Forbes: Man of Steel

Heidi Brown Nathan Vardi 3/28/2005 @ 12:00 AM

Alex Shnaider became a billionaire in the dimly lit steel mills of eastern Europe. How will he handle the glare of the Western world?

Alexander Shnaider was relaxing on a recent winter morning with his wife and three young daughters on his 170-foot Benetti yacht in a Miami harbor. Within a couple of months, he daydreamed aloud in accented but fluent English, he would unveil the first Russian Formula One team, in Moscow’s Red Square. President Vladimir Putin would be there. So would Moscow’s mayor, Yuri Luzhkov. Thousands of racing fans would gather under a 30,000-square-foot heated tent with the spires of St. Basil’s Cathedral as a backdrop.

Russian by birth, Canadian by upbringing, Shnaider was in a rare expansive mood. His 12-person staff served him and his guests as they settled down to a lunch that included a roast chicken, pasta with clams and sautéed beef. “I’m building something,” says Shnaider, 36.

He has already built a $4 billion (sales) empire sprawling from Yerevan to Toronto. Much of that business-and his $1.4 billion in net worth-comes from trading Ukrainian steel and grabbing control of that country’s fourth-largest steel mill, Zaporizhstal. There is also a power grid in Armenia; two hotels, a bakery chain and a meat-packing company in Serbia; small interests in Turkey and Israel; a Russian steel mill in Volgograd; and an ornate office building and casino in Moscow’s Arbat pedestrian mall. They’re all under his holding company, Midland Resources, registered in the British tax haven of Guernsey.

So what does a newly minted billionaire do for a second act? He works on his image. In Canada Shnaider is bankrolling the nation’s tallest building, fronted by Donald Trump. And in January he spent $50 million to buy the Jordan Formula One team, with the idea of turning it into a Russian franchise next year.

After years of doing business in dangerous places and cutting fast deals with strongmen, Shnaider is stepping into the unaccustomed glare of public scrutiny. Even his Ukrainian holdings are now subject to prying eyes, as the new president, Victor Yushchenko, calls for a reexamination of how state jewels like the large steel mills were sold off. “I don’t know if I am ready for all this attention,” says Shnaider, a compact 5 foot 8. But given how far he has come, this tough, if low-key, player can probably handle anything.

Born in St. Petersburg, Shnaider and his family got to Israel via Ukraine when he was 4 years old and wound up in Toronto nine years later. His parents ran a deli in a Russian enclave of north Toronto. Shnaider stocked shelves and mopped floors. Tapping family friends, he began trading textiles and electronics with crumbling Soviet factories while living with his parents and finishing a degree in economics at York University. As the Soviet Union collapsed, he left to work for a steel-trading house in Zurich before setting up his own in Belgium, competing at times with Marc Rich.

Knowing nothing about how to move steel, Shnaider hung out at Ukrainian mills and made deals with desperate managers, providing everything from VCRs to dining room sets in exchange for hot-rolled steel. His margins were huge, swapping, say, a $40 microwave for $150 worth of coil steel, which he sold to Asian traders. One of Shnaider’s favorite customers was the Zaporizhstal plant in eastern Ukraine, built in the 1930s. There he often bumped into Eduard Shifrin, who worked for a competing Hong Kong trader and had once run a nearby specialty steel mill for a decade. Shifrin seemed to know everybody.

The two became partners and set up Midland Resources in 1994. Paying for electricity with coal brought in from Russia, they started financing steel production at the factory. The company’s directors gratefully handed off finished steel as payment.

It was a shadowy business. As in Russia, disputes among steel traders sometimes ended violently; at least seven steel executives were assassinated in Ukraine in the 1990s. But Shnaider quickly learned how to keep people happy-a hallmark of his business. “You had to be nice to a general director and do things like taking him on tours in foreign countries,” he recalls. “We would hire their relatives, give them gifts-whatever could be done.”

In Ukraine, the world’s third-largest steel exporter, easy profits lasted only as long as the government owned the mills. When privatizations began in the mid-1990s, shares in state-owned factories were sold off in murky auctions, often to the well-connected. It soon became Zaporizhstal’s turn, thanks in part to the efforts of Vasily Khmelnytsky, an ambitious businessman-turned-politician. A parliament deputy, Khmelnytsky was a leading member of the Green Party, which supported the prime minister’s coalition, and got himself named manager of the government’s stake in Zaporizhstal. When the auctions started, Khmelnytsky and his investment group started snapping up the shares.

From the sidelines Shnaider saw that his livelihood was at stake. “If we didn’t buy the steel mill our business would be finished because nobody was going to let us keep making [those] absurd margins,” he explains. But few had the stomach for getting involved. “We thought it was too hot to handle and could have been dangerous physically,” says Michael Bleyzer, who runs a Houston private equity fund with $200 million under management, specializing in Ukraine. He once owned 2% of Zaporizhstal, but he didn’t dare buy more.

Shnaider and Shifrin were willing to take the risk, and they started acquiring big stakes in the mill when the government began offering shares in cash auctions in 1999. Sources close to the company say it also started sharing trading profits with Khmelnytsky’s group; Midland has an exclusive contract to export steel from Zaporizhstal. (In an e-mailed response, Khmelnytsky denies being part of a consortium that owns the steel plant or of sharing in export trading profits.)

The way Shnaider tells it, by 2001 control of the company passed to him and Shifrin, as well as to the Khmelnytsky group. The government still held a quarter of the shares, a voting bloc large enough to thwart board decisions. At that point Shnaider showed his quiet steeliness, threatening to initiate capital calls and thereby dilute the government’s stake. The political elite relented and held a final tender auction with some sweetheart terms that effectively excluded any other potential bidders. Whoever bought the final stake had to have delivered 700,000 tons of iron ore or 400 tons of scrap metal to Zaporizhstal within the last year.

The cozy little deal prevailed-even after Tekt, a Kiev investment bank, sued to stop the auction, charging unfairness and claiming it was willing to pay $37 million for the 25% stake; Shnaider & Co. offered $13 million, says Tekt. After the case was thrown out and the auction proceeded, Tekt tried to appeal, to no avail: In a curious decision the judge ruled that the company could not do so because it had not qualified to participate in the auction. In total Shnaider’s consortium managed to buy 93% of Zaporizhstal for $70 million. The group recently turned down a $1.2 billion offer from a Western steel company.

Will Shnaider get to keep such cheaply bought assets? The betting cuts both ways. Steel is Ukraine’s largest industry, generating more than 25% of GDP. At the World Economic Forum in January, Yushchenko announced that a Ukrainian court had frozen the assets of Kryvorizhstal, the country’s largest steel producer, which was sold to oligarchs Rinat Akhmetov, Ukraine’s richest man, and Victor Pinchuk, the son-in-law of former President Kuchma (see box, p. 134) for $800 million. In February a Kiev court ruled that the privatization of Kryvorizhstal was illegal. Yushchenko hasn’t specifically mentioned Zaporizhstal, but some private investors say that it may be only a matter of time.

Shnaider insists he bought the mill fair and square. But, perhaps to take some of the heat off, Khmelnytsky recently reduced his ownership to 10% from 25%, says Renaissance Capital, a Moscow investment bank, citing local sources. In any event Shnaider is behaving like a long-term player, having reinvested $500 million to date to upgrade Zaporizhstal, picking up new blast furnaces and railcars to reduce freight rates. Last year the plant earned $129 million on $1.3 billion in sales.

The mill has also won praise for its relative transparency, still rare in Ukraine. It releases financial statements to banks and brokerages (7% of Zaporizhstal trades on the Ukrainian stock exchange) and grants investors meetings with management. Such glasnost has helped the company obtain key financing, like a $30 million credit line from Fortis, Belgium’s biggest financial services firm, and a pending $300 million bond offering underwritten by J.P. Morgan Chase and Deutsche Bank.

Shnaider’s first missteps occurred when he ventured out of Ukraine and steel. While looking into a grain investment in Armenia, he discovered that the nation’s electricity grid was up for sale. On a lark Shnaider paid $15 million and assumed $25 million of debt for a company that was losing $40 million a year-and for a business he knew nothing about. He was immediately denounced by opposition political parties, the World Bank and the European Bank for Reconstruction & Development. “I learned in Armenia what happens when I don’t do p.r.,” he admits.

Concerned that Shnaider had no experience running critical infrastructure, the European bank gave up its option to buy 20% of the grid. The World Bank threatened to cut off $20 million in loans to Armenia unless Shnaider agreed to bring in (of all things) a unit of Korea’s Daewoo to consult. Shnaider later replaced Daewoo with his own Russian engineers-and raised another ruckus by shutting off power to any deadbeats, including the public areas of Yerevan, which went dark for a day over a weekend. The grid earned $20 million last year, and Shnaider is negotiating to sell it for $100 million to one of several bidders. The World Bank is now so happy that it’s shooting a movie that depicts the Armenian grid as a model for future privatizations.

Shnaider is still venturing into unknown territories, p.r. lesson or no, throwing money around and staring down rivals. In Serbia, “Alex had no strategy,” says an investment banker in eastern Europe. “One day he’s in meat, next day he’s in metal.” Six months after Shnaider bought a steel mill in Montenegro last June for $1,000, plus $500,000 for social programs and a promise to invest $46 million more, the car of his handpicked general director was blown up. Authorities are investigating, but, Shnaider says, there are many suspects. The mill had stopped doing business with suppliers who were price-gouging, he adds.

Even the First World has presented pratfalls, as Shnaider grapples with his more public image. In Canada he can’t seem to escape the stigma of having made his fortune in eastern Europe. The Toronto Star calls its adopted son “the man in the shadows.” The tower project has been scandal-laced since its origin in 2000. The Trump International Hotel & Tower started out as the Ritz-Carlton Hotel and Condominium Residences, backed by a developer named Leib Waldman, who had fled Pennsylvania years earlier to avoid serving time there for embezzlement. When his past was uncovered by the media in 2002, the Ritz pulled out and Waldman disappeared again. (Extradited last June, he is awaiting sentencing on related charges in a New York federal prison.)

Brought into the deal by Waldman’s former Toronto partner, Shnaider bought the downtown site for $28 million in cash late last year, assuming majority control of the equity in a putative $500 million, 70-story tower that, so far, exists only on paper. With the exception of some interest from Asia, sales have been slow-few Torontonians care to spend $484,000 for a studio apartment-and Shnaider is waiting for 50% occupancy before breaking ground. Trump is licensing his name and will manage the property. No equity yet; no profit participation. The two barely know each other. “We heard fantastic things about [Shnaider],” Trump said by phone from his honeymoon. “But sometimes people say wonderful things whether they mean them or not.”

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