UPDATE 2-Russian officials at odds over Mechel bailout

Wed Jul 30, 2014 11:40am EDT

* Mechel's debt totals $8.6 bln, needs restructuring

* Options are participation of VEB or converting debt to shares

* VEB bank opposed to helping miner

* Bankruptcy possible if no agreement reached - Kremlin aide (Adds reaction from VEB, Severstal comments)

By Darya Korsunskaya and Andrey Kuzmin

MOSCOW, July 30 (Reuters) - The head of Russia's state development bank has ruled out taking part in a rescue of ailing miner Mechel, possibly making a rival government-promoted debt-for-equity deal involving creditors a more likely option to save the company.

Russia has been looking into ways to help Mechel, a coal-to-steel group with $8.6 billion in debt and 70,000 workers, for several months and has proposed two schemes, both involving a change in ownership.

The first option would involve the participation of development bank Vnesheconombank (VEB), though it has already recommended avoiding further restructuring schemes.

The head of VEB stuck to his guns on Wednesday, saying any involvement in saving Mechel, controlled by businessman Igor Zyuzin, was not in the bank's best interests. "The scheme involving VEB's participation is loss-making for us - we cannot participate in this," Chairman Vladimir Dmitriev told journalists.

The government's other proposal is to convert part of Mechel's $8.6 billion debt into shares, with the involvement of the main creditor banks.

The final decision on which course to follow lies with Mechel's owners and its creditor banks - mainly Sberbank , VTB and Gazprombank - President Vladimir Putin's top economic aide said on Wednesday, warning of the risks if a consensus isn't reached.

PROLONGED DOWNTURN

"Bankruptcy will happen if they do not reach an agreement," aide Andrei Belousov told journalists. "If they manage to reach an agreement, all these options in one form or another involve at least a temporary change of ownership," he said, promising a decision within days.

Russia has been nursing its oligarch-owned conglomerates through a prolonged downturn in the commodities cycle, seeking to avoid a wave of defaults that would lead to mass job losses at a time when the economy is at near standstill.

However, a stagnating economy and recent Western-imposed sanctions, including against the Russian banking sector, mean state finances are tight.

Earlier in July, a Russian minister suggested for the first time that Mechel, which has already undergone several debt restructurings, could be allowed to go bust.

While officials disagree on who should help Mechel, Severstal, Russia's second-biggest steel producer, said it would consider buying some of Mechel's assets if they were put up for sale after a bail-out.

"It's obvious that Mechel can't survive without restructuring," Alexey Mordashov, Severstal's controlling shareholder, told reporters when asked whether the company would consider buying a stake in Mechel.

"Mechel's assets probably have some value, which is significantly lower than its current debt," Mordashov said. "If the final owner of Mechel is determined (and they) decide to sell them, we certainly will look at the proposal."

Severstal recently agreed to sell two U.S. steel plants for $2.3 billion, of which it plans to dole out $1 billion in a special dividend. (Writing by Polina Devitt and Alessandra Prentice; Editing by Elizabeth Piper and David Holmes)

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