.

Pricing and quality

Do Chinese rails meet Ukrainian quality requirements?

“The Pangang and Inner Mongolia plants produce rails in accordance with the EN 13674 standard. This is the standard required by Ukrzaliznytsia,” the rail operator emphasizes.

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Metinvest’s press service says that before choosing a partner, its representatives studied the market and offers of key manufacturers for compliance with the requirements for the upper track structure, namely heat treatment, hardness, chemical composition, and ferrite-pearlite banding.

“Given all the specifications, European (but they had many orders, including a pre-order for 2024) or Chinese manufacturers were the available rail suppliers,” says Metinvest. As a result, Pangang Group Panzhihua Steel & Vanadium was the selected supplier.

Siryk agrees that this Chinese manufacturer has the technical capabilities to produce rails of the appropriate quality.

It should be noted that in the first tender, Metinvest-SMC offered the products of another plant, namely Inner Mongolia BaoTou Steel Union Co Ltd.

Three different companies won four lots in the second tender, but no contracts have been concluded with them yet. China First Heavy Industries International Development (China) won two lots, having offered rails at UAH 43,200-45,345 ($1,185-$1,244) per ton. Baku Business Group (Azerbaijan) and Metinvest International SA have one win each with UAH 48,000 ($1,319) per ton and UAH 46,150 ($1,266) per ton, respectively.

Dorinvestcapital offered rails at UAH 59,940 ($1,644) per ton (including VAT) in the first tender, whose results are challenged in court. According to the Nashi Hroshi (Our Money) anti-corruption investigative project, such trials can take up to a year. Ukrzaliznytsia admits they have several tenders for the purchase of rails for the needs of railway transport at various stages.

“Ukrzaliznytsia cannot influence it,” the company says.

Moreover, a NV Business source, who is familiar with Ukrzaliznytsia’s plans, says the winners of the second tender won’t have time to ship the products by the end of the year. Therefore, these contracts, most likely, won’t be concluded either. Although the prices that were offered are much lower than the current contracts that were signed at the beginning of the year.

European manufacturer and Russian oligarch

It’s under these contracts, which were signed without tenders, that Ukrzaliznytsia receives rails this year. Surprisingly, the list includes a European manufacturer.

Ukrzaliznytsia uses its own funds to buy rails under direct contracts from two EU companies, namely AS SKINEST RAIL (Estonia) and Voestalpine (Austria).

“These are the only manufacturers that at the end of 2022 confirmed the possibility of shipping rails in 2023,” Ukrzaliznytsia emphasizes.

Estonians will supply 10,000 tons of rails for $15.9 million, while Austrians will provide almost 19,000 tons for EUR 37.6 million ($41 million).

Ukrzaliznytsia says that Voestalpine is the manufacturer itself, while AS SKINEST RAIL offered the rails of the Aktobe Rail and Beam Plant (Kazakhstan). And here is an interesting point.

Kazakh media reported that this plant is owned by Transport Technologies LLP (Kazakhstan). Kabul Chodiev is said to be one of its founders. He’s the older brother of Patokh Chodiev, who is an Uzbek oligarch with assets over $2 billion. But the most interesting thing is that during his student years, he lived in a dormitory of the Moscow State Institute of International Relations in the same room with Alisher Usmanov. The latter is a sanctioned Russian billionaire and the owner of the Metalloinvest iron and steel company.

Usmanov’s Russian iron and steel companies, including Ural Steel and Oskol Electrometallurgical Plant (OEMK), had been suppliers of semi-finished products for the Aktobe Rail and Beam Plant for a long time. In early 2023, OEMK sued the Kazakh enterprise for RUB 1 billion ($11.2 million), which it didn’t pay for semi-finished products for rails in May 2022. In March, Usmanov’s Russian enterprise withdrew the lawsuit.

It should be mentioned that Ukraine imposed sanctions against OEMK on Nov. 23, 2023, so the Kazakh rail manufacturer will hardly be able to supply its products to Ukraine without changing the structure of suppliers.

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Ukrzaliznytsia’s need for rails for 2024 is estimated at 70,000-75,000 tons. The company says that part of this volume will be covered by current contracts, as well as additional auctions will be held in the Prozorro transparent procurement system.

“In addition, the qualification of participants in the tender for the purchase of rails, which is being held at the European Bank for Reconstruction and Development’s [EBRD] platform, is currently underway,” Ukrzaliznytsia added, without disclosing the details of the purchase.

The EBRD has so far also refused to comment on the possible amount of support for Ukrzaliznytsia, clarifying that it’s taking place within the UZ Emergency Capex project for a total of EUR 200 million ($218.3 million).

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Read the original article on The New Voice of Ukraine