Change of political situation

Severstal performs its main activities in the CIS, North America, Europe, Africa and Asia regions and is registered as a taxpayer in various countries. Different countries have different political climates, limitations on business activity, assets expropriation and confiscation rules, monetary systems and their potential negative changes, and potential for other crisis factors due to government policy. There is a possibility that new trade barriers will be established that may have a negative impact on our export or import operations. Political risks also include potential conflicts, terrorist acts, social unrest, and the introduction of a state of emergency, all of which can have an influence on our activities. However, the probability of these events is considered to be quite low in the short-to-mid term.

Mitigation

A significant part of our production facilities and business operations is based in regions and countries with stable political systems and social situations. Additionally, we make operating and investment decisions based on systematic risk assessment and monitoring. In countries with an unstable political situation, we undertake additional risk mitigation measures such as specialised types of insurance against political risks.

Change of economic situation

In 2009, the global economy experienced the most significant downturn since the Great Depression. As IMF pointed out, world GDP decreased by 0.8% compared to 2008.

The second half of 2009 and the beginning of 2010 gave rise to a number of positive developments, both in the global and the Russian economy. The beginning of restocking and the unexpected strength in US consumption contributed to positive developments in countries with developed economies. Key emerging and developing economies demonstrated strong demand, supported by government stimulus measures. Nevertheless, global rebounding is subject to a number of risks: government deficits, premature cancellation of stimulus programmes, unexpected inflation, long-lasting unemployment, effects of stock and commodities market bubbles.

The dependence on the policy-induced demand remains a serious problem for the sustainability of the recovery. New financial shocks are probable but their impact will be restricted by the ability of government and monetary authorities to provide enough liquidity to overcome problems. According to the estimates of Rosstat, Russian GDP fell by 7.9% year-on-year in 2009, investments decreased by 17% year-on-year, industrial production decreased by 10.8% year-on-year. Average annual unemployment was 8.4%.

At the same time, the Russian economy has avoided many serious problems such as an external corporate credit crunch, disruption of the banking system, or an exchange rate crisis. The Russian federal budget deficit in 2009 is estimated at 5.9% of GDP. The federal budget is expected to be stable as the Russian government has enough money in the reserve fund to mitigate potential negative changes in its income. Nevertheless, changes in the tax policy, such as the reforming of the social tax in 2011, may lead to an additional tax burden for the Company. Consumer inflation in Russia was subdued in the second half of 2009.

Annual inflation decreased to 8.8% in 2009 from 13.3% in 2008. In 2010 the growth of world oil prices might lead to a higher than expected risk of inflation. Higher inflation in Russia may lead to growth in production costs which in turn decreases global competitiveness. Being an important exporter of oil, Russia is seriously dependent on the level of oil world prices. Their decline may cause the price of Severstal shares to fall and lead to a decrease in the purchasing ability of Severstal’s customers which, in turn, will have substantial negative consequences for the Company.

Mitigation

The geographical diversification of our sales helps to minimise the negative impact of economic risks. The domestic market is the priority, but our ability to change the geography of our deliveries quickly allows us to react flexibly to the challenges of the external environment and insure ourselves against a sudden regional crisis. The majority of experts believe a second wave of the crisis is unlikely to happen in the near future. Nevertheless, we are monitoring a set of the most important advance indicators of the possibility of an economic slowdown. Also we are developing economic scenarios to prepare the management for the majority of negative changes in the external environment.