Part of Palms & Company's Commercial Intelligence Assistance as Purchasing Agent for Buyers of Russian Aluminum billets and ingots.

WHO OWNS "RUSSIAN ALUMINUM"

Formally speaking, Rusal is not at all a major Russian company (which it should be,

going by its consolidated turnover), but is a modest legal entity registered in Omsk and

owning practically nothing at all. This is because Rusal still has not been formally

registered as a united holding. Even when the group issued ruble denominated bonds for 2

billion rubles the official issuer was Bratsk aluminum plant. With Rusal controlling 80

percent of Russia's aluminum production, almost all the remaining 20 percent is in the hands

of the Siberian Urals Aluminum Company (SUAL), which doesn't have any raw material supply

problems. The company was founded by Viktor Vekselberg, a former KrAZ shareholder who,

together with his partner, Vasily Anisimov from the Transconsult group, was pushed out of KrAZ

by Rusal. Anisimov also planned at first to take part in developing SUAL, but it seems he

could not handle the criminal aspects of the aluminum business. Vekselberg turned out to have

tougher nerves and more persistence. He formed an alliance with Alfa Group, with whom he

invested in buying the Tyumen Oil Co.

ALFA Group executives visited me in Seattle in 1993

In Alfa's Mikhail Fridman, Vekselberg found a reliable partner without interests in the

aluminum sector. (Alfa Group controlled the Achinsk alumina ore plant, but later handed it

over to Rusal.).

Poor refining facilities Among other things, SUAL owns the Timansky bauxite deposit, Europe's

largest. But the company's secure raw material supplies are offset by insufficient refining

facilities. SUAL's Bogoslovsky, Kandalaksha and Nadvoitsky plants are smaller and

technologically more backward than those of Rusal. Only its Irkutsk and Urals plants use the

same technology as KrAZ and BrAZ, but have less capacity. SUAL, however, controls shares in

Irkutskenergo, Russia's largest electricity producer after Unified Energy Systems (UES), and

its access to cheap electricity helps to keep profitability at an acceptable level. The only

other aluminum producer of any significance in Russia is North West Aluminum, controlled by

St. Petersburg entrepreneur Alexander Sabadash and the Aimet holding company. NorthWest

Aluminum owns the Volgograd aluminum plant, the Pikalevsky alumina ore plant and the

Volkhovsky aluminum plant.

As a rule, attempts by potential players on the aluminum market to build new plants have ended

in failure. The existing big Russian companies do not need any competition, and there is

already enough competition on the world market. It is not yet clear how the Russian aluminum

market will continue to develop in its current monopolized state. On the one hand,

globalization of the aluminum business gives Rusal the opportunity to attract investment to

modernize its plants, but on the other hand, the only potential suppliers of new technology

are Rusal's competitors, Alcoa, PA and Kaiser Aluminium.

Negotiations with these companies have so far brought no more than vague promises to "be

friends." The rival companies usually insist on wanting to buy shares in the Russian plants,

but Rusal's owners have so far refused all such offers. SUAL and North West Aluminum have even

fewer hopes of raising the money to modernize their plants. It would be easier to simply build

new ones.

There is even less competition in the Russian nickel and platinoid sector. There is

essentially only one company in the whole country involved in this highly profitable business,

and that is GMK Norilsk Nickel, or simply Norilsk Nickel, as it used to be called. Norilsk

Nickel is controlled by Vladimir Potanin's Interros Group. In August 2001, Mikhail Prokhorov

replaced Dzhonson Khagadzheyev as general director of Norilsk Nickel.

Norilsk Nickel's output contributes 4 percent of Russian GDP, but the company is not just big

by Russian standards, it accounts for almost half of world platinoid production and 20 percent

of nickel production. It is also Russia's largest copper producer. Only two other Russian

companies produce any significant quantity of copper, Yuzhuralnickel and Ufaleinickel in the

Chelyabinsk Oblast, though their production is more of a sideline to their copper production

activities. All in all, Norilsk Nickel does not have any real competitors in Russia. Norilsk

Nickel is an unusually well balanced company. It gets its energy from local gas monopoly

Norilskgazprom and does not have any serious energy problems.

As for raw material supplies, the Norilsk deposits are forecasted to last for hundreds of

years. Sales are no problem, either. World markets start trembling when Norilsk Nickel cuts

back production volumes.

The Norilsk company also forms the foundation of an entire city within the polar circle, where

living standards were falling fast until Interros took over. Living standards in Norilsk are

now almost at Moscow level. The only cloud on the horizon is restrictions on Russian precious

metals and platinoid exports. Norilsk Nickel's platinum and platinoid exports depend totally

on the Finance Ministry, Gokhran (the state precious metals repository) and the government,

who set quotas and are thus able to regulate the firm's profit making opportunities. Platinoid

exports are handled by export firm Almazyuvelirexport, which is affiliated with Gokhran.

So, Norilsk Nickel faces a certain amount of regulation of its business, and constant threats

of re-nationalization (Interros got control of the company through the loans-for-shares

scheme). But this doesn't stop the company joining Rusal on the very short list of Russian

enterprises that actually have some weight in the world economy. Extending domains Now,

Interros wants to extend its domains beyond the Arctic north and is currently holding

negotiations on buying a stake in a nickel deposit in New Caledonia. The company also still

has hopes of sooner or later taking part in developing the nickel industry in Cuba. The nickel

mines and plants in Cuba were built by Soviet specialists, but in recent times, Canadian

companies.

Norilsk Nickel's competitors have begun making inroads on the island. This explains why

Norilsk Nickel always tries to make sure it has a representative in any official delegation

visiting Cuba. It is not yet clear how much new General Director Mikhail Prokhorov will try to

change the company's policy. Prokhorov has said that he wants to make Norilsk Nickel a "world

class company." The other Russian nickel producers are a lot smaller. Norilsk Nickel exported

185,000 tons of nickel in 2000, while its competitors, Ufaleinickel, the Rezhsky nickel plant

controlled by Mark Leivikov's Geolink company, and Yuzhuralnickel, controlled by Chelyabinsk

steelworks Mechel.

Each exported 10,000-15,000 tons. As with nickel, Russia does not have many major producers of

copper, another metal with world wide demand. Copper producers aside from Norilsk Nickel

include the Urals Mining and Metals Company (UGMK). Of all the assets ascribed to Iskander

Makhmudov, UGMK is the only one he is more or less officially linked to. Makhmudov began his

business with UGMK, or rather, with its component company Uralelektromed. Uralelektromed is

headed by Andrei Kozitsyn, Makhmudov's long time partner, who has taken part in most of UGMK's

battles for assets, including the seizure of the Kachkanarsky GOK (mining and enrichment

company). UGMK is a holding that unites some 30 copper producing companies. The largest of

these are the Gaisky GOK, Uralelektromed, Svyatogor and Safyanovskaya Med.

UGMK is the only company in the non-ferrous metals sector to have launched a program to

upgrade its production facilities, which has now been going on for four years. Like Rusal,

UGMK faces a raw materials supply problem, though not on as acute a scale. This is why UGMK is

so active in looking for new resources. Together with the Railways Ministry, UGMK owns the

Zabaikalsky Mining and Ore Co., which is to develop the Udokansky copper deposit. (It is

possible that British company Bateman will also join this project). For the time being, UGMK

makes up for its raw materials shortfall by buying supplies from other companies. Its

suppliers include the Valentorsky copper deposit, which belongs to SUAL, and two companies in

Bashkortostan, the Sibaisky GOK and Uchalinsky GOK. Raw materials processing started a

conflict between UGMK and Russia's third biggest copper producer, Kyshtym Medelektrolitny

plant (KMEZ). KMEZ is a purely regional company with no support from Moscow and no well placed

connections. KMEZ General Director Alexander Volkhin and his management team control 50

percent of shares in the company, with the other 50 percent owned by the workforce. When the

conflict with UGMK began in May this year, specialists from OPS Uralmash arrived at KMEZ. The

OPS in Uralmash's name stands for "public political union," but the Russian letters can be,

and are, read as standing for "organized crime group." It is not yet clear whether Uralmash

has taken KMEZ and Volkhin under its wing or bought shares in the plant.

Rare metals

Aside from the companies producing copper, nickel and aluminum, Russia has a whole host of

companies producing much rarer and more expensive non-ferrous metals ranging from tungsten to

lantanoids. These companies include Dalpolimetal, controlled by Glencore, and state owned

Sevredmet , but none of them are well known. The only exceptions are two large companies that

work together, VSPMO and Avisma.

These two companies control 70 percent of the rolled titanium market in the United States and

managed to sign a 10 year contract to supply rolled titanium to Boeing.

The problem now is that with the exception of Eastern Siberia, where little development work

has been done, non-ferrous metals deposits are not very big. But across the entire former

Soviet Union, from Western Ukraine to Uzbekistan, there are plenty of non-ferrous metals

plants all trying to find their place on the Chinese export market, the same market that

the Russian companies are working for. The government had been planning to unite all the

companies in which it still held a large stake in a state holding this year. A company like

this would have had a chance of becoming a serious player on the world rare metals market, but

for some reason, the project did not go ahead. Probably, the explanation is that the country

is making enough money by exporting nickel, copper and aluminum.

Courtesy of Palms & Company, Inc.

First, Wholly American Owned, Washington State Corporation

Licensed by Ministry of Foreign Economic Relations of the Soviet Union

in 1989

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