The political economy of russian aluminium between the dual state and global markets

The situation of the Russian aluminium sector is analysed within this broader context, with cial attention to the role of Russian aluminium sector in global and regional trade, how its

The Political Economy of

Russian Aluminium

Between the Dual State and Global Markets Edited by Jakub M Godzimirski

Series editor Timothy M Shaw Visiting Professor University of Massachusetts Boston, USA, and Emeritus Professor at theUniversity of London, UK

impacts its organization and governance The IPE series has tracked its development in both analysis and structure over the last three dec-ades It has always had a concentration on the global South Now the South increasingly challenges the North as the centre of development, also reflected in a growing number of submissions and publications on indebted Eurozone economies in Southern Europe An indispensable resource for scholars and researchers, the series examines a variety of cap-italisms and connections by focusing on emerging economies, companies and sectors, debates and policies It informs diverse policy communities

as the established trans-Atlantic North declines and ‘the rest’, especially the BRICS, rise

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Jakub M Godzimirski The Political Economy

of Russian AluminiumBetween the Dual State and Global Markets

Norwegian Institute of International

Affairs

Oslo, Norway

International Political Economy Series

DOI 10.1007/978-3-319-57234-5

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This book is one of the deliverables of the TIGER project, financed by the Research Council of Norway (RCN) The author is deeply grate-ful—without this funding, this book would not have been written The aim of the project, with its team of leading Western and Russian experts, has been to shed light on Trade Integration, Geopolitics and

the Economy of Russia—thus, ‘TIGER’ The situation of the Russian

aluminium sector is analysed within this broader context, with cial attention to the role of Russian aluminium sector in global and regional trade, how its development has been driven by geopolitical fac-tors in a larger historical perspective and its specific role in the broader context of recent economic and political developments in Russia The project has been coordinated by Dr Arne Melchior of the Norwegian Institute of International Affairs (NUPI); many members of the pro-ject team have given invaluable comments on earlier drafts of the book

spe-at project workshops and seminars in Helsinki, Oslo and Moscow I would like to thank Roman Vakulchuk from NUPI, Nataliya Volchkova and Nataliya Turdeyeva from the Centre for Economic and Financial Research (CEFIR), Aleksander Knobel from the Gaidar Institute IET, Laura Solanko and Heli Simola from the Bank of Finland Institute for Economies in Transition (BOFIT) as well as David Tarr, who has long experience from the World Bank, for useful comments on the book man-uscript and fruitful collaboration within the framework of this fascinating and very timely project

This book could not have been written without the support of many other colleagues Here I wish to thank my NUPI colleague Indra Øverland, for making funds available as well as for many useful com-ments throughout the process Also Helge Blakkisrud, Julie Wilhelmsen and Iver B Neumann from NUPI have been inspirational sparring partners—our conversations on matters Russian have helped me to understand the complexity of the situation in this great and important country.

The current form of the book owes very much to Susan Høivik, our long-standing language editor and guide, who has (de)Polished my English and, I hope, made reading these chapters a smoother experi-ence to those at the other end of the book value chain Also, our NUPI librarians deserve my thanks for helping with access to various types of written sources on Russian and global aluminium industry Many of the most important texts used in my analysis have been provided by David Johnson through his Johnson’s Russia List (JRL) David’s efforts are indeed Herculean, so he deserves warm thanks from all those working

on Russian matters, this author included We all recognize JRL as an indispensable tool in our daily dealings with Russia—and hope that we will never experience a day without his List

I would also like to express my gratitude to Elena Morenko from

UC Rusal, for providing materials on the history of the company and its current situation, during my visit to Moscow in 2016 Also several Norwegian business partners deserve mention here for all the assistance provided over the past 15 years—without their help this book would have never been written

Let me also note my gratitude to Tim Shaw, the editor of the IPE series, who from the very beginning has shown great interest in and support for this book project Christina Brian and James Safford from Palgrave Macmillan have guided me through the editorial process and shown great support at critical junctures However, overall responsibil-ity for this volume, and any editorial shortcomings, rests entirely on my shoulders

Finally, I would like to thank my wife Magdalena, for outstanding patience and understanding during the preparation of the final draft of the book She provided practical support in this hectic period—as she has done ever since we first met, one autumn day in Paris in 1984 Also my children Zuzanna and Jan have met the challenges with understanding and positive attitudes

To all these persons, I extend my warmest thanks

Part I Russian Aluminium and Market Forces

3 Soviet and Russian Aluminium Until 2000 in Brief 29

5 Global Consolidation and Challenges 2007–2016 79

Part II Russian Aluminium and Russian Politics

7 Capture of the Russian State Under Yeltsin? 139

9 Masters of the Russian Aluminium Roulette 211

10 Conclusions 261

Jakub M Godzimirski has since 2012 been research professor at the

Norwegian Institute of International Affairs NUPI Between 1995 and

2012, he served as a senior research fellow at the Centre and Department

of Russian and Eurasian Studies at NUPI In 2009–2010, he was the head of the NUPI Energy Programme, and in 2012–2014, he was the head of the Research Group on European Affairs In 2014, he returned

to the Research Group on Russia, Eurasia and the High North at NUPI

He holds a PhD in social anthropology His present research interests include Russian and European foreign and security policy, with a focus

on energy’s role and Russia’s relations with the West He has authored, co-authored, edited and co-edited several volumes on these issues, and published many peer-reviewed articles and book chapters with leading academic publishers such as Palgrave Macmillan, Routledge or Ashgate

The most recent of his major publications are Russian Energy in a

Changing World What is the Outlook for the Hydrocarbons Superpower?

published in December 2013 with Ashgate and EU leadership in Energy

and Environmental Governance? Global and Local Challenges and Responses with Palgrave Macmillan.

GEW Gigawatt

IMF International Monetary Fund

kW kilowatt

MW Megawatt

RAO UES Russian Joint Stock Company Unified Energy Systems

RBK RossBusinessConsulting

SAMEKO Samara Metallurgical Company

TBT/SPS Technical Barriers to Trade/Sanitary and Phytosanitary measures

TNK BP Tyumen Oil Company British Petroleum

Fig 10.1 Russian aluminium industry between market and politics 267 Fig 10.2 Abramovich, Deripaska and Vekselberg in

Nezavisimaya Gazeta annual rankings of

Table 2.1 USSR and Russia: shares in global production of bauxite,

Table 4.1 RAO UES and Aluminium Sector in Expert

Table 5.2 The effect of the crisis on bauxite production of

Table 6.4 Regional dimension of primary aluminium

Table 7.1 Timeline of the main events in relations between

Table 7.2 Russian key oligarchs under Yeltsin: members

Table 9.2 Deripaska’s meetings with leadership of the

Table 9.3 Russian aluminium actors in Russian top

Table 9.4 Deripaska’s and Vekselberg’s ‘support teams’ on

Table 9.7 Russian economic elite 2008–2016

(top ten positions based on Russian Forbes

In his intriguing and unconventional account of developments in President Putin’s close entourage, Mikhail Zygar (2015, p 18) has recounted how a small piece of aluminium—most probably produced

in Russia—might have changed the course of history Persons close to the Russian president told Zygar that when Vladimir Putin was to meet the newly elected US President George W Bush for the first time, in Ljublana, he decided to show him a small aluminium medal with an image of the Virgin Mary Putin explained to his US counterpart that this was his most precious family souvenir, a gift from his grandmother that had been miraculously saved when his summer house was com-pletely gutted by fire In fact, Zygar was told, this piece of aluminium had nothing to do with Putin: it had been forged by the Russian secret services, in order to be used instrumentally as an element of deliberate image building As President Bush was known to be a fervent born-again Christian, the Kremlin image-makers thought that if Putin could present himself as a believer that would help him to convince Bush that he was a man to be trusted, someone who held the same basic values

Judging from the comments made by George W Bush in the math of this meeting, where he said that he had looked Putin in the eye and had found him to be very straightforward and trustworthy, the alu-minium trick apparently worked, and the two newly elected leaders got along well together Of course we cannot know whether this faked holy medal was made from Russian aluminium, or what happened later to this small piece of aluminium that was used to win over the US president

after-Introduction

© The Author(s) 2018

J.M Godzimirski, The Political Economy of Russian

Aluminium, International Political Economy Series,

DOI 10.1007/978-3-319-57234-5_1

However, what is certain is that the story of the Russian aluminium industry deserves closer academic scrutiny, as this branch of Russian industry can serve as a prism through which to examine the real work-ings of modern Russia.

The recent history of the Russian aluminium industry has gone through various phases In order to understand all its ups and downs

we need to paint a broader picture, one that includes not only opments in the branch but also the wider political and economic con-text in Russia This book aims to show how the aluminium industry is

devel-an importdevel-ant element of the Russidevel-an political devel-and economic puzzle, devel-and how, in order to survive, it has had not only to cope with global market

forces but also to find a modus vivendi with the new system of

govern-ance that has emerged in Russia after the collapse of the Soviet Union and the entry of the new elite Although the subject is the evolution

of the Russian aluminium industry throughout the entire post-Soviet period, special attention will be paid to the time after 2000, and how the industry and Russian aluminium tycoons have related to the global aluminium markets that have been the main ‘recipient’ of this Russian commodity and to the political framework that has defined the rules of the game on the domestic front

Relations and tension between market and political forces are key questions studied by political economists This book examines how those relations and tensions are managed by one specific branch of the Russian economy that must operate in a challenging political and mar-ket environment What makes the study of the Russian aluminium sector

of particular interest is the specific nature of the global aluminium ket which has been undergoing a major transition The centre of inter-est has been shifting to Asia—more specifically to China, which has now developed its own production of this key industrial commodity The evo-lution of the political system in Russia has had both a direct and an indi-rect bearing on how the various aluminium actors can operate in today’s Russia

mar-In his study of the political economy of Putin’s Russia, Pekka Sutela observed that there are three factors which make Russia a special case (Sutela 2012, p 1) The first is geology, which has endowed Russia with exceptional natural resources Secondly, Russia is the only country that is located in Central Europe, the Arctic, the Pacific Rim, the Caucasus as well as Central Asia; thus, Russia is part of many pictures without neces-sarily being the centrepiece of any of them The third factor noted by

Sutela is Russia’s recent past as a superpower founded on a special sianic ideology of the Second World War The former superpower has a rich industrial base, an educated population, prominent capabilities in research and development—as well as a heavy psychological burden to bear (Sutela 2012: 1).

mes-All three factors have influenced the development of the country’s aluminium industry Geology poses some challenges, as Russia is not well endowed with bauxite ores, which have had to be imported or replaced

by locally available raw materials like nepheline or apatite Russia’s raphy is both an opportunity and a challenge It provides Russia with important assets—like hydropower, the main source of energy for the country’s aluminium industry Moreover, the fact that today’s Russian Federation is spread over such a vast territory is advantageous for devel-oping trade and economic relations with other actors, crucially important for the country’s aluminium producers who export the lion’s share of production abroad But geography also poses challenges: the raw materi-als and final products must travel long distances, making transport costs a substantial part of the Russian aluminium equation

geog-Finally, there is Russia’s recent past as a superpower and how that has affected the Russian aluminium industry We can identify at least three main influences here First, the rising ideological Soviet superpower decided to develop aluminium production in the USSR for strategic rea-sons, as access to this commodity was of strategic significance for mod-ernizing the military–industrial complex as well as the aviation and car manufacturing industry The development of the aluminium indus-try was also directly linked with the flagship programme of the Soviet Communist Party: electrification of the Soviet Union Access to cheap hydropower has until recently been a key competitive advantage enjoyed

by Russian aluminium producers Second, the collapse of the Soviet Union as an ideology-driven superpower with global ambitions resulted

in a drastic fall in demand for aluminium on the Russian domestic ket Demand for aluminium in Russia in the first years after the collapse

mar-of the Soviet project was 97% lower than during the Soviet period The main reason was declining demand from the country’s military–industrial complex, which was forced to slash production, for economic reasons (Leijonhielm and Larsson 2004, p 16) Third, the collapse of the Soviet project had been due largely to inability to compete economically with other centres of global power, so the new political elite of Russia decided

to change the model of economic development One measure intended

to make the Russian economy more competitive, while also reducing the possibility of sliding back to the recent Communist past, was the programme of privatization of economic assets The result was that the Russian state relinquished its control of key aluminium assets, which ended up in private hands That changed the ownership structure of the industry and opened a period of what has been described as ‘Russian alu-minium wars’, with key actors fighting for control over production assets.This book examines recent developments in a vital sector of the Russian economy that is very strongly connected to global markets, but also clearly influenced by Russian politics Such a study is an interesting academic endeavour, for several reasons For one thing, there have been various parallel processes involved in shaping the evolution of the alu-minium sector—and indeed of the whole Russian economy—since the fall of the Soviet Union.

First, the system has changed, from one in which the state was the sole owner, to one where private ownership has become predominant Second, the process of denationalization and privatization of the aluminium sector has passed through several phases—the ‘aluminium wars’ of the 1990s, fol-lowed by oligarchic consolidation at the national level around 2000, and globalization and internationalization from around 2007 Third, inter-nationalization of the sector was to some extent caused by the fact that the post-Soviet Russian aluminium sector has had to redefine itself and go global in order to survive, due to plummeting domestic demand In the wake of the economic crisis that hit Russia hard after the collapse of the Soviet project, the sector has evolved—from being a central element of the autarchic and heavily militarized national economy that supplied the Soviet military and civilian industry with huge volumes of raw and processed alu-minium, to becoming a key player on the increasingly competitive global aluminium market, which also has been facing structural demand-and-supply challenges Fourth, internationalization of the sector has helped

to make it much less opaque and more transparent, as going global has brought the need to meet internationally accepted standards of govern-ance and reporting in order to be able to attract necessary investment.The evolution of the sector has been influenced not only by global market forces but also by the evolution of the Russian political system Privatization of the aluminium sector took place during the turbulent 1990s, with Boris Yeltsin as the president of the country and the emer-gence of the Russian oligarchic system During this period, several partly violent conflicts led to consolidation of the Russian aluminium industry,

and its key assets came under the control of a small group of oligarchs Vladimir Putin’s ascent to power and the consolidation of the country’s political system have changed the political and economic framework con-ditions for the activity of the aluminium sector in Russia, forcing the owners to learn how to survive under these new circumstances To be able to generate revenues on the global commodities market and flourish

in Russia, the owners had to learn not only how to ‘read’ the economic script but also how to read the minds and intentions of the country’s politicians Russian aluminium tycoons whose revenues were generated globally but whose main assets were located in Russia had to learn how

to adapt to changing global market conditions and also to the changing rules of the political game in the Russian dual state, where real political power has shifted from the Yeltsin family supported by a small group of oligarchs, to Putin’s power vertical dominated by a small group of new insiders with roots from the Soviet and Russian power structures

outline of the book

To examine the evolution of the Russian aluminium sector in a broader historical, economic and political context, this book addresses several specific questions

The second chapter presents the global market context in which Russian aluminium sector operates Special attention is paid to the spe-cific characteristics of the lifecycle of aluminium production and mar-ketization, and how those specific characteristics have influenced the development of the global as well as the Russian aluminium sector We also examine how the situation in the global commodities and alumin-ium market evolved—in a longer historical perspective, and in the period 2000–2015, which is the main temporal focus of the study Recent assessments of the future outlook of the global aluminium market are presented, to show how those factors have influenced and will continue

to influence the evolution of the Russian aluminium sector Russian minium production is presented in a broader global context through a mapping of the key actors operating in this sector, their strategies, and how their actions may influence decisions taken by the Russian national champion and key global player, United Company Rusal We examine the role of Russian aluminium producers in the global aluminium mar-ket, their share in global aluminium trade, their competition with other aluminium suppliers and their international aluminium trade relations

alu-Here the focus is on the economic dimension of Russian aluminium trade, and the revenues generated by aluminium production and trade, and the share of aluminium in Russian exports in a longer historical per-spective.

Following this analysis of the global context, the focus narrows in

on the recent evolution of the Russian aluminium sector in the market context Chapter 3 of this book addresses a number of crucial questions What has been the Soviet and post-Soviet geographical and economic logic of the sector? What makes aluminium production an important sec-tor of the Russian economy? What is the connection between the alu-minium sector and the energy sector in Russia? What is the geographical framework for the operations of the Russian aluminium sector, in Russia and elsewhere? How have the processes of national consolidation of alu-minium assets and internationalization of the operations of the Russian aluminium sector affected the geographical dimension of its operations? How does this sectoral geography impact on its competitive ability, regionally and globally? In order to give readers a better understanding

of how this sector has changed over the last years, Chaps 3 4 and 5

of this book take up several other questions, like the evolution of the economic, political, institutional, personal and corporate landscape that has shaped the development of the Russian aluminium sector under Yeltsin and under Putin; and the ‘actorness’ of this sector, focusing on key actors operating in the sector, but also on other actors whose actions have had direct and indirect bearing on the current situation

Part II turns to the broader Russian context for the activity of Russia’s aluminium producers Chapter 6 examines how the relationship between the Russian political power elite and the key players in the country’s alu-minium sector developed and evolved at the regional level The focus

of this chapter is on the regions where the activities of the aluminium sector are concentrated This meso-level analysis focusing on the situa-tion in the Krasnoyarsk krai is used to present a more detailed map of various actors with direct and indirect stakes in the aluminium sector

In Chaps 7 and 8, special attention is devoted to the evolution of the relationship between the Russian state and key economic actors operat-ing in the country What was the point of departure for this evolution? How did the policy of liberalization and privatization launched by the young liberals in the first years of Yeltsin’s rule contribute to changing this relationship? What were the specific features of this relationship dur-ing the Yeltsin era, and how has the situation changed since the ascent

to power of Vladimir Putin? How was this relationship influenced by the very modest attempts at reforming the Russian economy undertaken

by Dmitrii Medvedev during the presumably more liberal interregnum between Putin 1.0 and 2.0 and the Putin 3.0 period? How have the eco-nomic problems faced by the Russian economy during the Yeltsin, Putin and Medvedev periods contributed to modifying the state’s approach to the Russian business community, and vice versa? What are the specific features of the Putin regime today—how has the regime responded to the current economic crisis in Russia, and how might this crisis influence the future economic development of Russia and its aluminium sector? All those important questions—and many others—are taken up in Part II, which paints a broader background picture of the key political, economic and social factors that influence conditions for various economic actors, including those operating in the Russian aluminium sector

Finally, in Chap 9, we examine various strategies used by actors operating in the Russian aluminium sector in seeking to adapt to the changing domestic and international political and economic framework conditions How have these actors gone about coping with the economic and political challenges and crises that have hit Russia several times in the past two decades? In conclusion, we take up the question of how the internationalization of Russian aluminium sector has contributed to changing its internal and external modes of governance

Russian Aluminium and Market Forces

Aluminium is a chemical element in the boron group, with the symbol

Al and atomic number 13 In its pure form, aluminium is a silvery-white, soft, nonmagnetic and ductile metal It is the third most abundant ele-ment in the Earth’s crust—exceeded only by oxygen and silicon That

makes aluminium the most abundant of all known metals,

compris-ing about 8% of the Earth’s crust by mass Due to its chemical teristics, aluminium is rarely found in its pure state but is abundant in combination with other elements in more than 270 different minerals The most important ore for aluminium is bauxite, but aluminium is also extracted from other ores, such as nepheline, which is important for pro-duction of alumina in Russia

charac-Its physical and chemical characteristics—such as light weight, sion resistance, electrical conductivity (Holloway 1988, p 10)—are what makes aluminium important economically and in market and technologi-cal terms Also the fact that aluminium is easily recyclable has made it the metal of choice for many industries and has created incentives for building national systems for its collection and reuse (Das et al 2010; International Aluminium Institute 2009; Schlesinger 2013) These characteristics led

corro-Life magazine to describe aluminium as the metal of the twentieth

cen-tury; and as one book on this dream metal argues (Sheller 2014), it has indeed changed the lives of millions of people

Basics of the Global Aluminium Market

© The Author(s) 2018

J.M Godzimirski, The Political Economy of Russian

Aluminium, International Political Economy Series,

DOI 10.1007/978-3-319-57234-5_2

et al 2010, p 37) Concerning end use in Russia, the same report quoted a Russian study from 2003 showing that 7% of aluminium con-sumption concerned the construction sector, 19% the transport sector, 18% the power generation sector (electricity), 10% went to production

of durable goods, 3% to packaging, and 40% for machinery and ment (Menzie et al 2010, p 38) In an October 2015 presentation on the aluminium market, the head of UC Rusal Russia and CIS division Roman Andryushin quoted historical data on how the use of alumin-ium changed in Russia between 1993 and 2014 (Andryushin 2015) (see Fig 2.1)

equip-However, before aluminium products can reach their final market tinations they must go through the production process The following sections give a brief orientation on the steps necessary before products can be shipped to the markets; who are the main producers today and how the market has evolved; and finally, some words on the changing role of Russia in the global context and on the role of aluminium in Russian trade

des-rAw mAteriAls And ProcessesBauxite was discovered by the French geologist Pierre Barthier in 1821

in southern France, near the village Les Baux-de-Provence—from which the mineral took its name However, industrial production of alumin-ium could begin only after the technology for extracting alumina from bauxite ore—the Bayer process—had been elaborated in 1888 by Karl Josef Bauer, and the technology for producing aluminium from alumina devised by the US chemist Charles Martin Hall assisted by his sister Julia

in 1886, and almost simultaneously by the Frenchman Paul Héroult in 1888

Initially, bauxite production was concentrated in France and in the USA, but technological developments and the growing market resulted

Fig 2.1 Changes in the use of aluminium in Russia 1993–2014 Source

Andryushin, R (2015) ‘Situatsiya na rynke aluminya 2015 Alyuminevaya dolina’, (Moscow: UC Rusal), p 6

in exponential growth in bauxite, alumina and aluminium tion and trade Between 1890 and 2012, global production of bauxite increased from 22,000 tonnes to 211 million tonnes; the growth in alu-mina and aluminium production was almost the same (Ingulstad et al

produc-2014, p 2) Approximately 85% of bauxite produced is used as input for the production of alumina; and all alumina ends up as input for the pro-duction of primary aluminium Producing one tonne of primary alumin-ium requires two tonnes of alumina, which in turn requires that between four and five tonnes of bauxite be extracted The process of alumina and aluminium production is extremely energy-intensive—in 2012, produc-tion of non-ferrous metals, mostly aluminium, accounted for 2% of all delivered industrial energy consumption in both the OECD and non-OECD regions, and was expected to remain at a similar level also in the future (US Energy Information Agency 2016, p 118) All these factors have had impact on the national and global markets for bauxite, alumina and aluminium

In the introduction to their edited volume on the global bauxite industry, Ingulstad, Storli and Gendron (2014, pp 3–4, 5–6) present

a concise description of the production process and global aluminium value chain that can serve as a good point of departure for the present study of the role of Russian aluminium producers in the global context The process of production of aluminium from bauxite is described as

‘one of the longest and most complex refining processes for any known metal’(Ingulstad et al 2014, p 3) This process involves several steps, including heating and cooling of bauxite in caustic soda under pressure, removal of impurities, and washing and calcination during production of the alumina that then goes into the production of primary aluminium through the highly energy-intensive Hall–Hérault process

The need to transport huge volumes of bauxite from extraction sites

to alumina production sites creates an incentive to localize alumina duction facilities close to areas of bauxite extraction The massive need for energy—production of 1 tonne of primary aluminium is estimated to require some 15,000 kWh of electrical energy—provides a major incen-tive to locate aluminium production facilities in areas with easy access

pro-to cheap and reliable energy, preferably not pro-too distant from the final markets Ideally, production of primary aluminium should take place in the same area where bauxite ores are extracted and processed into alu-mina, where there should also be access to inexpensive—preferably sus-tainable—energy, and facilities located not far away from where primary

aluminium is reprocessed into more value-added products, which in turn should be shipped to final markets located not far from the production sites Shorter physical distances between various elements of the global aluminium value chain could lower the transport costs and make the whole system more flexible for responding to changing market condi-tions (Fig 2.2).

However, due to the interaction of various geological, political, nomic and market factors, many primary aluminium production facilities are located in peripheral areas, far away from where bauxite is extracted and alumina is produced Also the distance to final markets drives the costs of operations up The need to have access to abundant, cheap and reliable sources of energy—preferably electricity—drives the cost of oper-ations down and up Down, because energy costs represent between 20 and 40% of total aluminium production costs; up, because of high trans-port costs from alumina production sites to aluminium production sites, and from aluminium production sites to final markets

eco-These problems, in addition to security concerns driven by Soviet strategic calculations, have played a major part in shaping the Soviet and Russian aluminium industry A further recurrent challenge has been the

Ingots

Aluminium products Aluminium scrap

toxic red mud.

Fig 2.2 Aluminium value chain (simplified) Based on Menzie, W.D., Barry,

J., Bleiwas, D.I., Bray, E.L., Goonan, T.G., and Matos, G (2010), Ingulstad,

About-aluminium/Aluminium-life-cycle/

fact that neither the Soviet Union nor Russia has managed to develop its own resource base for production of aluminium, so a relatively high share of the aluminium produced in Russia—and historically in the Soviet Union—has depended on import of bauxites and alumina from abroad Factors shaping the industry in Russia and the evolution of the Russian aluminium industry are discussed in Chaps 3 4 and 5 of this book—here in this chapter, the focus is on the global level and the role

of Russian aluminium in the global context

globAl geogrAPhy—where does russiA fit in?

In order to understand how the aluminium market works, we also need

to examine how the markets for bauxite and alumina have evolved Several studies—(Bertilorenzi 2014, 2016; Bertilorenzi and Barjot 2015; Bertilorenzi and Mioche 2013; Gendron et al 2014; Holloway 1988)—have already shed light on these aspects of the market; there is no point

in simply reiterating their findings here Instead, I focus on the place

of the Soviet Union/Russia in this international landscape by ing some data on the evolution of that market Readers wishing to know more about the longer historical lines can consult an excellent recent work that presents the evolution of the Soviet production and participa-tion in global trade (Bertilorenzi 2016 see pages 209, 215, 240 and 256 for a statistical overview of evolution of the Soviet production) My focus

examin-is on the post-Soviet period, and here I have found the work of Carmine Nappi, mapping the evolution of the global market between 1972 and

2012 (Nappi 2013), very useful (Table 2.1)

In this period, the production and market shares of bauxite and mina decreased, with bauxite production going from ca 7 million tonnes

alu-in 1972 to ca 6.45 million tonnes alu-in 2010, and alumalu-ina production from 2.9 million tonnes to 2.7 million tonnes Shares fell from 10% in 1972 to 3% in 2010 in bauxite production and from 12 to 3% in alumina produc-tion Although the share in primary aluminium production also dropped, from 16% in 1972 to 9% in 2010, production volumes almost doubled—from 1.9 million tonnes in 1972 to 3.7 million tonnes in 2010

Russia managed this market transformation relatively well However,

it was not able to solve the structural problem of dependence on plies of bauxite and alumina from abroad that were needed to feed the increasesd volumes of aluminium production

sup-Two developments in that period changed Russia’s position on the market The first was the collapse of domestic demand for Russian alu-minium, due mainly to the general economic turmoil in the wake of the collapse of the Soviet political project and the de-militarization of the Russian economy, forcing Russian producers to redirect to the global market The second change was the transformation of the ownership structure in the industry following the political decision on the transfer

of state-owned economic assets to private owners

These processes are described in detail in the following chapters Here let me just point out that the process of consolidation of alumin-ium assets led to the creation of an aluminium duopoly in Russia, and then in 2007 the first privately-owned natural monopoly in the country, controlling all aluminium production, most of which was exported This new actor had to learn how to operate in the global aluminium landscape that was becoming far less predictable, with many actors fighting for shares in this rapidly growing market In the 1970s, the market had been dominated by six big international aluminium companies—Alcoa, Alcan, Reynolds, Kaiser, Pechiney, and Alusuisse—which by 1979 controlled 54.4% of bauxite, 73.8% of alumina and 62.2% of aluminium production

Table 2.1 USSR and Russia: shares in global production of bauxite, alumina

(share) Country (share) Country (share)

Jamaica 18 4 Australia 13 23 USSR/Russia 16 9

Now the corporate map of the sector had undergone huge changes, and by 2010 new actors were emerging—among them UC Rusal—who gained control over relatively high market shares Especially, two groups

of new actors contributed to structural change in the market: Chinese companies and aluminium producers from the Gulf area Whereas Chinese companies produce aluminium mainly to supply the domestic market, facilities in the Gulf area—together with other suppliers—have become important exporters of aluminium to the global market

Russian aluminium producers facing the grim post-Soviet reality entered a global aluminium market that was growing almost exponen-tially Global aluminium production had crossed the symbolic one mil-lion tonnes line in 1941, when the industry had to provide military hardware to parties already at war or preparing for entry (Bertilorenzi

2016, p 229) In particular, the huge numbers of aircraft that had to

be produced drove demand for aluminium during the war—USSR alone produced no less than 158,218 aircraft from 1939 to 1945, and each one needed aluminium inputs (Bertilorenzi 2016, p 240) The two million tonnes global aluminium production line was crossed in

1952 20 years later, it reached 11.7 million tonnes (Bertilorenzi 2016,

p 256); in 2010, 42.3 million tonnes—and in 2015, 57.9 million tonnes

of aluminium were supplied to customers worldwide (International Aluminium Institute 2016b)

When Russia emerged as a new state after the collapse of the Soviet Union, the country had to redefine itself as an international actor Also, various kinds of economic actors operating in Russia had to adapt to these new political and economic realities Faced with the growing unpredictability and falling demand for their products on the domes-tic market, where the main customers were companies in the country’s powerful military industrial complex, Russia’s aluminium producers had

to find a quick, workable solution And thus they set about drastically increasing Russian participation in the global aluminium trade

As noted by Gaddy in his study on the adaptation of Russian tarized economy to the post-Soviet challenges, the new situation led Russian aluminium producers to see new opportunities (Gaddy 1996,

mili-pp 100–101) Although figures differ—Gaddy quotes the level of export

of aluminium from Russia as ca 250,000 tons before the export boom

in 1990 and 1.8 million tons in 1993(ibid: 100), whereas two Swedish experts (Leijonhielm and Larsson 2004, p 72) quote slightly higher fig-ures (876,000 tons in 1990 and 2.178 million tons in 1993)—in the

course a few years (1990–1993) Russia emerged as a key player on the global aluminium market.

This came at a very special moment, when aluminium prices were very low—USD 1254 per tonne in 1992 and USD 1139 per tonne in

1993 (Leijonhielm and Larsson, 2004, p 81)—and market had to cope with oversupply However, the dramatic fall in domestic demand left Russian producers with no alternative: for them it was a question of either exporting and surviving, or shutting down the factories and dis-appearing—like many other branches of the economy that could not cope with global competition and political, social and economic tur-moil in Russia The arrival of huge volumes of Russian aluminium on the already strained global market caused huge tensions and resulted

in accusations of dumping and unfair market behaviour Those tions notwithstanding, Russia established itself as key global aluminium player; and ever since then, a very high share of the country’s aluminium production have gone to the global market According to most detailed available data for this early period of Russian market expansion, between

accusa-1990 and 1996, the share of export in Russian aluminium production increased from slightly above 30% to more than 80%, and the volume grew from 876,000 tons to 2.3 million tons (Leijonhielm and Larsson

in Russia and controlling the money flows through the ‘tolling schemes’ that were abolished in two rounds: one in 1999, and then in 2004, when the new tax code removed tolling privileges by imposing additional taxes

on such operations Further details on this specific feature of the early period are discussed in Chaps 3 4 and 5; here let me simply give the reader a general idea of the economic dimension of this activity

A rough assessment of the value of Russian aluminium exports between 1992 and 1996 can be made by combining data on the volumes

of Russian export of aluminium with data on the average annual price for aluminium on the London Metal Exchange (Data on volume and prices from from Leijonhielm and Larsson 2004, p 81) This approach yields the following possible revenues generated by export of Russian alumin-ium in this formative period: USD 1.5 billion in 1992, USD 2.48 billion

in 1993, USD 3.44 billion in 1994, USD 4 billion in 1995 and USD 3.45 billion in 1996—altogether nearly USD 15 billion during those

5 years

Data prior to 2000 are not easily available or reliable, but from 2001 onwards there is the UN Comtrade database that can be used for map-ping Russia’s aluminium relationships (UN Comtrade 2016) Instead of analysing data for each year in this period, I use data for Russian exports

of aluminium and articles (commodity code 76) to map the long-term economic importance of key Russian aluminium partners

In the period between 2001 and 2015, Russian exports of this modity generated no less than USD 94.2 billion in revenues After the

com-2007 consolidation of the Russian aluminium industry, these trade and money flows were controlled by UC Rusal Three countries ‘contrib-uted’ in that period with more than USD 10 billion: the USA (USD 20.7 billion), Japan (USD 17.2 billion) and the Netherlands (13.6 bil-lion) They were followed by a group of countries that imported alumin-ium from Russia worth between USD 10 and 1 billion: Turkey (9.6), Germany (3.6), Portugal (3.5), South Korea (3.4), Switzerland (2.4), Norway (2.1), Greece (1.7), the UK (1.6), Italy (1.4), Poland (1.3) and Ukraine (1.2) It was only after Ukraine (number 14 on this list) that China emerges, having imported aluminium from Russia worth ca USD 0.88 billion In other words, China did not become a key market for Russian aluminium, mainly because the country managed to develop its own industry, which today stands for more than 50% of global produc-tion of aluminium

Given the geographical proximity of the rapidly growing Chinese market to major Russian production facilities in Eastern Siberia, Russian producers viewed China as a sort of promised land for aluminium In recent decades, however, not only has China become self-sufficient, but, together with the global crisis of 2008–2009, supplies of aluminium from China sold on the global market have contributed to its destabiliza-tion (Fig 2.3)

On the other hand, Russian producers still have at least one tive advantage: their production is based mostly on the use of renew-able hydropower supplied by giant hydropower plants in Eastern Siberia, whereas China’s energy mix—and thus its aluminium produc-tion—is dominated by polluting coal The Chinese market is still viewed

competi-as highly attractive, due to the expected high growth in demand for aluminium as well as China’s growing focus on pollution and climate change According to some estimates, China was set to increase its import of aluminium from 3 to 4 million tons in 2015, and UC Rusal was ‘well positioned to benefit from the growing demand’ and wanted

to increase the share of the Southeast Asian market in its export to 30%.1 However, the success of this strategy hinged on UC Rusal having access to inexpensive energy In 2011, the situation was advantageous for Russian aluminium producers because they paid less for energy than the Chinese producers: the cost of electricity varied between USD 20 to USD 30 per MWh in Russia, as against almost twice as much—USD 70 per MWh—in China.2

Russia's share China's share

Fig 2.3 Russia and China: shares in global aluminium production Source U.S

Geological Survey (2016) ‘Aluminum Statistics and Information’ (updated 25 October 2016)

recent mArket develoPments, outlook for the futureAluminium does not differ much from other global commodities in market terms The central factor to be taken into account by those who make strategic decisions on production and trade in this commodity is the price of aluminium they can expect to get in the market According

to a detailed study on commodities published by the World Bank in

2009 (The World Bank 2009), the most characteristic feature of price formation in the market for commodities is its cyclical behaviour, caused

by the fact that ‘supply decisions (how much to plant, how many mine shafts to dig) must be made by market participants well before the final sale price of the commodity is known’ (Ibid., p 54) The same study notes that industrial commodities—including aluminium—generally face

a more volatile price environment because demand is influenced not only

by supply decisions and demand, but also by business cycles and related supply (and demand?) shocks Commodity prices are also sen-sitive to spare capacity, but there are differences between various types

policy-of commodities here With aluminium—and other metals—periods policy-of booms and busts tend to be longer, because of the lags between deci-sions on investment in new capacities and increase in supply

Actors operating on the aluminium market must also be prepared to operate in a more volatile environment as to what they can expect in revenues, because they are more exposed to demand shocks According

to a 2014 study on commodities markets (Deutsche Bank 2014), the global outlook for aluminium is characterized by three distinct phases in the evolution of prices for an oversupplied commodity Phase I involves

a rapid price decline as the market moves into significant over-supply

In Phase II, the characteristic feature is a slow price decay, possibly lowed by a period of price stabilization, as production growth slows or producers implement supply cuts In Phase III, price appreciation is to

fol-be expected, as supply curtailments reach a critical mass, and the ket either anticipates or again moves into deficit These trends can be observed throughout the history of the aluminium industry The situ-ation of recent years can serve as a solemn reminder of how the mar-ket develops and how difficult it is to predict when each of these three phases will begin and end, or how various actors will adapt to the chang-ing market conditions In the course of the past decade, the aluminium market experienced a huge commodity boom that lasted from 2002 until the second half of 2008 Then came a market bust that for the first time

mar-in recent history resulted mar-in lower production of alummar-inium mar-in 2009 than in the year previous Indeed, 2009 was a tough year for alumin-ium producers, who were hit hard by the fall in demand and in prices The 2009 recession resulted in an 8.2% drop in demand for aluminium, and the average price for aluminium dropped by 35% Aluminium pro-ducers responded by cutting annual production by approximately 2.4 million tonnes, to take this volume from the falling market Global alu-minium production decreased by 5.9% as compared to 2008, ending at 37.8 million tonnes in 2009 However, the International Aluminium Institute has assessed the drop in production as even greater—minus 6.18%, from 38.8 million tonnes in 2008 to 36.4 million tonnes in 2009 (International Aluminium Institute 2016b).

According to the latter source, production of primary aluminium declined all over the globe, with the exception of Asia (Area 4/5), where

it actually increased by 12.18%, from 3.92 million tonnes in 2008 to 4.4 million tonnes in 2009 Production of primary aluminium in four other regions was affected only moderately, falling by 1.08% in China, 1.98% in Africa, 3.74% in Oceania (mainly Australia) and 5.71% in Latin America Three production areas were hit more severely: East and Central Europe (including Russia) saw a decline of 11.61%, North America 17.7% and Western Europe 19.4% in primary aluminium production compared with 2008 Alcoa’s primary aluminium production was 11% lower

in 2009 than in 2008 (3.564 in 2009 and 4.007 in 2008),3 RioTinto Alcan reduced its production only by 4% (from 3.981 to 3.803 million tonnes),4 whereas Hydro suffered heavy losses, with primary alumin-ium production falling by more than 20%, from 1.750 to 1.396 million tonnes

The turmoil in the aluminium market was caused partly by a new phase in the world economic crisis, especially in Europe and the USA, but also other factors were involved Especially important here is the

cyclical nature of commodity markets, including the aluminium market,

as seen in Fig 2.4

In its 2014 outlook analysis, Deutsche Bank indicated that try profitability improved between 2010 and 2014 due to a combina-tion of higher prices and lower costs, and opined that the current all-in price of ca USD 2500 per tonne would make most of the aluminium industry cash positive—that is, cash inflows will exceed cash outflows Further, according to the Deutsch Bank analysis, average industry costs

indus-had declined due to weaker producer currencies, price-linked input-cost reductions and general efficiency-improvement measures.

According to the January 2015 World Bank assessment of trends

on global commodities markets, the situation on the global aluminium market was expected to improve slightly in future (World Bank 2015a) However, the price fall observed throughout 2015 could pose new challenges The World Bank study estimated that metal prices in gen-eral would decline by more than 5% in 2015, whereas aluminium prices were expected to rise by 3% —but that has not been the case The report noted also that aluminium inventories, rising since end-2008, decreased

by 22% towards the end of 2014—an important factor influencing the market Further, the main risk was held to be a sharp slowdown in the Chinese economy

In fact, the situation in 2015, with falling aluminium prices, gave rise

to concern Aluminium prices fell 9% in the first quarter (Q1) of 2015, and this negative trend continued in Q2 (World Bank 2015b, p 26) and Q3 as well (World Bank 2015c, p 23) Main reasons given were weaker demand as well as higher exports from China, which created a global sur-plus despite curtailment efforts undertaken by other actors (World Bank

Fig 2.4 Price of aluminium 1960–2015 Source http://pubdocs.worldbank org/en/500671478119762068/CMO-Historical-Data-Annual.xlsx

inventories were declining That served instead to slow demand and tinued growth in smelting capacity in China, in turn influencing market behaviour Although demand for aluminium remained robust because the metal is used for many different purposes and in various sectors of the economy, the price of aluminium continued to fall Some key actors, like Alcoa, announced capacity cuts, but they were limited to only 1% of the market and had little effect on price Here again, Chinese produc-ers were blamed for flooding the market with semi-manufactured prod-ucts that could not be put on the domestic market, where demand was weaker than expected (World Bank 2016, p 29).

con-According to this 2016 World Bank study, the situation in 2016 would remain volatile Falling LME inventories, stronger demand and production cuts in China would push prices up by 3% However, the study concluded that the global market would remain oversupplied,

as new capacity was expected to come on line in China and elsewhere Metal prices were projected to decline by 9% in 2016 due to surplus capacity in most markets However, the price of aluminium was expected

to remain relatively stable, especially compared with nickel and copper, expected to fall by 22 and 15%, respectively

This fairly negative market outlook has also had consequences for Russian aluminium producers In 2016, they faced not only turmoil

on the global market, but also negative developments in Russia where the new round of the economic crisis affected the expected growth in demand for aluminium on the domestic Russian market where they hoped to be able to sell a higher share of their production The lower pace of state-driven investments in Russia and the cuts in the defence budget announced recently may spell problems for Russian aluminium producers However, there is also a certain hope that they will be able

to adapt to this new aluminium reality in the same way as they have adapted to changing political and economic realities in the post-Soviet period of development of this branch of the Russian economy Chapters

3 and 4 tell the story of adaptation of this industry to changing market conditions Chapter 6 paints a more detailed picture of how this adapta-tion took place in Russian regions where Russian aluminium assets are located whereas Chaps 7 8 and 9 examine how Russian aluminium actors adapted to fundamental changes in the Russian political frame-work

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