Aluminium in Russia

The Aluminium industry in Russia was arguably founded on 14 May 1932 when the Volkhov smelter in the Leningrad Oblast produced its first batch of aluminium. One year later, the first aluminium was produced by the Dneprovsky smelter in Ukraine. Despite the fact that in later years these smelters were steadily boosting output, it was not enough to meet the growing demands of the economy and construction of new production facilities in Russia began.

In 1938, the 40,000 Mtpa Tikhvin Alumina Refinery was put into operation (today known as the Boxitogorsk Alumina Refinery), and in 1939 the Uralsk Aluminium and Alumina Complex was commissioned with an annual capacity of 70,000 Mt of alumina and 25,000 Mt 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 evacuation of production facilities on an unprecedented scale. The main equipment of 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 smelter produced its first aluminium in Siberia. Two years later, on 9 May 1945 – the Victory Day – the Bogoslovsk aluminium smelter also produced its first metal.

During the post-war period the demand of the Soviet economy for strategic metals continued to grow, prompting a rapid development of the aluminium industry. In the 1950s, the Kandalaksha (1951), Nadvoitsy (1954) and Volgograd (1959) smelters were commissioned, as well as the Belaya Kalitva metals production facility (1954) which specialises in aluminium alloy-based products. In 1960, the Samara metal works began operations; today it is the largest producer of aluminium semi-finished and finished 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 Pikalevo refinery, an integrated production facility processing nepheline concentrates was commissioned; in 1964, the Pavlodar aluminium smelter in Kazakhstan was put into operation; 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 sited close to large hydro-electric power plants to make use of these cheap energy sources. Over the same period, the Krasnoyarsk metal works, the Pavlodar aluminium smelter and the Dmitrov pilot facility for production of aluminium tape were also commissioned.

Due to the poor domestic raw materials supply unable to meet the rapidly increasing demand for aluminium, Russian metal producers were forced to procure alumina from overseas: Guinea, India and other countries. The Nikolaev alumina refinery in Ukraine became the first production facility in the industry designed to use high-quality imported materials. The Nikolaev alumina refinery was built in 1980 and initially refined African bauxite.

In 1985, the Sayanogorsk aluminium smelter began operation, equipped with state-of-the-art technologies and equipment. In 1995, the Sayansk Foil mill was put into operation. It is the largest Russian producer of aluminium foil and foil-based packaging materials.

The successes of the aluminium industry in Soviet times were now threatened by the break-up of the USSR. The industry was at risk of falling prey to the system’s weaknesses: a lack of in-house resources of raw materials, isolation of the Soviet economy and absence of connections with international alumina producers.

The signs of the ensuing crisis first emerged in the 1980s. After the collapse of the Soviet bloc, alumina supplies from Hungary and Yugoslavia were drastically reduced. Under the long-term contracts with these countries, the USSR used to purchase up to 1.5 million Mt of raw materials annually.

Due to the shortage of raw materials a number of production facilities began downsizing production at the end of the 1980s. Following the decision of the USSR Council of Ministers in 1991, 480,000 Mt of aluminium were allocated for sale in the world market in order to use the proceeds to procure the raw materials and equipment required by the facilities.

The break-up of the Soviet Union aggravated the shortage of raw materials. Alumina refineries located in the Ukraine, Kazakhstan and Azerbaijan with their total annual capacity of 2.5 million Mt became foreign operations located in the independent countries. The Russian production facilities were only able to meet 40% of the aluminium business demand for raw materials.

For this reason, the government, headed by Yegor Gaidar authorised further sales of aluminium in the world market to raise funds for the purchase of raw materials. Distribution of quotas for metal sales and purchase of materials was managed by the state concern ‘Aluminium’, which was established in 1990 on the basis of the respective divisions of the Soviet Ministry of the Metal Industry.

However, this practice of providing the industry with raw materials did not develop any further. The country was going through a period of hyper-inflation and the rouble-nominated working capitals of the companies were diminishing every day. It was becoming evident that in the foreseeable future the industry would simply run out of money to continue export and import operations. Moreover, the ‘shock therapy’ economy hit the military-industrial complex and mechanical engineering the hardest, which consumed a large share of the Russian aluminium producers’ output.

By 1994, aluminium consumption in Russia fell down to 15% of the 1989 mark to about 2 kg per capita. It was becoming obvious that the only way the industry could survive was to re-orient itself towards foreign markets. As a result, the 1992 performance data showed that aluminium export exceeded the 1,000,000 Mt mark for the first time.

At the beginning of the 1990s, a long time before privatisation, the Western companies started to bring Russian aluminium smelters under their control. One Swiss trader Marc Rich began a gradual takeover of the Krasnoyarsk smelter from 1991. At the same time, the Bratsk aluminium smelter fell into the hands of the fledgling British Trans World Group (TWG). Western companies started aggressive lobbying for the introduction of the internationally renowned tolling schemes in Russia, when the imported alumina is refined and the produced aluminium is exported from the country.

In February 1993, privatisation of the aluminium industry began. In two years, the distribution of production facilities in the industry was completed. As a result, the Bratsk, Sayanogorsk, Krasnoyarsk (partially) smelters and the Pavlodar alumina refinery in Kazakhstan with an annual capacity of 1 million Mt were appropriated by TWG, whose interests in Russia were represented by the two brothers, Michael and Lev Cherney.

While selling the Russian aluminium independently on the London Metal Exchange, TWG allowed the plants to keep sufficient money to cover only production and maintenance costs. TWG did not make any investments in production with the only exception of the A7E high purity aluminium projects, in great demand in the world market.

However, in 1995 the influx of Russian aluminium caused a slump in the LME prices. The price of one tonne of aluminium dropped by US$ 300. At the same time, the Russian Ministry of Railways raised export tariffs for railway transportation. Together with the rocketing alumina prices in the world market, production profitability fell down to 1%. This situation lasted for two years. Changes in world market trends did not have a major impact on tolling operators, who preferred to place all the costs upon the Russian plants and keep excess profits. TWG prevented any attempts by the Directors of Russian plants to pursue an independent industrial policy.

It became evident that exporting production facilities were heavily dependent on market trends, when trading companies benefited from the rise in the prices, while a drop in the prices had an adverse effect exclusively on the Russian producers. Moreover, tolling did not bring any profits to the Russian state budget.

Under the tolling scheme the imported alumina and the exported aluminium were duty-free. Tolling did not allow the working capital of the plants to increase to the required amounts. It was also not one of the strategic goals set by traders. On the contrary, TWG granted credits to the plants through its own off-shore companies and banks making them dependent not only on raw materials but also on credits. The metal that the smelters were allowed to produce for its own needs was used to repay loans of TWG, which during the second stage of privatisation became a co-owner of Russian aluminium smelters and was focused on becoming a leader in the world market by selling Russian metal on LME.

In the early 1990s, the Russian aluminium sector obtained domestic capital. In 1992, Aluminproduct headed by Oleg Deripaska started to buy shares of the Sayanogorsk aluminium smelter both for itself and for Trans-CIS Commodities, a subsidiary of TWG. By the beginning of 1994, both Aluminproduct and TWG (through Trans-CIS Commodities) became the major shareholders of the Sayanogorsk smelter. Oleg Deripaska was elected the General Director of the smelter.

In 1995, it was proposed to create a financial industrial group (FIG) in the aluminium industry of Russia. The establishment of the FIG was followed by preparation for registration of the managing company Siberian Aluminium, whose shareholders were to be represented by the above mentioned group members. It was planned that TWG subsidiaries would be entitled to almost 50% of shares.

However, the preparation process stalled when the establishment of the FIG under the auspices of Trans-World Group was almost finished. By mid-1997, a serious conflict arose at a number of facilities between the Russian shareholders and top managers on one side, and TWG shareholders on the other. This resulted in a split inside the Trans-World Group.

By that time the most vulnerable areas of TWG’s aluminium empire started to cause problems. Despite excess profits, almost no investments were made into the upgrading and modernisation of production facilities. The aluminium industry moved forward from the period of survival to sustainable development; however, TWG simply did not recognise the change.

The company’s assets were not integrated. Raw materials and aluminium production facilities still did not work together. This, on the one hand, increased dependence of the plant management on TWG’s actions, but, on the other hand, made it less immune to the impact of external factors in general. In addition, the system built by the British company was not balanced in terms of raw materials. More than three quarters of the smelters’ alumina demand had to be satisfied by external resources and the materials were purchased not under long-term contracts, but in the spot market. So, when TWG’s rivals managed to take control over the Achinsk refinery, the Nikolaev refinery and the Pavlodar smelter, the empire started disintegrating rapidly.

In the autumn of 1997, Oleg Deripaska announced the termination of the partnership with Trans-World Group and initiated the establishment of a group of Russian aluminium smelters called Siberian Aluminium. The Sayanogorsk smelter became the parent enterprise with other members including the SAYANAL foil mill and the Dmitrov pilot plant of aluminium can sheets, where for the first time in Russia the production of aluminium beverage cans was being established.

Oleg Deripaska began to pursue an active policy of acquisitions and diversification of relations. In late 1997 – early 1998, the Sayanogorsk aluminium smelter entered into partnership agreements with two major alumina refineries of the former USSR, the Nikolaev refinery in Ukraine and the Pavlodar refinery in Kazakhstan. The agreements provided for a future incorporation of the two refineries into the Siberian Aluminium Group.

After additional shares of the Sayanogorsk aluminium smelter were issued in April–May 1998 to raise funds required for development and modernisation of the smelter, and the tender for some of the state-owned shares was held in September 1998, the companies representing TWG effectively lost their control over Sayanogorsk. During this time Aluminproduct and other companies controlled by Deripaska consolidated more than 76% of the smelter’s authorised capital.

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 and maintained stable working relations with a number of the leading Western companies such as Reynolds Metals Company (USA), FATA Group (Italy) and others.

In the meantime, Mr. Deripaska was extensively promoting the idea of the necessity to cancel the internal tolling tax benefits in the aluminium industry. His position was supported by the Russian Government, and in December 1999 the Governmental Committee on Urgent Issues adopted a resolution to cancel the tax-free internal tolling scheme from January 1, 2000.

The new conditions made it impossible for Lev Cherney to continue his aluminium business in Russia. In February 2000, he sold his shares in the Krasnoyarsk and Bratsk aluminium smelters, the Achinsk alumina refinery and the Krasnoyarsk HPP to the shareholders of Sibneft.

As a result of negotiations between the shareholders of Sibneft and Siberian Aluminium in April 2000, it was decided to combine all the aluminium assets under their ownership and create a powerful integrated company, which could compete on an equal footing with the largest producers in the world market. The new company accounting for about 10% of the world’s aluminium output was called Russian Aluminium. Oleg Deripaska became the CEO of the company, whilst maintaining his position as President at Siberian Aluminium. In December 2001, Siberian Aluminium was renamed, the Basic Element Company.

At the same time, another vertically integrated aluminium holding was being created in Russia. As a result of consolidation of the equity capitals of the Irkutsk and Uralsk aluminium smelters in 1996, the Siberian-Urals Aluminium Company (SUAL) was established, and by 2000 it included the Bogoslovsk and Kandalaksha aluminium smelters. Thus, the beginning of the third millennium marked the appearance of two powerful companies in Russia with leading positions in the world’s aluminium market.