Severstal said Ukraine had issued "discriminatory" new rules for the June 9 auction for its biggest steel producer, Kryvorizhstal.
Under the new terms announced Wednesday by Ukraine's State Property Fund, participants must prove that they have produced 1 million tons of Ukrainian coke annually since 2001 -- a requirement that would exclude foreign companies, said Vadim Makhov, deputy CEO of Severstal Group.
"None of the foreign investors [interested in participating in the tender] meets this condition. We consider this situation discriminatory with regard to our alliance," Makhov said, referring to Arcelor, the world's largest steelmaker and Severstal's bidding partner.
Severstal's comments took Kiev by surprise. "I don't know why Severstal is making these announcements," a Ukrainian property fund spokeswoman said by telephone from Kiev. "Perhaps they didn't understand the conditions."
She said the Cherepovets-based company had misunderstood the conditions and that the coke clause was not mandatory for all participants. She said it was just one of four requirements, meeting any one of which would qualify bidders.
Ukraine has set a minimum bid of $714 million for 93.1 percent of Kryvorizhstal, one of Ukraine's few profitable metals companies. It reported pre-tax profits of $302 million last year and has a capacity of 6 million tons of rolled steel, 7 million tons of steel and 7.8 million tons of pig iron.
Severstal reported sales of $2.8 billion, less than a tenth of its French partner Arcelor, which reported sales of $31 billion.
Arcelor declined to comment on the new tender conditions.
Makhov said Severstal's lawyers had looked over the coke condition of the tender and found it to be mandatory, and that it could be challenged in court as a breach of a bilateral agreement between the United States and Ukraine on protecting investments.
Nonetheless, he said, Severstal and Arcelor will submit their joint bid.
If foreigners are indeed excluded from the contest, the clear front-runner would become a homegrown consortium comprised of Ukraine's Interpipe and System Capital Management.
Other companies that have declared their intention to bid include TATA Steel of India, which is reportedly prepared to invest $1 billion in Kryvorizhstal if it wins.
Officials of U.S. banking giant Citibank, which is representing Severstal and Arcelor in the privatization, met with Ukrainian property fund chief Mikhail Chechetov in Kiev on Wednesday and "did not receive a clear answer" to their questions, Severstal spokeswoman Lada Askias said.
Severstal is controlled by Alexei Mordashov, Russia's ninth-richest man with a fortune of $4.5 billion, according to Forbes magazine.
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