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By John Helmer, Moscow

Commanders of empires like the French, British, American and Russian suffer from an identical blind spot.

They all believe their power (arms, cash) is or should be great enough to destroy their adversaries decisively, totally, so that they can’t get up to fight again. The Americans lost the Vietnam war, as they are losing the Iraq, Afghan and in time, the Libyan and Syrian wars, because their enemies can and do get up to fight again. Not even B-52 carpet bombers, Tomahawk cruise missiles, or assassin drones can kill enough of them, nor the firepower prevent the empire’s casualties reaching breakpoint.

That’s the point when this happens:
And this (Saigon):
And this (Grozny):

For generations of Russians under effective authoritarian rule, their commanders have enjoyed an enormous advantage over the others – they could call up an unlimited number of new fighters to fill the places of those already killed, and keep fighting. In short, the Russians can win wars of attrition because – at least until after Marshal Georgy Zhukov’s day – there were always more men to be thrown into the line, and pay what British empire commanders used to call the “butcher’s bill”.

Russia under President Vladimir Putin can’t fight wars of attrition any longer; that’s one of the most important, most underrated achievements of Russian democracy of the past two decades. In that time also, the genuinely clever Russian commanders have learned a new strategy for dealing with enemies that doesn’t depend on overwhelming firepower, expendable manpower, or terror in the mutually assured destruction (MAD) nuclear bomb form.

This strategy has been tried before. Indeed, as a recent history book reveals, it has been by far the most successful, for a longer period than any of the other empire strategies. This is the 1,100-year strategy of the Byzantines. The history by Edward Luttwak – a man of more covert warfare experience than he coyly divulges (nor the identities of those he fought for) – sums up the Byzantine code this way: “the purpose of war for the Byzantines could not be to seek battle for decisive victory, for there was no such thing, but only to contain immediate threats by weakening the enemy with expedients, ruses of war, and ambushes…”

This isn’t the time to delve deeply into how Putin learned the lessons of Byzantine strategy, and into the applications he is now making of it. It’s Friday — time to be let out to play. So for now, here is a brief story of an exemplary skirmish in the steel trade between the US and Russia.

Skirmishing is what the Byzantine military manuals recommended as the most effective way of disabling, deterring and defeating enemies with greater numbers, better weapons, more gold. First rule – avoid declaring war, but be ready to fight at every instant. Second rule — never accept battle head-on. Third rule – spy and bribe the enemy to anticipate his moves, distract him, lure him into traps. Fourth rule – keep moving. Fifth rule – attack where and when least expected; withdraw on meeting resistance; probe for weak points.

What is happening in the steel trade is that over the past three months American steelmakers have woken up to the fact that there is a surge of Russian steel crossing their frontier at a price they can’t compete against. They would like to counter-attack using the heavy weaponry used in the 1990s, when Russia wasn’t a member of the World Trade Organization (WTO), when Boris Yeltsin was a pushover, and when Russian steelmakers didn’t own large chunks of the US steel industry themselves. Then the US subjugated the Russian steelmakers under penalty price and trade quota controls on the ground, easy to push through the US Congress and the Department of Commerce, that Russia’s natural cost advantages were rigged by a red menace in the Kremlin and corrupt entrepreneurs firing their smelters with below-cost gas, electricity, iron-ore and coal, and despatching their products on state-subsidized railway wagons.

This is now a line of attack that is easy for Russians to repel. And so today the steel trade dynamic between Moscow and Washington is one in which the US is being beaten at a game it thought it had dominated, on its own territory.

The table shows the movement of Russian steel imports into the US market, month by month last year, and programmed for the three months of this year:

Source: http://ia.ita.doc.gov/steel/license/smp/Census/GDESC52/MMT_ALL_Ru_15M.htm.

According to import license data collected by the Import Administration of the US Department of Commerce, Russian steel products for import in January hit 235,213 metric tonnes, the largest monthly aggregate since May 2011. The totals for February and March were 181,507t, and 123,993t, respectively. By contrast, the global import totals for the US in January and February were modestly above the average for 2011, and the March aggregate well below it.

This increase has in turn triggered a change in the reference prices of the product imports for the second quarter, starting on April 1. These are the minimum prices for the Russian products to be eligible to receive import licenses according to the suspension agreement between the US and Russia. That agreement ended an investigation into alleged price-cutting below the cost of production (aka dumping), and thereby avoided the penalty price, anti-dumping duties that might have excluded Russian exports entirely. In return, the Russians agreed not to sell their steel below the reference prices. Here’s that 1999 deal.

In theory, the higher the reference price goes, the more difficult it should be for Russian exports, which cost less to produce, to undercut the prices of steel manufactured by the domestic mills. And if the new reference prices are compared with those in effect a year ago, they have been hiked significantly. That means the barrier is going up. But not high enough to defend, the US steelmakers argue.

The Import Administration has now released new reference prices for hot-rolled steel imports from Russia for the second quarter. Group-1 products, covering commercial and structural quality steel, are to be cut-priced to $408.43per tonne, down 6.6% from the first quarter reference price. The Group-2 price (for high strength, low alloy steels) has also been cut by 6.6% and set at $448.42/t, and the Group-3 price (coils and sheets for pipes and casings), down by the same margin to $521.37/t.

A year ago, the second-quarter reference prices for the three Russian groups of imports were $339.80/t, $373.07/t, and $433.76/t, respectively, so Washington has raised them since by 20.2%. However, the domestic American steel lobby believes the new reference price levels should have been fixed higher, not cut back. The lobby, which includes Nucor, ArcelorMittal, and US Steel, is claiming that the Russian imports are surging because their prices are lower than the cost of their raw materials. That’s an allegation of dumping.So the lobby is demanding anti-dumping action to penalize the Russian steel imports by the amount of the dumping margin, and lift their prices on landing so high, they won’t be able to sell. This is the Commerce Department’s equivalent of pouring hot oil on the Russian attackers to drive them off.

In a presentation of this position to CRU Steel News yesterday, Alan Price, a trade lawyer representing Nucor, says the reference price mechanism “fails to meet a statutory requirement of preventing price undercutting.” In a submission to the Commerce Department, Nucor and its allies claim “the pricing and cost structure of the hot-rolled steel market have undergone such a fundamental shift since that time [that] the quarterly pricing mechanism in its current form cannot prevent price underselling. The suspension agreement in its current form allows the Russian producers of hot-rolled sheet to dump with impunity in the United States.”

“The failure of reference prices to track changes in domestic producer prices adequately reflects a basic shortcoming in the reference price mechanism itself,” the steelmakers told the government. “Because raw material costs for hot-rolled steel production have not reverted to pre-2004 levels, and nobody believes they will do so for extended periods in the foreseeable future, the reference prices will remain substantially below domestic market prices and disconnected from reality.”

Price says his client and its allies have asked the Commerce Department either to revise the suspension agreement to eliminate the alleged price undercutting, or terminate it and restart an anti-dumping investigation.

However, now that Russia is no longer the former state economy it was when the last round of anti-dumping investigations was undertaken, it is much more difficult for the US government to prove, according to the WTO rules now covering Russian exports, that the domestic Russian costs represent hidden state subsidies to the cost of steelmaking, or that the difference between domestic Russian and Russian export prices amounts to dumping, as US trade law defines it.

According to the US attorney, the lowering of the second-quarter reference prices just announced will make it easier for Russian producers to sell their steel in the US, including semi-finished products. Price acknowledges that the Commerce Department is studying the claims but has yet to reach a decision on what to do.

Take a second, closer look at this line in the Import Administration’s latest table:

What this reveals is that most (78%to 82%) of the Russian surge over the US trade wall is semi-finished steel which is headed into American mills which are owned by Russian steelmaking groups. The major Russian groups now feeding US-owned mills are Novolipetsk, owned by Vladimir Lisin; Severstal, owned by Alexei Mordashov; and Evraz, owned by Roman Abramovich. The Russian pipemakers, TMK (Dmitry Pumpyansky) and United Metallurgical Company (Anatoly Sedykh), are also shipping semi-finished steel for manufacturing into pipes at their US properties.

Sedykh is the most recent arrival of a Russian steel oligarch on American territory. At the start of this month, he announced that he has bought TTS, a Texas plant for finishing pipes, and will start supplying semi-finished steel from his Vyksa plant at home for the expansion of production of oil and gas country tubular goods (OCTG) in the North American market. TTS is reported to have a current production capacity of 150,000 tonnes per annum. The announcement from Sedykh sugggests that it plans to double this.

US state governors in Ohio and elsewhere, desperate for new investment in their declining industries, have also courted Victor Rashnikov and the Magnitogorsk Metallurgical Combine (MMK) to build new plants and modernize old ones, with the understanding that unless the Russians can deliver home-priced blooms, billets and slabs, there isn’t enough profit margin for such US projects to get off the drawing boards.

Look at this conflict from an American point of view, and it’s a fight between one gang of US proprietors, who happen to be Russian, and another gang, one of whom is Indian, and another, Nucor, draws its raw materials from Trinidad. Divided among themselves as they are, it isn’t likely that the embattled government in Washington is going to do more. It may even be that the Russians have mastered the lobbying process, and pulled off the 6.6% reduction in the reference pricing level so that they could compete against other, higher-cost exporters from rival countries.

When Nucor issued its 2011 results report to the US market, it didn’t mention Russia at all. Here’s what Nucor reported on February 28, less than a month ago, in its Form 10-K filing to the US Securities and Exchange Commission:

“Recently we have experienced increased competition in the U.S. sheet steel market stemming from significant capacity increases. Since the beginning of 2010, domestic sheet capacity has increased by approximately 5,000,000 tons as a result of the opening of a new sheet facility in Alabama, capacity additions at existing sheet mills, and the reopening of a previously shuttered sheet mill in Maryland.

“Competition from foreign steel and steel product producers presents unique challenges for us. Imported steel and steel products often benefit from government subsidies, either directly or indirectly through government-owned enterprises or government-owned or controlled financial institutions. Foreign imports accounted for approximately 22% of the U.S. steel market in 2011. In particular, competition from steel imported from China, which accounts for more than 40% of the steel produced annually in the world, is a major challenge. Chinese producers, many of which are government-owned in whole or in part, continue to benefit from their government’s manipulation of foreign currency exchange rates and from the receipt of government subsidies, which allows them to sell their products below cost. These distorting trade practices are not only widely recognized as being unfair but also have been challenged.”

This is a game in which the defenders are making all the noise, while the attackers keep shtum. Asked to comment on the US steel lobbying and the Commerce Department action, the counterpart Russian Ministry of Trade says it will not respond. Alexei Bezymyannykh, the chairman of the Russian steel lobby, the Metallurgists Union, said his organization “does not deal with these issues.” Evgeniy Lukashevich, spokesman for Novolipetsk Metallurgical Combine (NLMK), told CRU Steel News it is “studying this question”. Mikhail Ternovykh, spokesman for Severstal, said he is not aware of the issue, and believes that because Severstal operates substantial steel production lines in the US, he believes the US decision “will have no impact on the company’s activities.” Evraz declined to respond to emailed questions.

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