Sanc­tions on Rus­sian alu­minium pro­ducer are first shots in eco­nomic war by the US

The National - News - - IN DEPTH BUSINESS - ANDY HOME

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.

Reuters

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

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