Annual report and accounts 2012

Legislative and regulatory risks

Taxes

Russian tax legislation is amended or corrected annually. Changes to legislation can both benefit or hinder business. For instance federal law #227 of 18 July 2011 expanded the list of interdependent parties and their characteristics, and controlled deals (deals between interdependent parties and parties equated to them).

Current Russian tax legislation provides effective tools for taxpayer protection, and Severstal makes extensive use of these tools.

Internationally, risks could arise for Severstal on the domestic market and on external markets, as the tax legislation of any country can be changed and amended over time. However, risks connected with foreign tax legislation changes are partially mitigated by Severstal being registered in Russia for tax purposes. Near-term exposure within the US is limited as a result of the existence of considerable tax loss carryforwards.

Property law

Russian property law, in particular in relation to private land ownership and use, is less developed than that in more developed market economies (e.g. North America and Europe). In Russia, land use and title systems are rather complex, and as a result, the status of titles to land targeted for use of ownership by Severstal may be unclear or in doubt. Moreover, we run the risk that our right to the title or use of our properties may be challenged or invalidated due to technical errors or defects in title documents. This lack of developed legislation creates operational uncertainties in emerging markets, which could hinder Severstal’s long-term planning abilities and prevent us from successfully implementing our business strategy. Should relevant approvals, consents, registration certificates or other documents be missing or be found to be erroneous, we could lose the right to use property. This could have a material adverse effect on our business, financial position and operational results.

Administrative sanctions

We have expanded our operations through the acquisition of companies that are incorporated and operate in Russia, or by acquiring assets that are located in Russia, such as the mining companies that currently comprise Severstal Resources. Some of these acquisitions are, or were, subject to the prior approval or subsequent notification requirements of the Federal Antimonopoly Service of the Russian Federation (FAS), or its predecessor agencies. Some of these requirements are worded vaguely, and as such there can be no assurance that FAS will not challenge our past compliance, which could result in administrative sanctions, compulsory divestitures or limitations on our operations. Any such sanctions, divestitures or limitations would have a material adverse effect on our business, financial position and operational results.

Licence agreements

Our business depends on the continuing validity of our licences, the receipt of new licences and our compliance with the terms of our licences, including subsoil licences for our mining operations in Russia. Regulatory authorities exercise considerable discretion in the timing of licence issuing and renewal, and in monitoring licensees’ compliance with licence terms. The requirements imposed by these authorities may be costly and time-consuming, and may result in delays in starting or continuing exploration or production operations. Moreover, legislation on subsoil rights remains internally inconsistent and vague, and the acts and instructions of licensing authorities, and the procedures by which licences are issued, are often arguably inconsistent with legislation.

In addition, our business outside of Russia also depends on the continuing validity of licences, the receipt of new licences and compliance with the terms of such licences, which may involve uncertainties and additional costs for us. Any or all of these factors may affect our ability to obtain, maintain or renew the necessary licences. If we are unable to obtain, maintain or renew the necessary licences, or can obtain or renew them only with newly introduced material restrictions, we may be unable to benefit fully from our reserves, and this could have a material adverse effect on our business, financial position and operational results.

Mitigating factors:

  • We base our activities, Russian and international, on strict adherence to all applicable laws and regulations (e.g. tax, customs and currency control). We ensure monitoring and timely, appropriate reaction to changes, and strive to maintain constructive dialogue with regulators on issues of interpreting and implementing laws and regulations.
  • In particular, we work with Russian federal and local authorities, and participate in the Russian Union of Industrialists and Entrepreneurs and various ad hoc governmental committees. Our international activities are analysed both by in-house lawyers and respectable local or international law firms. We always hold negotiations with government bodies, such as anti-trust, financial and securities market authorities, in good faith and in strict compliance with their regulations, to maintain long-term constructive dialogue.
  • Severstal business includes different types of activities, some of them subject to licensing. With regard to organisation and technology, Severstal business processes conform to the highest standards, and as such there is low risk of the stiffening of license requirements and conditions.
  • It should be noted, that the Russian government has begun cutting the number of activities subject to licensing, and simplifying licensing procedures.
  • From the above, we could conclude that changes to licensing requirements or the necessity for additional licensing of several activities would lead to additional costs on obtaining new licenses or renewing existing ones. However, related risks are minimal.
  • The risk of necessity to license activities on external markets is also minimal.