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WHO WE ARE
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HISTORY OF THE RUSSIAN ALUMINIUM INDUSTRY
HISTORY OF THE RUSSIAN ALUMINIUM INDUSTRY
Creation of the industry
The aluminium industry in Russia is believed to have been founded on 14 May
1932, when the Volkhov smelter in the Leningrad region produced its first batch
of aluminium. One year later, the first aluminium was produced by the
Dneprovsky smelter in the Ukraine. Despite the fact that these smelters were
steadily boosting output in the years that followed, it was not enough to meet
the growing demands of the economy and so the construction of new production
facilities in Russia began.
In 1938, the 40,000million tonnes per annum Tikhvin Alumina Refinery, which is
today known as the Boksitogorsk Alumina Refinery, was put into operation, and
in 1939 the Urals Aluminium and Alumina Complex was commissioned with an annual
capacity of 70,000 million tonnes of alumina and 25,000 million tonnes of
aluminium.
World War II spurred industrial development in the eastern regions of the
country. Faced with the threat of having a significant part of the state's
territories occupied by the enemy, the Soviet government ordered the evacuation
of production facilities on an unprecedented scale. The main equipment from the
Volkhov and Tikhvin smelters was disassembled and transported to the Urals and
Western Siberia, where it was used to construct the Bogoslovsk and Novokuznetsk
aluminium smelters. In 1943, the Novokuznetsk Aluminium Smelter produced its
first aluminium in Siberia. Two years later, on 9 May 1945 - "Victory Day" -
the Bogoslovsk Aluminium Smelter also produced its first metal.
Post-war years
During the post-war period the demand of the Soviet economy for strategic
metals continued to grow, prompting the rapid development of the aluminium
industry. In the 1950s, the Kandalaksha (1951), Nadvoitsy (1954) and Volgograd
(1959) smelters were commissioned, as was the Belaya Kalitva metals production
facility (1954), which specialises in aluminium alloy-based products. In 1960,
the Samara metal works began operations and today it is the largest producer of
semi-finished and finished aluminium products in Europe.
In addition to aluminium smelters and processing plants, the USSR was
simultaneously engaged in the construction of alumina refineries. In 1959, the
Pikalyovo refinery, an integrated production facility processing nepheline
concentrates was commissioned; in 1964, the Pavlodar Aluminium Smelter in
Kazakhstan was put into operation and in 1970, the first batch of products was
released by the Achinsk Alumina Refinery.
The 1960s and 1970s saw construction of the Irkutsk, Krasnoyarsk and Bratsk
smelters which were erected in the vicinity of the largest hydropower plants to
allow cheap energy sources to be exploited.
Over the same period, the Krasnoyarsk metal works, the Pavlodar Aluminium
Smelter and the Dmitrov pilot facility for production of aluminium tape were
commissioned.
Due to the acceleration of aluminium production and a poor domestic raw
materials supply, Russian metal producers were forced to procure alumina from
overseas from Guinea, India and other countries. The Nikolaev Alumina Refinery
in the Ukraine became the first production facility in the industry designed to
use high-quality imported materials. The refinery was built in 1980 and
initially refined African bauxites.
In 1985, the Sayanogorsk Aluminium Smelter, which was equipped with
state-of-the-art technologies and equipment, began operations.
But the successes of the aluminium industry in Soviet times were now put under
threat with the break-up of the USSR.
Post-Soviet period
In the early 90s, as Russia was going through market reforms, its aluminium
industry was hit hard by the economic downturn and the political uncertainty
that the country experienced in the years following the collapse of the USSR.
Suffering heavily from hyperinflation and the elimination of budget financing,
the industry was virtually being bled dry. The ruble-nominated working capitals
were diminishing daily, making it impossible for cash strapped aluminium plants
to perform their day-to-day operations.
Wages were not paid for months, forcing skilled workers to leave their jobs.
Widespread theft paralyzed the production process and the workers, faced with
wage delays, were stealing anything they could resell from the plants.
The well-being of the Russian aluminium industry was also threatened by a
shortage of raw materials, which was significantly aggravated after the break
up of the Soviet Union. Alumina refineries in the Ukraine, Kazakhstan and
Azerbaijan became foreign operations located in the independent countries,
while Russian production facilities were only able to meet 40% of business
demand for raw aluminium materials.
Moreover, the shock therapy tactics used to transfer the economy into a market
system put the military and the machine building sector into a shambolic state.
Both had been large consumers of Russian aluminium. By 1994, aluminium
consumption in Russia fell to around 2 kg per capita, compared with 17 kg per
capita in 1990. As a result, the industry found itself in a crisis. The only
way it would survive was if it re-oriented itself towards international
markets.
Soon this crisis resulted in the intervention of foreign businessmen and the
introduction of tolling into the industry. In 1991, Swiss trader Marc Rich
began a gradual takeover of the Krasnoyarsk smelter. In 1992, the fledgling
British Trans World Group (TWG), headed by the Reubens brothers, took control
of the Bratsk aluminium plant.
TWG initiated the introduction of the infamous tolling scheme in Russia. Under
the scheme imported alumina was refined and the produced aluminium was exported
from the country. Both the import of alumina and the export of resulting
aluminium were included in a tax-free regime by the Russian government. This
scheme, combined with TWG’s ability to take advantage of the difficulties at
Russian aluminium plants, enabled the company to make a profit of up to 200 USD
per tonne at a time when the normal return was around 5 USD per tonne in the
West. As a result, TWG quickly became one of the top three players on the
London Metals Exchange (LME).
Having accepted the tolling schemes, Russian plants had managed to solve, on a
short term basis, the problem of working capital and the deficit in raw
materials. However, tolling did not allow the working capital of the plants to
increase to the amounts required. The low processing fees imposed by TWG and
other suppliers of raw materials as a condition of “solving” the financial
difficulties of Russian plants only allowed the plants to keep sufficient funds
to cover production and basic maintenance costs, while two-thirds of the hard
currency raised from the sale of aluminium in the world market was siphoned
into the accounts of off-shore intermediary firms.
In 1993, the large-scale privatization of the Russian aluminium industry began
and within a few years all Russian aluminium plants were in private hands.
TWG, whose interests in Russia were represented by two brothers, Lev and
Michael Cherney, dominated the market. By 1996, TWG obtained control over 40%
of the aluminium industry in Russia. Over that period TWG acquired a
significant stake in the Bratsk, Krasnoyarsk and Sayanogorsk aluminium smelters
as well as the Novosibirsk Electrode Plant and the Achinsk Alumina Refinery.
TWG also seized control in the Pavlodar Alumina Refinery in Kazakhstan.
Other segments of the industry were controlled by:
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AIOC - the American trading company which bought out Marc Rich’s shares in the
Krasnoyarsk smelter,
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RIAL - the company that appropriated the Volgograd and Kandalaksha aluminium
smelters,
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MIKOM - the company that seized control over the Novokuznetsk smelter,
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Renova – who controlled the Irkutsk aluminium plants and the Urals Aluminium
Plant,
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Aluminproduct – who had a stake in the Sayanogorsk aluminium smelter.
Aluminproduct, headed by Oleg Deripaska, started to buy shares in the
Sayanogorsk Aluminium Smelter in 1993. By November 1994, Mr Deripaska’s
companies and TWG had become the largest private shareholders in the smelter
and they owned 21.36% and 21.33% of the shares respectively. Mr Deripaska was
elected the General Director of the plant in November 1994. When Mr Deripaska
stepped in, the Sayanogorsk Aluminium Smelter was facing significant financial
and operational problems.
It quickly became apparent that the two largest private shareholders of the
Sayanogorsk smelter were pursuing different goals. Mr Deripaska’s efforts were
aimed at improving production and management systems at the plant; to secure a
direct alumina supply line and to initiate an anti-theft campaign at the
smelter. TWG, on the other hand, was not interested in the plant’s development
and focused its efforts on maximizing profits.
Lucrative profits in the aluminium sector also made it an attractive target for
criminal gangs. Russian organized crime exploded exponentially after the
dissolution of the Soviet Union and it enjoyed new freedoms in a market based
economy. Large amounts of money obtained through illegal activity allowed them
to pay bribes to government officials. Law enforcement agencies were powerless
as low budgets and hyperinflation meant they had no means to even buy basic
equipment. As a result of corrupt government officials and a lack of law
enforcement, criminal groups controlled almost 45% of the Russian economy by
the end of 1990s.
Expansion of organized crime into the aluminium industry began with its taking
control over transport, trucking, and ports. Plants had to pay criminals a fee
for using these facilities while shipping metal out of Russia. Along with
extortion, criminal gangs also stole aluminium from the plants by bribing
workers and the security services.
Gradually, criminal groups grew interested in profit sharing and direct
ownership of aluminium plants, rather than simply extortion and theft. In their
fight for control over the aluminium industry, gangs were ready to use every
means at their disposal - from intimidation to physical assault and murder.
Plant managers who were unwilling to co-operate were threatened and, in some
cases, murdered.
The violence of that period, combined with the inactivity of law enforcement
agencies, left no choice for legitimate businessmen but to accept ‘protection”.
Any attempt to refuse ended up with physical assault or killing of either the
businessman or someone from his circle, such as a family or team member. An
alternative way to get rid of the “protector” was to pay a large indemnity fee.
However, this often led to the businessman being confronted with a “protection”
offer by a rival criminal group.
Despite the long lasting violence that shook the Russian aluminium plants in
the mid to late 90s, the industry gradually began to demonstrate signs of
improvement. In 1995 and 1996 the Sayanogorsk smelter, headed by Mr Deripaska,
managed to improve its performance dramatically and it even built a foil
manufacturing plant (SAYANAL) with its own funds. Soon, the Sayanogorsk smelter
became the leading player in the industry in terms of profitability,
technological development, product quality and environmental safety. At the end
of 1998, it was named among the 20 leading Russian companies by Expert, one of
the most reputable business magazines in Russia.
In the autumn of 1997, Mr Deripaska initiated the establishment of a group of
Russian aluminium smelters called Siberian Aluminium, which in 2001 was renamed
the Basic Element Company. The Sayanogorsk smelter became the parent enterprise
with other members including the SAYANAL foil mill and the Dmitrov pilot plant
which produced aluminium can sheets that allowed for the production of
aluminium beverage cans in Russia for the first time.
Mr Deripaska began to pursue an active policy of acquisitions and
diversification. In late 1997 and early 1998, the Sayanogorsk aluminium smelter
entered into partnership agreements with two major alumina refineries of the
former USSR, the Nikolaev refinery in the Ukraine and the Pavlodar refinery in
Kazakhstan. The agreements provided for a future incorporation of the two
refineries into the Siberian Aluminium Group.
By mid 1998, Siberian Aluminium became the industry's largest vertically
integrated structure that possessed not only a powerful production base but
also an in-house sales system. It also maintained stable working relations with
a number of the leading Western companies such as the Reynolds Metals Company
in the USA, the FATA Group in Italy and others.
The conflict of interests between two major private shareholders of the
Sayanogorsk smelter ended up with TWG’s losing control over the plant. After
additional shares of the Sayanogorsk smelter were issued in April and May 1998
to raise funds required for the development and modernization of the smelter,
and the tender for some of the state-owned shares that was held in September
1998, Aluminproduct and other companies controlled by Mr Deripaska consolidated
more than 76% of the smelter's authorised capital.
In tandem, directors of other aluminium plants also made efforts to break free
from TWG, which had systematically starved the aluminium industry, despite its
excessive profits. While the industry urgently needed investment to upgrade and
modernise production facilities, TWG breathed just enough oxygen into the
plants to keep production alive, while the ageing facilities were largely left
to wither. This resulted in a serious conflict at a number of TWG controlled
facilities. In addition, due to a conflict among TWG shareholders, the company
was split on the inside. Faced with such developments, the TWG empire began to
crumble.
From 1999, when Mr Putin became President of Russia, organized crime activity
began to gradually diminish. Political will to combat organized crime and
restore order in the country gained strong support from businessmen, many of
whom personally experienced enormous pressure from criminal gangs. Over time,
businesses became more confident in the ability of law enforcement agencies to
protect legitimate entrepreneurs and this created solid ground for the
sustainable development of Russian industry.
In the meantime, Mr Deripaska was actively promoting the need to cancel the
internal tolling tax benefits in the aluminium industry. He was supported by
the Government of the Russian Federation, which decided to abandon customs
privileges for internal tolling from January 1, 2000. Export duties on raw
aluminium were introduced from the second quarter of 2000.
During 1999 and 2000 TWG began to sell its aluminium assets in Russia.
Controlling stakes in the Bratsk and Krasnoyarsk smelters and the Achinsk
Alumina Refinery were sold to Roman Abramovitch, owner of Sibneft.
Simultaneously, Sibneft's shareholders agreed to buy the Novokuznetsk smelter
from the MIKOM company.
At the same time, TWG started to lose its assets in other CIS countries. TWG's
acquisition of shares in enterprises in Kazakhstan was annulled. Also, TWG's
transactions for the acquisition of shares in the Nikolayev Alumina Refinery
were rescinded on the basis of a law that allowed the Ukrainian prosecutors to
proceed against, and for the courts to cancel, transactions that deliberately
damaged the economy. 36% of the plant's shares were offered at auction and
acquired by Ukrainian Aluminium, a company affiliated with Siberian Aluminium.
This transaction, in addition to the stake in the Nikolayev Alumina Refinery
acquired by Siberian Aluminium in 1999, brought the group's interest in the
plant to 66%.
In 2000, Mr Deripaska and Mr Abramovitch agreed to merge their holdings to form
a powerful integrated company, which could compete on an equal footing with the
largest producers in the world market. The new company created by Mr Deripaska
and Mr Abramovitch on a 50:50 basis, which accounted for around 10% of the
world's aluminium output, was named Russian Aluminium (Rusal). In 2003, the
Sibneft shareholders sold a 25% stake in Rusal to Basic Element and in 2004,
Sibneft exited the business entirely and Basic Element became sole owner of
Rusal.
After Rusal was set up the aluminium industry was changed dramatically. Mr
Deripaska and Mr Abramovitch managed to consolidate different sections of the
industry under Rusal’s umbrella creating a platform for modernization and
steady growth.
A modernization program designed to increase production and reduce harmful
emissions was introduced at Rusal’s smelters and refineries. The company
launched the full-scale modernization of the Krasnoyarsk and Sayanogorsk
aluminum smelters and the expansion of the Nikolayev Alumina Refinery. By the
end of 2003, reconstruction of the ARMENAL plant in Armenia, acquired by Rusal
in 2000, was started. At the beginning of 2004, the company commissioned a new
aluminum cans production project in the city of Vsevolozhsk. In 2006, Rusal
launched the Khakas Aluminium Smelter, the first aluminium production facility
built in Russia over the last 20 years.
Rusal paid particular attention to expanding its raw material supply base. By
taking over the management of the Compagnie des Bauxites de Kindia and the
Friguia Bauxite along with the Alumina Complex in Guinea in 2001 and 2002,
RUSAL enhanced its raw material supply by 25%. In 2006, Rusal also bought the
majority stake in the Aroaima Mining Company in Guyana.
Over the years Rusal has been consistently building its presence in the global
arena. In addition to its acquisitions in Guinea and Guyana, in 2005 the
company purchased a 20% stake in the world’s largest alumina refinery
Queensland Alumina Limited (QAL) in Australia, thus extending its alumina
supply by another 770,000 tons a year. In 2006, Rusal added to the list of its
international assets the ALSCON Aluminium Smelter in Nigeria, a cathode plant
in China and the Eurallumina Alumina Refinery in Italy.
The company has always based its activities on a strong commitment to corporate
governance and corporate social responsibility — an ethos far removed from the
state of affairs in Russia's aluminium industry just 10 years ago. In 2006,
Rusal disclosed its ownership structure as well as its main operating and
financial indicators. The company also introduced a Code of Ethics and invited
independent directors to its Board. These steps further strengthened Rusal’s
commitment to greater transparency, good corporate governance and high business
standards. Rusal was the first company in Russia that published its CSR report
in compliance with the UN Global Compact Principles.
In parallel with the formation of Siberian Aluminium and after that of Rusal,
another vertically integrated aluminium holding was being created in Russia. As
a result of the consolidation of the equity capitals of the Irkutsk and Urals
aluminium smelters in 1996, the Siberian-Urals Aluminium Company (SUAL) was
established and by 2000 it included the Bogoslovsk and Kandalaksha aluminium
smelters.
Two years later, SUAL appropriated a 90% stake in the Nadvoitsy Aluminium
Smelter and merged its aluminium assets with the aluminium business of
SevZapProm. This increased SUAL's assets to 19 production facilities including
the Volkhov and Volgograd smelters and the Pikalyovo Alumina Refinery. In 2003,
the merged company produced about 2 million tonnes of alumina (65% of total
Russian output) and 850 thousand tonnes of primary aluminium (25% of total
Russian output) a year. In 2004, SUAL bought the Zaporozhye Aluminium Complex
in Ukraine, the first of SUAL’s businesses outside Russia.
Thus the beginning of the third millennium was marked by the appearance of two
powerful companies in Russia with leading positions in the world's aluminium
market.
Most Recent History
In 2007, the process by which the Soviet Union’s aluminium assets were
privatised, broken up and slowly consolidated came full circle after Rusal
merged with its Russian rival Sual and the alumina arm of the Swiss resource
group Glencore. The merged entity, United Company Rusal, the largest aluminium
producer in the world, accounts for approximately 12% and 15% of global
production of aluminium and alumina respectively. It is a truly global business
with operations in 19 countries across 5 continents and 100,000 employees. The
company is comprised of 15 aluminium smelters, 12 alumina refineries, 7 bauxite
mines and 3 foil mills producing 4.2 million tonnes of aluminium and 11.3
million tonnes of alumina every year.
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