Sanctions on Russian aluminium producer are first shots in economic war by the US
When it comes to US sanctions, it seems not all Russian oligarchs are created equal.
Seven were designated by the Treasury Department for sanctions along with 17 Russian government officials.
But one has been singled out for special treatment: Oleg Deripaska, owner of the world’s largest aluminium producer outside China. Of the 12 companies subject to sanctions, eight are controlled by Mr Deripaska.
United Company Rusal, which produces 6 per cent of the world’s aluminium in any year, takes centre stage.
But the sanctions encompass the length and breadth of his empire, from offshore entities such as the British Virgin Islands-registered B-Finance to the London-listed EN+ holding company to Russian power generator EuroSibEnergo, commercial vehicles producer GAZ Group and farming group AgroHolding Kuban.
The sanctions are aimed at allies of Russian President Vladimir Putin in one of Washington’s most aggressive moves to punish Moscow for its alleged meddling in the 2016 US election and other “malign activity”.
But why has Mr Deripaska been targeted? The answer is aluminium.
Imports of steel and aluminium are “an assault on our country”, US President Donald Trump declared as he signed executive orders imposing tariffs on both on March 8.
In the build-up to that moment, presidential rhetoric and media coverage focused on China.
Absent was public discussion of Russia, although it has been the second-largest volume supplier of unwrought aluminium to the US for several years.
Mr Trump was even offered the option of draconian tariffs on Russian aluminium as one of five countries identified by the Commerce Department as operating “significant overcapacity” or being “potential unreliable suppliers”.
Instead, he went for a flat 10 per cent duty with exemptions for allies, first and foremost Canada, the largest supplier to the US market.
There was no need to single out Russia for special tariffs treatment since the government knew it was about to slam the door on Russian aluminium imports through sanctions on Rusal.
The stated aim of steel and aluminium tariffs is to raise US production to 80 per cent of capacity. The country’s aluminium smelters operated at 43.2 per cent capacity last year.
The removal of 700,000 tonnes of Russian imports combined with spiking aluminium prices, in terms of the London Metal Exchange and local US premiums, are a powerful incentive to refire long-idled potlines.
If the combined effect of price and sanctions does not spark restarts, nothing will revive long dormant American smelters.
At some stage in the US’s study of its dependency on aluminium imports, there must have been a realisation of how vulnerable Mr Deripaska’s empire would be to sanctions.
This is not just because he has two entities listed outside Russia – Hong Kong-listed Rusal and London-listed EN+, both of which have been dumped by investors. It is also because Rusal’s aluminium business is nearly totally exportoriented, dependent on dollardenominated debt and at the heart of a complex network of supply chains.
Of the 3.7 million tonnes of metal produced by Rusal last year, only 650,000 tonnes went to the Russian market, according to Goldman Sachs.
Everything else was exported and the United States was the largest single source of nonRussian revenue from external customers last year, as it was in 2016.
Rusal had debt of $8.5 billion at the end of 2017, just about all of it dollar-denominated, including three Eurobond issues totalling $1.6bn, which are being cut off from the bond market infrastructure.
The company’s alumina refineries and smelters, meanwhile, are dependent on external raw material supplies.
Rusal may have offered the US an easy target, but it is also a strategic one.
The company is not only the major employer in far-flung cities such as Krasnoyarsk and Bratsk but is also the de facto government, a hark back to Soviet days.
As Rusal notes in its accounts, “the group contributes to the maintenance and upkeep of the local infrastructure and the welfare of its employees, including contributions toward the development and maintenance of housing, hospitals, transport services, recreation and other social needs of the regions of the Russian Federation where the group’s production entities are located”.
Rusal, in other words, is simply too big to fail from a Russian government point of view. Moscow will have to step in if the company cannot survive the sanctions.
This aluminium-tipped strike travels from the low-tax island of Jersey, where Rusal is incorporated, through assets in Ireland, Sweden and Guyana, to Russia’s industrial heart.
And here’s the thing. What form will the next strike take? Will it be nickel-tipped? There’s speculation in the metal markets over Norilsk Nickel, another Siberian industrial giant, in which Rusal owns a 27.8 per cent stake. That is probably too low a threshold for Norilsk to be caught up in these sanctions.
But its oligarch owner, Vladimir Potanin, has just been put on notice, as have all the powerful industrialists surrounding the Putin administration.
Aluminium ingots at the foundry shop of the Rusal Krasnoyarsk smelter in Siberia. The US has its eye on Rusal because it has ties to the Kremlin