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Non-ferrous Metallurgy
Nonferrous metallurgy is one of the most important industries for the Russian economy. It is probably the only area in which the country determines the world market situation. Russia controls up to 20% of world aluminum production, 40% of nickel production, and a significant portion of platinum and copper production. Nonferrous metallurgy accounts for 8.9% of overall industrial production in Russia, with a total annual turnover of more than $11 billion.
The nonferrous metallurgy industry is strongly export-oriented: up to 70% of the country's nonferrous metal production is exported. Aluminum makes up 48% of export volumes; nickel, 20%; and copper, 12% in terms of value. Most of the rest consists of precious metals produced by Norilsk Nickel (Nornikel).
The industry employs about 20% of the country's employable population and is growing dynamically: output volumes in nonferrous metallurgy increased by 7.1% in 2001. However, at present the industry's effectiveness is a result of low resource costs, including energy costs, and Russia's enormous mineral reserves rather than high technology. Therefore, nonferrous metallurgy is one of the most successful and at the same time one of the most problematic sectors of the economy, since it is the first to react to any changes in the country's macroeconomic situation.
HISTORY: 1991-2000
The history of the Russian aluminum industry is directly tied to Russia's political history. Any privatizations or major alterations in the industry cause large-scale political crises and conflicts in the government. Only events in the banking and financial sectors have a greater influence on the state administration. Politics, as is well known, is a dirty business. The history of nonferrous metallurgy in Russia is tightly bound to politics and is not always "clean" either, but it is our history.
1991
On September 16, trading opened on the Moscow Nonferrous Metal Exchange, which was supposed to handle 45% of world nonferrous metal turnover and 20% of world aluminum turnover within a year. The "world giant" lasted for three years.
The South Ural Nickel Association (Yuzhuralnikel), which operated exclusively on Cuban nickel concentrate, shut down due to a disruption in deliveries from Cuba. Nickel concentrate from Cuba arrived in the Urals only in 1993 when Zarubezhtsvetmet and Nafta-Moskva secured deliveries in exchange for oil.
The Swiss company Marc Rich organized tolling at the Krasnoyarsk Aluminum Smelter (KrAZ). Oleg Deripaska, Mikhail Chornoi, and Yury Shlyafshtein would later be credited with inventing tolling, but in fact it was Marc Rich that brought it to Russia. The company left Russia within a year due to internal conflicts, making way for the AIOC company.
1992
The founding meeting of AO MIKOM was held in February; Mikhail Zhivilo was elected president. The industry's largest enterprise, the Bratsk Aluminum Smelter (BrAZ), was under Zhivilo's control for only six months, after which MIKOM's was left with only Novokuznetsk Aluminum Smelter (NkAZ), and not for long.
On March 7, an external tolling plan was approved for BrAZ by order of the President of Russia. The smelter headed by Boris Gromov was transferred to the control of the newly formed TWG company.
In August, the head of the Aluminum (Alyuminy) concern, Igor Prokopov, tried to push the government to introduce reduced power rates for aluminum smelters. Special rates for aluminum smelters had been abolished in the USSR back in 1968. His demand was officially refused in December, and the State Committee for the Management of State Property (Goskomimushchestva) proceeded to break up the concern, which was transformed from a holding into a "management consulting superstructure."
In October, aluminum smelters collectively agreed to increase aluminum prices one and a half times; over the next year, prices rose smoothly to world levels. A sharp increase in demand for Russian aluminum on world markets led to a drop in prices to a historic minimum of $1300 a tonne.
Shares of the Sayany (SaAZ) and Bratsk Aluminum Smelters were put out for a privatization voucher auction in December.
1993
Mass privatization of the aluminum industry began in February; in the course of 1993, all aluminum smelters had acquired their first owners. The Volgograd (Volgogradsky alyuminievy zavod) and Kandalaksha (Kandalakshsky alyuminievy zavod) smelters passed to Raznoimport-Aluminii (RIAL); Al-invest, a subsidiary of AO Alyuminprodukt, bought up shares in SaAZ; and Mikhail Zhivilo's company MIKOM became the owner of NkAZ. Renova, a Russian-American joint venture headed by Vladimir Balaeskul, took over the Irkutsk Aluminum Smelter (IrAZ)
The EU convened a special commission in February to consider the introduction of quotas on Russian aluminum imports to Europe. The French company Pechiney, which had suffered losses due to dumping by Russian companies, lobbied for quotas. Aluminum prices in London fell to $1150 a tonne.
Oleg Soskovets presented TWG manager Lev Chornoi as a "potential Western partner" to the directors of Russian aluminum smelters at a meeting of AO Sovalyuminy (formerly the Alyuminy concern) in April. Within six months, Mikhail Turushev, the general director of KrAZ, had signed a contract with TWG to process 300 000 tonnes of aluminum per year until 2003.
Igor Prokopov accompanied Boris Yeltsin on his trip to Greece, where he negotiated the project of the century, the construction of a joint alumina factory near Athens at a cost of $350 million. However, the project fell through.
In summer, the management of NkAZ demanded that their partner Vadim Yafyasov explain why his company had paid the smelter for a large consignment of metal with a fake note and then cancelled the contract. Yafyasov left the business for Rosskommetallurgiya and then for Yugorsky Bank.
On July 6, President Yeltsin signed the decree " On Special Features of the Sale of Shares and Privatization of the Russian State Nonferrous and Precious Metal Concern Norilsk Nickel." The state owned 51% of the voting shares in the company.
On November 4, Mikhail Turushev fired KrAZ's commercial director Yury Kolpakov "for abuses during tolling with the French company Trans Commodities." At about the same time, a number of Trans Commodities employees were also fired, including Mikhail and Lev Chornoi. A new company called Trans-CIS-Commodities was organized, which later joined TWG. Turushev retired a few months later, after he was nearly beaten to death in the entrance of his home. He was replaced by Yury Kolpakov.
AO Alkur was registered in Yekaterinburg on November 22; member companies included AO Sevuralboksitruda and AO Ural Aluminum Smelter (Uralsky alyuminievy zavod). Alkur could not withstand the competition, and the idea of uniting Ural aluminum companies into a holding had to wait until 2000, when Viktor Bekselberg and Vasily Anisimov created the Siberian-Urals Aluminum Company (SUAL).
The Metallurgy Committee of the Russian Federation announced a plan for a cross sale of shares of aluminum smelters and RAO UES of Russia (RAO EES Rossii) in Bratsk. Anatoly Dyakov, the head of RAO EES, did not support the idea, but Anatoly Chubais and Oleg Deripaska revived it in 1999.
In December, Mikhail Khodorkovsky became chairman of the board of directors of AO Avisma, which produced rolled titanium. He sold the factory in 1997 to corporate blackmailer Kenneth Dart through the investment company Creditanstalt-Grant.
1994
Goskomimushchestva halted an investment tender for the sale of 9% of BrAZ's shares. Vasily Boiko, head of the company Your Financial Guardian (Vash finansovy popechitel) confirmed that the tender had been stopped on his initiative, because he had not received any bids. Boiko continued his struggle to participate in managing BrAZ until 1999.
In February, the Ministry of the Interior (MVD) Investigative Committee initiated a criminal case on evidence of a sudden proliferation of transaction payments made with fake notes by partners of TWG and Trans-CIS-Commodities.
In April, aluminum companies terminated a previous agreement on collective price adjustments. AO Alyuminy left the group, since it no longer had any means of influencing the smelters. There were rumors immediately afterwards that export quotas on aluminum would be abolished, which in fact occurred on July 1.
An investment tender for 19% of BrAZ's shares announced in May was won by AO Malakhit. According to some sources, Malakhit was backed by MENATEP Bank (it had provided a bank guarantee for the bid), and according to others, by TWG, which later managed this share package. Viktor Vekselberg's company Renova and Vash finansovy popechitel protested unsuccessfully when their bids were turned down without consideration.
Shares in Nornikel were put out for voucher auction in June. Anatoly Chubais called this lot "the pearl of privatization."
In June, Marc Rich & Co. AG, which had left the Russian aluminum business, changed owners and changed its name to Glencore International AG. Glencore gradually started returning to the Russian nonferrous metal market.
In August, the Gai Ore Mining and Processing Combine (Gaisky GOK), the Mednogorsk Copper-Sulfur Combine (MMSK), and Yuzhuralnikel bought controlling share blocks from one another at a tender in order to exclude outside shareholders. Within a year, the general director of Gasky GOK, who had initiated the deal, was forced to leave the company and the Ural Mining and Smelting Company (UGMK) started to form around the GOK.
On August 30, the question of whether tolling was beneficial or harmful to the aluminum industry was discussed for the first time at a meeting of the government executive commission. The Federal Foreign Exchange and Export Control Service and the Ministry of Natural Resources were opposed to tolling; however, Oleg Soskovets, who had lobbied for tolling, won the round.
An investment tender for the state block of shares in SaAZ was announced in September. According to the tender results, Alyuminprodukt and Russian Capital (Russky kapital) were the largest shareholders; Gennady Sirazutdinov, the smelter's general director, submitted his resignation in November. He was replaced by 26-year-old Oleg Deripaska, and Vladimir Lisin, a vice-president of Trans-CIS-Commodities, became chairman of the board of directors
On September 17, Vladimir Sementsov, Investigator of the MVD Investigative Committee made plans to question Vice-Premier Oleg Soskovets in the case of large-scale embezzlement connected with tolling in the Russian aluminum industry. Sementsov was arrested several days later, and the file on the case he had been secretly conducting disappeared from his office. He spent a year and a half in Lefortovo Prison on charges of smuggling rare metals until the Supreme Court acquitted him.
On October 28, Yury Kolpakov, the head of KrAZ, was struck off the list shareholders of Zalog-bank and Russky kapital, through which the TWG group controlled 17% of the smelter's shares. This was the beginning of a struggle for KrAZ among various shareholders that is still going on.
1995
In mid-January, the new head of Goskomimushchestva, Vladimir Polevanov, announced plans to nationalize the aluminum industry. Anatoly Chubais obtained his resignation by spring.
In February, Viktor Chernomyrdin signed a resolution on creating the integrated structure FPG (Financial and Industrial Group) TANAKO out of the aluminum enterprises in Krasnoyarsk Territory, including 20% of the shares in KrAZ. Yury Kolpakov and KrAZ's commercial director Kornei Gibert brought Anatoly Bykov to the smelter with the TANAKO project; they needed him to prevent TWG from taking over KrAZ.
In Moscow on April 6, there was an attempt on the life of Valery Tokarev, the commercial director of SaAZ.
Vadim Yafyasov, Kolpakov's deputy and a former vice-president of Yugorsky Bank, was murdered in Moscow on April 10. Yafyasov had come to the smelter in March to resolve the conflict between the managements of KrAZ and TWG.
On March 9, RAO Nornikel's board of directors worked out the terms for committing the state shareholding to trust at ONEKSIM Bank. However, under pressure from competing banks, Vladimir Potanin agreed to put up the shares for auction, the instance of a documentary pledge auction. Within a week, a well-known banking consortium publicized the idea in a letter to the government.
Oleg Kantor, the head of Yugorsky Bank and VadimYafyasov's former superior, was murdered near Moscow on June 19. There were rumors in Moscow that Yafyasov and Kantor had been killed by order of Lev and Mikhail Chornoi, the owners of TWG. Mikhail Zhivilo first made them public in his reference to a New York court six years later.
On June 25, Lev Chornoi sent an open letter from Caracas, Venezuela to the MVD Investigative Committee, which had implicated him in the murders of Kantor and Yafyasov. He protested his innocence and declared openly that business in Russia was a deadly affair.
In August, AIOC, the Mikrodin Group, and TWG began a struggle for the Novosibirsk Electrode Plant (NovEZ), a supplier of electrodes to the country's large aluminum smelters. All three contenders for NovEZ gave up the struggle, which is still going on.
Feliks Lvov, AIOC's Russian manager, was found murdered on September 7. It had been learned a week earlier that AIOC would be taking part in a sale tender for the 36.6% state shareholding in KrAZ. Yugorsky Bank had previously been a contender for this share package.
On October 6, the shareholders and management of Gaisky GOK agreed to cooperate, marking the start of what would become the largest copper holding in Russia. This was the first collaboration attempt of Iskander Makhmudov, then a member of the governing board of Sayany Bank, and Oleg Deripaska, the general director of SaAZ.
ONEKSIM was the winner of the documentary pledge auction for Nornikel on November 19. Russian Credit (Roskred), whose application for participation had been eliminated, announced it would appeal the auction results in court. ONEKSIM paid $170 million for 28% of Nornikel's shares, whereas Roskred subsidiary TOO (limited liability company) Kont had offered $355 million.
At the end of 1995, TANAKO and KrAZ gained control of the Achinsk Alumina Combine (AGK).
In December, Inkombank gained control over AO SAMEKO, the largest aluminum rolling mill in Europe. Oleg Deripaska held buyout negotiations for SAMEKO, but the price was too high.
1996
On January 30, the Norilsk Attorney General's Office initiated a criminal case against Nornikel's managers, accusing them of improper use of credit funds.
Krazpa Metals NV, which was 50% owned by Glencore, was presented in London on March 28 as KrAZ's marketing partner. Krazpa replaced AIOC, whose joint venture with KrAZ and Sibalko had collapsed at the end of the previous year after Feliks Lvov's murder. TWG, Renova, RIAL, Trastkonsalt, and Glencore formed a "big five" of traders in the aluminum business.
On April 13, ONEKSIM won a victory over Nornikel's management. Nornikel's president, Anatoly Filatov, was dismissed by government order and Vsevolod Generalov, the deputy chairman of Rosskommetallurgiya, became the new president. The company's board of directors was replaced a little later.
On April 23, Generalov left on a two-week vacation. While on vacation, he left the fuel and energy complex and politics and never returned to Nornikel. He was replaced by Aleksandr Khloponin, who headed the company until 2001.
In July, MDM Bank, which Andrei Melnichenko had built up from almost nothing, increased its charter capital by four times. Its shareholders included Gaisky GOK and AOOT Uralelektromed, which owned about 35% of the bank's charter capital. Sayanal and SaAZ had previously been large shareholders of Gaisky GOK. Thus, the interests of Oleg Deripaska, Mikhail Chornoi, and Iskander Makhmudov intersected once again.
On July 19, the managers of SaAZ, BrAZ, Zalog-bank, the Pavlodar Aluminum Smelter (Pavlodarsky alyuminievy zavod) of Kazakhstan, and TWG signed a protocol in Moscow on creating the Siberian Aluminum (Sibal) transnational financial and industrial group.
Acting general director of AO Norilskgazprom Aleksandr Sherstnev was murdered on August 13. Just prior to this, Norilskgazprom had announced plans to bankrupt Nornikel on the initiative of territorial governor Valery Zubov. The persons who ordered Sherstnev's murder have never been found.
Swiss police arrested Mikhail Chornoi at the beginning of December. He was officially suspected of links with Alimzhan Tokhtakhunov, better known in the international criminal world as Taivanchik. The Swiss authorities contacted the MVD Investigative Committee, knowing that they would probably want to question him in the old case of fake notes. The Committee unexpectedly replied that there were no claims against Chornoi, and within three days, he was released.
In December, Yevgeny Kiselev started the "TV aluminum wars" on the NTV program "Itogi", relating how the TWG group had managed to gain control over 70% of Russia's aluminum production with Oleg Deripaska's help. According to unofficial sources, Boris Berezovsky was behind the disclosures. The timing was fortuitous: Lev and Mikhail Chornoi quarreled with one another at TWG and the group began to fall apart.
1997
On February 19, the State Duma passed a resolution that de facto nationalized RAO Nornikel. ONEKSIM Bank was requested to return the state share package in Nornikel that it held in pledge.
A major alteration of spheres of influence began at KrAZ in February. Gennady Druzhinin, the chairman of KrAZ's board of directors, circulated a statement through official channels that Yury Kolpakov, KrAz's general director, and shareholder Oleg Kim had stolen $20 million from the company. Kolpakov was convinced that Druzhinin had made a deal with TWG to "hand over" the smelter and appeared on "Itogi", where he directly accused TWG of having ties with the criminal world.
Druzhinin was fired from KrAZ on April 21.
On June 3, an attempt was made on the life of Vice-Governor of Kemerovo Region Dmitry Chirakadze, an ally of Mikhail Zhivilo and former general director of NkAZ.
Open opposition between Gennady Druzhinin and Yury Kolpakov began at KrAZ on June 10. KrAz security blockaded the Yakhonit Hotel, where Druzhinin's office was located. A board of directors was appointed on July 11, and Druzhinin made plans to have Kolpakov fired.
The opposition to Kolpakov on KrAZ's board of directors increased, and Kolpakov submitted his resignation on July 11. However, Igor Vishnevsky, Krazpa's general director, was appointed as KrAZ's new general director, thus preventing Druzhinin from "handing over" the company to TWG.
ZAO New Holding (Novy kholding), a subsidiary of Alfa-eko and Renova, won an investment tender for the sale of 40% of the shares in the Tyumen Oil Company (TNK) on July 18. Renova became one of the country's most powerful industrial groups, and SUAL received powerful political support from Mikhail Fridman, an oligarch and joint owner of the Alfa group.
On July 28, Roskred unexpectedly announced that it had bought 47% of KrAZ's shares. It was learned that Yury Kolpakov had sold the securities to a bank owned by Boris Ivanishvili, who had been given the power of attorney to dispose of them by four of the factory's private shareholders, including Anatoly Bykov (10%) and Gennady Druzhinin (10%). Dmitry Bosov, TWG's representative at the factory, called Kolpakov "crazy."
On July 29, KrAZ's board of directors relieved acting general director Igor Vishnevsky of his post and appointed Druzhinin in his place. Kolpakov forced his way into the factory's administrative building and occupied the general director's office. Meanwhile, Roskred representatives were being questioned at the Attorney General's office.
On July 29, AO Norilskgazprom demanded the bankruptcy of the Nizhny Tagil Metallurgical Combine (NGMK) in court; NGMK owed the gas company almost 3 trillion rubles. Norilskgazprom also tried to change the terms of the sale tender for NGMK's shares.
On August 1, the Attorney General's office asked Viktor Chernomyrdin to suspend the tender for Nornikel. However, the Premier ordered to go ahead with the tender on August 5. The winner was ZAO Svift, which was part of Vladimir Potanin's Interros Group.
On August 7, Roskred agreed to return the KrAZ shares, that Kolpakov had sold to it, to Bykov and Druzhinin.
Kornei Gibert, the head of TANAKO, was appointed general director of KrAZ instead of Gennady Druzhinin at a meeting of the board of directors on August 30. TWG did not win a seat on the board.
Interros proposed a 100% additional issue of Nornikel shares at a scheduled shareholders' meeting on September 8 in order to secure the company's success once and for all. After the issue was placed, Interros received a controlling block of shares.
On October 2, Anatoly Bykov was appointed vice-president of Roskred Bank. At the same time, it was learned that the Trastkonsalt group had become a major Roskred shareholder (it is still not clear how the group acquired about 27% of KrAZ's shares or who sold them). Anisimov was loyal to Bykov and Roskred, and the three of them together owned a controlling block of shares in KrAZ. Kornei Gibert, who sided with TWG, was replaced as general director by Yury Ushenin, the deputy general director of Krasnoyarskenergo.
BrAZ shut down in November after TWG stopped deliveries of alumina. Oleg Deripaska told Kommersant Daily that SaAZ did not need credits from TWG, NkAZ cancelled sales contracts with it, and the British group's "metallurgical empire" collapsed.
December 18 was the beginning of the end for TWG in Russia. Oleg Deripaska and Vladimir Lisin announced the creation of the Soyuz-metall-resurs concern, which included Sibal, SaAZ (Deripaska), KrAZ (Bykov, Druzhinin, and Roskred), and the Magnitogorsk (Viktor Rashnikov) and Novolipetsk (Vladimir Lisin) metallurgical combines; the Rostar, Alyuminoprodukt, and Promresursy (Deripaska) companies; and Gaisky GOK, Kirovograd Copper-Smelting Combine (Kirovogradsky medeplavilny kombinat), and AO Uralelektromed (Iskander Makhmudov).
1998
Inkombank transferred management of a controlling block of shares in SAMEKO to Sibal at the end of February; Oleg Deripaska was appointed SAMEKO's general director on March 10.
Boeing signed a five-year contract with the Verkhnyaya Salda Metallurgical Production Amalgamation (Verkhne-Saldinskoe metallurgicheskoe proizvodstvennoe obedinenie) in March within the framework of the Gore-Chernomyrdin Commission in the US.
TWG was expelled from NovEZ in April, and SUAL took its place. The struggle for the electrode factory is still going on.
The first dispute among the founders of Soyuz-metall-resurs occurred on June 22. A meeting of representatives of BrAZ, KrAZ, and NkAZ was held in London to discuss the creation of a consortium to privatize the Nikolaevsk Alumina Plant (NGZ). Sibal, which had concluded a strategic partnership agreement with NGZ, doubted that the consortium would ever be created, and in fact it never was.
On June 26, Uralelektromed announced that the copper companies in the region would be combined into a holding before the end of the year. The Ural Mining and Smelting Company (UGMK) had already been set up, although it only received its name a year later.
By a court decision in July, control of the Achinsk Alumina Combine (AGK) went to Nail Nasyrov, a KrAZ protege. Alfa's fight for AGK continued until 2000.
On September 11, two weeks before the default, TWG attempted to finally gain control of KrAZ. The smelter's board of directors removed Dmitry Ushenin as head of KrAZ and replaced him with Aleksei Barantsev, a former manager at BrAZ. According to unofficial information, Roskred transferred control of its 27% of KrAz's shares to TWG.
In September, Interros resolved the problem of how to pay off ONEKSIM's creditors' committee after the default by offering them the SINDAKO oil company. However, Interros still owns Nornikel.
1999
On March 24, the Attorney General's office in Krasnoyarsk Territory initiated a criminal case against the management of Krasnoyarskenergo and KrAZ. The MVD Commission headed by Vladimir Kolesnikov freely admitted that they were after Anatoly Bykov, who had become chairman of KrAZ's board of directors. Bykov emigrated, and criminal charges were brought against him in April.
Anatoly Chubais, the head of RAO UES of Russia, became Oleg Deripaska's new partner in June. The result was the Sayany Power and Metallurgical Association project, which envisaged a union of the Sayano-Shushensk Hydroelectric Power Station (Sayano-Shushenskaya GES) and SaAZ.
Billboards with two different messages appeared on Moscow streets in the fall. One message read, " Ban tolling! Stop looting Russia!" The other one read, "Ban tolling-destroy Russia!" This was Oleg Deripaska's attempt to end internal tolling (he did not need it, since he had a reliable alumina supplier in NGZ) and make SaAZ more competitive compared to BrAZ and KrAZ. The word "tolling" gained country-wide recognition as a result.
Anatoly Bykov was arrested in Hungary in October on suspicion of involvement in murders connected with KrAZ. He was deported and remains in prison; however, he has not sold his KrAZ shares to anyone.
On November 16, Anatoly Shevtsov, the head of the metallurgical department at the Ministry of Economics, announced a plan to gradually renounce the use of tolling schemes in Russia.
UGMK was registered at the end of 1999.
2000
In response to a suit filed by Kuzbassenergo, a court appointed a new outside administrator at NkAZ in January: Sibal representative Sergei Chernyshev. It was alleged that RAO UES of Russia, Kuzbassenergo's parent company, had helped Sibal take NkAZ away from MIKOM, which had quarreled with Aman Tuleev.
At the beginning of February, Oleg Deripaska, the president of Sibal, and Mikhail Zhivilo, the head of MIKOM, held talks in one of Sibal's Moscow offices on the possible sale of NkAZ shares to Sibal. Zhivilo refused, and there were suspicions that he had found another buyer for the smelter. It was later learned that talks had actually been held, and the buyer was LogoVAZ.
In the first week of February, there were intensive negotiations between TWG and managers of KrAZ and BrAZ and unknown buyers. There were announcements that large blocks of shares in BrAZ and KrAZ had been sold, but the identity of the buyer was not revealed.
The name of the buyer became known on February 11, and the news was stunning: Sibneft shareholders had already bought BrAZ and KrAZ and were planning to buy NkAZ. Unofficial information later revealed that State Duma deputy Roman Abramovich had become the country's greatest aluminum magnate, and the sellers were Lev Chornoi and Gennady Druzhinin of TWG and Yury Shlyafshtein of Transkonsalt. It was not clear what the buyer was going to do with the shares. Sibal, to its dismay, had assumed that no deals had been made.
On February 16, the State Property Fund of Ukraine officially announced the terms for the sale of shares in the Nikolaevsk Alumina Plant (NGZ); the terms were very favorable to Sibal.
It was learned officially in March that NkAZ, CaAZ, BrAZ, and KrAZ would join Russian Aluminum (Rusal), the largest aluminum holding in the country and third-largest in the world in size, to be headed by Oleg Deripaska. The details of this megadeal are still unknown; however, it is a continuation of the work started by TWG in 1995 to unite the country's largest smelters into an "informal" holding.
Ukrainian Aluminum (Ukrainsky alyuminii), which was closely allied with Sibal, bought 30% of the shares in NGZ on March 22. NGZ joined Rusal by the end of the summer.
In an interview on April 11, Viktor Vekselberg told Kommersant Daily about SUAL's plans to unite with Trastkonsalt into a single structure that would become the second-largest aluminum holding in Russia and eighth-largest in the world.
On April 14, Anisimov's daughter and her husband were murdered in St. Petersburg.
In May, Iskander Makhmudov began restricting deliveries of raw materials to the Kyshtym Copper Electrolyte Plant (KMEZ), thus blocking the creation of a second copper holding based on KMEZ. The result of this action was a dispute between UGMK and KMEZ over Karabashmed (see "Trends").
On June 1, Anatoly Chubais severed his relationship with Oleg Deripaska, and the Sayano-Shushenskaya GES filed a suit in court against SaAZ demanding the payment of debts totaling 200 million rubles. This meant the end of plans for the Sayany Power and Metallurgical Association, which would have united the plaintiff and the defendant. Chubais acknowledged this two weeks later when he called the project "pointless."
On June 16, Nornikel began setting up its own marketing network abroad and buying up marketing companies, particularly the British company Norimet and the American company Almaz USA. No one knew that Interros was actually in the process of changing Nornikel's legal status. Thus, the Norsilsk Nickel Mining and Smelting Company (Norsilsky nikel GMK) appeared in 2001 in place of RAO Norilsk Nickel (Norilsky nikel), which could theoretically have been nationalized.
There was a change of leadership at KrAZ on June 28. Viktor Belyaev, the new chairman of KrAZ's board of directors, claimed that Rusal already controlled the activities of KrAZ, Krasnoyarsk Metallurgical Plant (KraMZ), and AGK and also indirectly owned a large share package in the Krasnoyask Hydroelectric Power Station (Krasnoyarskaya GES)
On July 10, Vladimir Potanin received a letter from First Deputy Attorney General Yury Biryukov requesting him to pay the government $140 million as compensation for allegedly buyi ng a controlling share block in RAO Nornikel too cheaply.
On July 19, Nornikel announced a restructuring plan for the company, which in effect was already a fait accompli. The Federal Security Commission (FKTsB) tried to oppose the plan in November but failed.
At the beginning of September, the Attorney General's office issued a warrant for the arrest of Mikhail Zhivilo on charges of "poisoning Aman Tuleev." Zhivilo went into hiding abroad.
In November, Vasily Anisimov left the SUAL project and emigrated to the United States. Renova remained SUAL's owner.
At the beginning of November, Nornikel's general director, Aleksandr Khloponin, announced his intention to run for governor of Taimyr Autonomous Region. He won the election, and first Dzhonson Khagadzheev and then Mikhail Prokhorov replaced him as general director of Nornikel.
At the end of December, Mikhail Zhivilo filed a suit in the New York District Court to recover $2.7 billion from Rusal's founders, who, he claimed, had "destroyed it by criminal means." According to the ex-magnate, who had been involved in the country's aluminum business from the very start, the entire history of Russian metallurgy was a history of crime. Zhivilo was later arrested in France at the request of the Attorney General of the Russian Federation, but a local court declared him a victim of political persecution.
by Dmitry Butrin
PRESENT
The situation in Russian nonferrous metallurgy contradicts the arguments of economists that competition is useful for companies in market conditions. The most successful companies in the industry are those that have few major competitors in Russia; the giants fight with foreign enterprises rather than among themselves. Efficiency is low in highly competitive sectors, such as secondary resource industries, production of rare metals, rolled metal, and the cable industry.
The Invisible Giant
At the end of 2000, the first Russian business event since the August 1998 crisis was reported on the front pages of The Wall Street Journal and The Financial Times. This was the creation of the Russian Aluminum (Rusal) company, now the world's third-largest aluminum producer. Rusal united up to 80% of the country's aluminum production facilities, trailing only the American company Alcoa and the Franco-Canadian company Pechiney-Alcan.
The Russian aluminum industry, like ferrous metallurgy, differs from the industry in the rest of the world. The country's three largest companies, the Krasnoyarsk, Sayany and Bratsk Aluminum Smelters, are among the five largest in the world. Neither Alcoa nor Pechiney-Alcan has such smelters, because they have no need for them. The reason is that the aluminum production technologies used in Russia, the so-called vertical and horizontal Soderberg processes, are outdated; only the Sayany smelter (SaAZ), the youngest of the large companies, which was built according to a Pechiney design, is technologically on par with Western counterparts. Western smelters are more compact, and their costs are at least 20% lower than in Russia. Rusal, which owns the three giants named above and also has designs on the Novokuznetsk Aluminum Smelter (NkAZ), formerly a member of Mikhail Zhivilo's MIKOM Group, is saved from bankruptcy more by low power rates than by high labor productivity.
Officially, almost nothing is known about the owners of this large company, which is competitive on a world scale. It is claimed that half of the shares are controlled by "Sibneft shareholders." This apparently means Roman Abramovich, the Governor of Chukotka, and partners, who are variously said to include everyone from Iskander Makhmudov to a certain "criminal authority" known as Salim [probably Yakub Salimov, a Tajik Aluminum Smelter (TajAZ) partner who was once a leader of the opposition in Tajikistan]. The remaining shares belong, also unofficially, to "Siberian Aluminum (Sibal) shareholders." All that is known is that Oleg Deripaska, the head of Rusal, owns a small block of shares, and the owners of large blocks include Mikhail Chornoi and the TWG group, which no longer owns giant factories but instead acts as their trader in Europe and the US.
Rusal exports up to 85% of the aluminum it produces, although Deripaska has also gambled on rolled aluminum; invested considerable funds in developing AO SAMEKO, the largest manufacturer of aluminum products in Europe; bought and completed the Dmitrovsky Aluminum Canning Sheet Demonstration Facility (DOZAKL) in Dmitrov; and manufactured aluminum cans for beer and other cold drinks. However, after Roman Abramovich set up the Sibal Group, rolled aluminum and beer cans took a back seat at Rusal. Today, Deripaska is more interested in a raw-materials base for aluminum production: Rusal's founders quickly realized that there was hardly any bauxite or alumina for the country's giant smelters.
Rusal is not Russia's largest aluminum company, as should follow from the holding's consolidated turnover; instead it is an unassuming company based in Omsk that owns almost nothing. In fact, Rusal is still not a single entity in the corporate sense. Even when the group decided to place ruble bonds valued at 2 billion rubles (this record issue was cancelled, however), the Bratsk Aluminum Smelter (BrAZ) was the official issuer.
A Second Wind for Viktor Vekselberg
The Siberian-Urals Aluminum Company (SUAL), another large aluminum producer, which controls almost all the remaining 20% of production, has no problems with raw materials. The company was set up by Viktor Vekselberg, who was previously a shareholder of the Krasnoyarsk Aluminum Smelter (KrAZ), which together with partner Vasily Anisimov (Transkonsalt group) ousted Rusal from KrAZ. Anisimov initially planned to develop SUAL's business; however, he apparently could not endure the criminal environment of the aluminum industry. Vekselberg turned out to be tougher and more consistent: he entered into an alliance with Alfa-group to purchase the Tyumen Oil Company (TNK) and thus found a reliable partner in Mikhail Fridman, who had no interests in the aluminum business. Alfa-grupp once managed the Achinsk Alumina Combine (AGK) but then transferred it to Rusal.
Although SUAL has no problems with raw materials (among other things, it owns the Timan bauxite deposit, which is the largest in Europe and is still not operating), it does not have enough processing facilities. SUAL consists of small plants that often have even more outdated technology than Rusal's facilities (e.g., Bogoslovsk, Kandalaksha, and Nadvoitsk). Only the Irkutsk (IrAZ) and Ural (UAZ) aluminum smelters use the same technology as KrAZ and BrAZ, but they have less capacity. However, allowing for the same low energy costs (SUAL owns a controlling block of shares in Irkutskenergo, the country's largest power company after RAO of Russia), the company is profitable enough.
There are really no other aluminum producers in the country, except for Northwestern Aluminum (Alyuminy Severo-Zapad), which is controlled by St. Petersburg entrepreneur Aleksandr Sabadash and the Aimet holding and includes the Volgograd Aluminum Smelter (Volgogradsky alyuminievy zavod), the Glinozem Production Association (PO Glinozem) in Pikalevo, and AO Volkhov Aluminum (Volkhovsky alyuminii). The numerous attempts by other potential players to construct new aluminum smelters in Russia have generally failed. The existing giants do not need competition within the country; they have enough of it on the world market.
The development prospects of the Russian aluminum industry in an overly monopolized market are unclear. On the one hand, globalization of business allows Rusal to attract funds to modernize its technology; on the other hand, only Rusal's competitors on the world market, i.e., Alcoa, Pechiney-Alcan, and Kaizer Aluminum, can supply the technology. So far, all negotiations with them have ended only in vague promises of "friendship"; and Rusal's owners for their part are not prepared to sell large share blocks to competitors, which is often one of the demands. SUAL and Severo-Zapad have even less chance of modernizing with Western credits; it is simpler to build new plants.
Vladimir Potanin's Polar Day
Nickel and platinoid production in Russia is even less competitive. For all practical purposes, only one company, the Norilsk Nickel Mining and Smelting Company (Nornikel), is involved in this highly profitable business (see "Trends"); and it is controlled by only one structure, the Interros Group owned by Vladimir Potanin and Mikhail Prokhorov. Prokhorov replaced Dzhonson Khagadzheev as Nornikel's general director last August.
Nornikel is large not only by Russian standards (its production accounts for 4% of GDP), but also by world standards (the company produces almost half of the world's platinoid and 20% of its nickel). Nornikel is also the country's largest copper producer. Two other medium-sized enterprises in Chelyabinsk Region, Yuzhuralnikel and Ufaleinikel, produce appreciable amounts of nickel, but this is more of a byproduct of the copper industry. As a whole, Nornikel, which is located above the Arctic Circle, has no competitors in the country.
Nornikel is an unusually well-balanced company. It does not experience problems with either energy (it is supplied by local gas monopolist Norilskgazprom), raw materials (Nornikel has enough reserves for hundreds of years), or markets (world markets shake when Nornikel reduces production volumes). As a result, Nornikel can provide a standard of living nearly comparable to Moscow's for the residents of the Arctic city of Norilsk. The only cloud on the company's horizon is connected with restrictions on exports of precious metals from Russia. Nornikel's platinum and platinoid exports are totally dependent on the Ministry of Finance, the State Treasury (Gokhran), and the government as a whole. Exports are subject to quotas, and thus bureaucrats are free to regulate the company's profitability. Platinoid is exported by a foreign trade company, Almazyuvelireksport, which is affiliated with Gokhran.
However, regulation of the business and threats to nationalize the country's largest nonferrous metallurgy enterprises (recall that Interros acquired a controlling block of shares in Nornikel through pledge auctions) does not prevent Nornikel and Rusal from being among the few Russian companies that are important in the world economy.
Interros is seeking to expand its influence beyond the polar region, and so Nornikel is holding talks on the possible purchase of a share in a nickel deposit in New Caledonia. In addition, the company hopes to eventually participate in developing the nickel industry in Cuba. The main nickel mines and smelters in Cuba were built by Soviet specialists and have only recently started being managed by Canadian companies, Nornikel's world competitors. Therefore, Interros representatives seldom miss an opportunity to join official Russian delegations to Havana.
It is still unknown how much Nornikel's policy will change under Prokhorov's leadership. Prokhorov himself has said that he plans to make Nornikel a "world-class company."
Other nickel producers in the country are considerably smaller. As a comparison, Nornikel exported 185 000 tonnes of nickel in 2000, whereas its competitors, i.e., Ufaleinikel, which is controlled by Mark Leivikov's company Geolink, Rezh Nickel Smelter (Rezhsky nikelevy zavod), and Yuzhuralnikel, which is controlled by MECHEL, exported 10 000-15 000 tonnes each.
Master of the Copper Mountain
A few large Russian enterprises also produce copper, another nonferrous metal in worldwide demand. The Ural Mining and Smelting Company (UGMK) is one of these, along with Nornikel. Of all the assets that Iskander Makhmudov is alleged to own, only UGMK more or less officially acknowledges having any relations with him. Makhmudov's business empire started with UGMK, or more precisely, with Uralelektromed. Andrei Kozytsin, who heads Uralelektromed, is Makhmudov's long-time partner and ally, who has figured in most of UGMK's battles, including the takeover of the Kachkanar Ore Mining and Processing Combine (Kachkanarsky GOK).
The UGMK holding unites about 20 copper-producing companies, the largest of which are the Gaisky GOK, Uralelektromed, AO Svyatogor, and Safyanovskaya Copper (Safyanovskaya med). Specialists consider UGMK to be one of the industry's most progressive enterprises: it is the only nonferrous metallurgy company to carry out a long-term (at least four years) program to modernize production.
However, like Rusal, UGMK has experienced some shortages of raw materials, although not as acutely as Rusal. Therefore, UGMK is actively searching for new resources. For example, UGMK owns the Transbaikal Mining Company (Zabaikalskaya gorno-rudnaya kompaniya) jointly with the Ministry of Communications; the company is supposed to develop the Udokan copper ore deposit (there is also a possibility that the British company Bateman will join the project). At present, UGMK makes up the shortfall by buying raw materials from other companies, such as the Valentor Copper Mine (Valentorsky medny rudnik) owned by SUAL and the Sibaisk and Uchalin ore mining and processing companies (Sibaisky GOK and Uchalinsky GOK) in Bashkiria. UGMK has come into conflict (see "Trends") over ore processing with the country's third-largest copper producer, the Kyshtym Copper Electrolyte Plant (KMEZ)
KMEZ is a regional company without either support from Moscow or important connections. About 50% of KMEZ's shares are controlled by the company's managers, led by general director Aleksandr Volkhin, and about 50% are owned by the labor collective. At the beginning of the conflict with UGMK in May 2001, specialists from the Uralmash Social and Political Association (OPS Uralmash) arrived at the company. However, in Sverdlovsk Region, the acronym OPS has traditionally been interpreted as "Organized Crime Community," and it is still not known whether the Uralmash group was there to protect KMEZ or whether they bought shares in the company.
Wandering Rarities
In addition to large enterprises producing copper, nickel, and aluminum, there are also many companies that specialize in producing rarer and therefore more expensive nonferrous metals from tungsten to lanthanides. However, neither Dalpolimetall, which is controlled by Glencore, the state-owned company Severmet, nor the other plants get much publicity. The only exceptions are two large companies that operate in tandem-the Verkhnyaya Salda Metallurgical Production Association (VSMPO) and Avisma. These enterprises control 70% of the rolled titanium market in the US and have concluded a ten-year contract to deliver rolled metal to Boeing Corporation
The problem, however, is that in Russia itself, with the exception of the little-developed East Siberian region, nonferrous metal deposits are very small. An huge number of similar enterprises spread out across the former USSR from Western Ukraine to Uzbekistan are oriented to the same primary export market, i.e., China, as Russian companies.
The government was apparently planning to unite all similar enterprises with large state-owned share blocks into a state holding in 2001. This corporation with the very conventional name of Russian Rare Metals (Rossiyskie redkie metally) might have been a serious contender on the world market; however, for unknown reasons, it was never created.
Evidently, the country has plenty of money coming in from exports of nickel, copper, and aluminum.
by Dmitry Butrin
TRENDS
The most interesting events in nonferrous metallurgy in the last six months have been connected in one way or another with a very intangible asset: a company's reputation in the business environment. The disputes in 2001 have shown that at the end of a stormy decade, nearly all industry players have finally realized that a company's business reputation is often worth forgoing tens of millions of dollars.
War and Peace
The most serious conflict in nonferrous metallurgy in the last six months occurred in the copper industry, which has been relatively quiet compared to the aluminum industry. The conflict concerns the Karabash Copper Smelting Combine (KMK), which was at the center of an ownership dispute in May 2001 between the country's second- and third-largest copper producers, the Ural Mining and Smelting Company (UGMK) and the Kyshtym Copper Electrolyte Plant (KMEZ).
To be more precise, the conflict between the two companies began a year earlier in May 2000, when Iskander Makhmudov began restricting deliveries of raw materials from UGMK to KMEZ. When UGMK failed to obtain the cooperation of KMEZ's management team headed by Aleksandr Volkhin, it successfully blocked its competitor's major project, the creation of a holding out of KMEZ, ZAO Karabashmed, the South Urals Mining Company (Yuzhno-Uralskaya gorno-dobyvayushchaya kompaniya), three companies controlled by the government of Bashkiria [Uchalin GOK, the Buribaev Mining Company (Buribaevskoe rudoupravlenie), and the Bashkiria Copper and Sulfur Combine (Bashkirsky medno-serny kombinat)], and the Chelyabinsk Zinc Electrolyte Plant (Chelyabinsky elektrolitno-tsinkovy zavod). The governor of Chelyabinsk, Petr Sumin, found himself in an unpleasant situation as the project's patron when it turned out that KMEZ had no money to create the holding.
Exactly a year later in May 2001, UGMK continued the attack on its competitor by buying a controlling block of shares in KMK, clearly anticipating a dispute. In fact, KMK had almost no production facilities, because KMEZ's management had moved its assets to ZAO Karabashmed in 1998. However, KMK still officially existed and even owned 14% of Karabashmed's shares.
Immediately after UGMK bought the shares, it replaced the management at KMZ and announced that it would contest the deal for moving assets to Karabashmed. KMEZ's response was predictable: they tried to bring in outside management at KMK and then liquidate the company.
The details of this dirty war are not important. Suffice it to say that UGMK won and succeeded in reregistering KMK at its own legal address in Verkhnyaya Pyshma. KMEZ called OPS Uralmash for help [it was not entirely accidental that the acronym for Aleksandr Khabarov's social and political association (OPS) was the same as the one for a well-known criminal group in Yekaterinburg], although whether or not OPS became a shareholder is still unknown.
Nevertheless, Andrei Kozitsyn, UGMK's general director, sent a package of proposals for settling the dispute to KMEZ's general director, Aleksandr Volkhin, in September. Kozitsyn did not insist on a total end to the legal battle; however, his proposals contained plans to set up a joint venture with KMEZ for processing scrap copper and a joint investment program at KMK. He also offered outright to end the confrontation between UGMK and KMEZ in the media. Volkhin's official response is unknown, but the disputes have ended.
Why did UGMK end a dispute that it probably would have won, given the enormous political resources available to Iskander Makhmudov? It would not be the first time that a large Russian company had voluntarily rejected full control over assets so as not to spoil its image. It is significant that this happened at UGMK, which had never hesitated to use all possible means to compete on the market.
Money and Power
The situation at Nornikel after the restructuring of its assets was completed was equally intriguing. The end of this operation, which was large even by world standards, was unexpected: Mikhail Prokhorov, the head of Rosbank and an owner of the Interros Group, became Nornikel's general director.
The restructuring at Nornikel had not been going very well in the last six months, although opponents of Interros succeeded only in fraying the nerves of the owner of the controlling share block without stopping the process. There were also attempts to get a court order to suspend quotations of Nornikel shares on the Russian Trading System (RTS) and the Moscow Interbank Foreign Currency Exchange (MMVB), small shareholders spoke out against the operation, and the Federal Securities Commission refused to recognize the legality of the restructuring. Nornikel was finally preparing to carry out the most delicate part of the restructuring, an exchange of RAO Norilsk Nickel (RAO Norilsky nikel) shares owned by tens of thousands of shareholders scattered across the country for shares of Norilsk Nickel Mining and Smelting Company (GMK Norilsky nikel). The promises of Aleksandr Khlopinin, Nornikel's ex-general director, that the company's capitalization would increase to $8 billion by 2004 would have been worthless if there had been any grounds for accusations that the rights of small shareholders had been infringed.
Then, a few days before the end of the year-long project to change Nornikel's management structure, there was unexpected news from the company's office. Mikhail Prokhorov had left his position as head of Rosbank to become the new general director of Nornikel. Prokhorov changed his image from that of a prominent banker received by high officials and one of the wealthiest men in Russia to director of an Arctic mining company who had something valuable to offer other than money. The question is why.
Prokhorov explained his action quite logically. After restructuring was completed, Nornikel would have great potential on the world market; however, it needed Western-style management, and while the previous general director, Dzhonson Khagadzheev, was an excellent production man, he was not really suited to the role of chief operation officer. Prokhorov also saw his new position as Nornikel's general director as a continuation of his career as a businessman who would try to turn Nornikel into a world-class company, just like the legendary Lee Iacocca had done at Chrysler.
This last argument deserves particular attention. In Russia, a career as a top manager has become just as attractive as that of a large owner. As head of Nornikel, Prokhorov had absolute control over the development of a large part of the reality that was Norilsk Nickel. After ten years of capitalism in Russia, the business world had concluded that, for business owners, the power to make crucial decisions was just as appealing as the power of money.
Past vs. Future
The third major deal was a share issue that resulted in the ouster of former chairman of the board (and now resident of Lefortovo Prison) Anatoly Bykov from the Krasnoyarsk Aluminum Smelter (KrAZ). This deal effectively completed the construction of the Russian Aluminum (Rusal) holding.
Recall that Bykov and his partners lost control over KrAZ after a series of KrAZ share deals in April involving Sibneft shareholders. They owned about 28% of the shares in the country's second-largest aluminum smelter, which, due to a peculiarity of its charter, made it impossible for Rusal to make any strategic decision regarding KrAZ. Bykov, who is already on trial for the murder of his former partner Vladimir Tatarenkov, has stated repeatedly through his lawyer Genrikh Padva that he was forced to sell these shares. He has never identified the buyer; however, under the present circumstances, it could only have been Rusal. Rusal has never denied that the holding needed Bykov's shares in KrAZ, but did not succeed in buying them from Bykov until summer 2001.
In August, the situation with the shares took a turn for the worse for Bykov. On August 5, KrAZ's board of directors, who were loyal to Rusal, decided to hold an additional share issue worth about $200 million. Meanwhile, a week before that, a certain Anatoly Kondratov, a 27-year-old resident of Kemerovo and owner of six KrAZ shares, mailed a complaint to the court against the actions of KrAZ's former board of directors. As a result, most of Bykov's shares, i.e., the 25.5% belonging to the offshore companies Solomonia Co. and Agoma Enterprises, were seized.
One suspects that Rusal was playing a legal game. On August 13, the court in Kemerovo released the shares; however, at the time of the seizure, Bykov's shares had not been registered for participation in the shareholders' meeting scheduled for August 22. Consequently, Rusal, which denied any connection with Mr. Kondratov, was able to approve the additional issue with a majority of votes. As a result, Bykov's shares decreased in value to 3% of KrAZ's charter capital and Rusal became the sole owner of the smelter.
The predictable outcome of the vote (Rusal's votes were the ones that determined it) at the meeting, which was held by correspondence on August 22, was not announced until October 1. According to unofficial information, Rusal had been holding intensive talks all along with Bykov's partners on buying up his shares, but had been unsuccessful. On October 2, it was learned that Bykov's shares would be degraded.
Along with the Zhivilo and Kachkanar GOK affairs, Anatoly Bykov's ouster from KrAZ, which had been going on since February 1999, became a symbol of Russian business practice at its most cynical. The additional issue completed the consolidation of assets in the aluminum business and opened the way for Rusal to finish building a world-class aluminum company. The question is, would Oleg Deripaska, who used the same scheme to oust former partner TWG from the Sayany Aluminum Smelter (SaAZ), have gone as far as Rusal did with Bykov?
Nevertheless, Rusal has so far avoided ending the ten-year history of the Russian aluminum business with a scandalous deal, probably because the present is a continuation of the past.
Dmitry Butrin
All the Article in Russian as of Oct. 09, 2001
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