Source: Reuters

Russia's steel elite, with cash to burn from record profits, has accumulated almost 10 percent of U.S. steelmaking capacity as it bets big that demand in the world's largest economy will ride out a global credit crunch.

Billionaires who built their fortune on Soviet-era steel giants have spent nearly $9 billion in the last few years acquiring U.S. mills to expand their global presence. At today's knockdown prices, investors believe it's a gamble worth taking.

"They're buying them because they're cheap. The underlying motive behind buying these mills is making money, not enhancing the political glory of Russia," said Tim McCutcheon, a partner and fund manager at DBM Capital Partners in Moscow.

Betting on U.S. steel is risky, say analysts, as the once-mighty automotive and construction sectors are in decline and demand growth has been eclipsed by emerging economies such as China and India.

But this has not deterred Alexei Mordashov, owner of Severstal (CHMF.MM: Quote, Profile, Research, Stock Buzz), whose acquisitions have pushed his company into the top five steel makers in the United States -- a scenario unthinkable when the countries were Cold War enemies.

"We remain committed to growth in North America and believe in the long-term promise of the U.S. market," Mordashov, ranked the world's 18th-richest man by Forbes magazine, said after announcing Severstal's latest acquisition last month.

Mordashov says the weak dollar is making Russian companies, which derive most of their revenues supplying a domestic market expanding at more than 7 percent annually, more competitive in the United States. The dollar has lost nearly 15 percent of its value against the Russian rouble in the last two years <RUB=>.

CHANGING WORLD

Russia's foray into North American steel marks the growing power of its leading steel firms, which are unburdened by high raw material costs after absorbing their own mines during a carve-up of the country's mineral assets in the late 1990s.

Severstal was the first Russian company to buy a U.S. steel asset when it bought Dearborn, Michigan-based Rouge Steel, once the in-house steel unit for Ford Motor Co (F.N: Quote, Profile, Research, Stock Buzz), in late 2003.

Evraz Group (HK1q.L: Quote, Profile, Research, Stock Buzz), part-owned by billionaire Roman Abramovich, followed with the acquisition of Oregon Steel Mills and Claymont Steel Holdings. Last month it also agreed to buy IPSCO's North American assets from Sweden's SSAB (SSABa.ST: Quote, Profile, Research, Stock Buzz).

"How the world has changed!" said Jack Dzierwa, global strategist at Texas-based U.S. Global Investors Inc.

"In the 1990s, Russia was a laughing stock, but its muscles have grown and the country has gone on an acquisition spree," said Dzierwa, who co-manages the $19.2 million Global MegaTrends fund and holds stock in Evraz and Mechel (MTL.N: Quote, Profile, Research, Stock Buzz).

Cash-rich Russian oil and gas firms were the first to announce large trans-Atlantic acquisition plans, including projects by Gazprom (GAZP.MM: Quote, Profile, Research, Stock Buzz) to build regasification terminals and refinery acquisition plans by oil major LUKOIL (LKOH.MM: Quote, Profile, Research, Stock Buzz).

Their penetration, however, has so far been limited to LUKOIL's network of 2,000 filling stations.

Steel barons have avoided the political scrutiny that has hampered other Russian attempts to invest overseas by spending at a time when parts of the U.S. steel industry are on their knees and limiting their ambitions to small or mid-sized mills.

This has, however, raised questions over asset quality.

Charles Bradford, New York-based metals analyst for Soleil Securities Group Inc, said Russians had bought assets nobody else wanted and face a huge challenge in turning them round.

"Some of these plants were so bad. I don't know if they could have been sold as scrap," he said.

FUTURE BUYS

Severstal's record $1.9 billion in net profits, for example, mask a sharp decline in earnings at its North American unit due to weaker market conditions and a blast furnace reline.

Its latest acquisition suggests more of the same. The Sparrows Point mill in Baltimore, Maryland is a former unit of Bethlehem Steel and was the world's largest steel plant in 1950. At least $350 million will be needed to turn it around.

But outdated mills shunned by U.S. firms present less fear to those well acquainted with the overmanned behemoths that once served the Soviet military-industrial complex.

"Someone who comes from Cherepovets or Lipetsk is not going to have a problem with an integrated mill," McCutcheon said, referring to the home cities of Severstal and NLMK (NLMKq.L: Quote, Profile, Research, Stock Buzz).

Evraz Chairman and Chief Executive Alexander Frolov said his company's acquisitions would expand its presence in rails -- its Oregon buy made it the world's biggest rail maker -- and pipes.

"This is an important sector for U.S. industry as it's linked to energy and infrastructure, and we believe there's long-term stable demand," Frolov said.

And while the jewels in the U.S. steel industry, U.S. Steel Corp (X.N: Quote, Profile, Research, Stock Buzz) and Nucor (NUE.N: Quote, Profile, Research, Stock Buzz), would remain off-limits to Russian investors, analysts say plenty more assets are up for grabs.

"To buy, you have got to go small, and there are a number of smaller companies without any protection," Bradford said.

"I've got 10 on my list."