Could Russian mining mergers counter Western sanctions?

Russia’s invasion of Ukraine triggered a swift response from Western countries with the imposition of tough economic sanctions that crippled many Russian resource industries. While the impact of the sanctions is under debate, huge sums of money have been taken from Russia, including up to $400 billion in assets belonging to the country’s central bank, as well as $30 billion in losses for Russian banks in the first two weeks of the war.

In response, some of the country’s biggest miners are acquiring and absorbing smaller companies with the apparent aim of creating vast enterprises that are simply “too big to fail” in the face of growing hostility. of the West. In July, Vladimir Potanin, the boss of the $47 billion Russian metallurgical group Norilsk Nickel, said he was ready to discuss a merger with the $16 billion aluminum maker Rusal to create a behemoth that could withstand the effects of Western sanctions.

Norilsk is the world’s largest producer of palladium and refined nickel while Rusal is the world’s largest aluminum producer outside of China, and the deal would not be new to Norilsk; the proposed takeover follows Norilsk’s acquisition of two Russian banks in a post-sanctions fire sale.

Potanin told Russian business newspaper RBK that it would be possible to create a “national champion” in metals who could “gain the ability to resist sanctions”, and that the influence of Russian majors on the global mining industry could improve the resilience of its businesses.

A lever against Russian sanctions

Provided the hydropower plants, which are technically owned by Rusal’s parent company, En+, are included in the deal, there could be a number of synergies in a Norilsk-Rusal merger. For starters, Rusal would have access to Norilsk’s sea fleet, which is rare for a metallurgical group.

Above all, a large company is likely to withstand sanctions better and obtain cheaper financing. This would be handy for developing sites like the massive Kolmozerskoye lithium ore deposit in Murmansk, at the northwest tip of Russia.

The proposed merger, however, required a public about-face from Potanin. He had previously opposed a merger of the world leader in nickel and palladium with the aluminum giant, which already owns 25.25% of Norilsk Nickel. However, the Russian invasion of Ukraine has radically changed the calculus, with both companies now affected, if only indirectly, by Western sanctions.

Norilsk Nickel imports sulfur control equipment shortly before Russia invades Ukraine. Credit: Norilsk Nickel.

As the larger of the two companies, Norilsk Nickel would certainly have the upper hand in any negotiation with Rusal. The company is a key supplier to the automotive industry, supplying nickel for electric vehicle batteries, as well as palladium for catalytic converters. Norilsk is also a major supplier of nickel to the European stainless steel industry.

Crucially, there are currently no sanctions on Russian nickel, which is still available under a mandate from the London Metal Exchange (LME). The LME is keen to avoid a repeat of the events that took place in March after the announcement of the initial sanctions against Russia, where the price of nickel skyrocketed to over $100,000 a ton in a “disorderly trade “, before the LME suspended trading for more than a week.

Too big to fail?

Meanwhile, the pressure on the leaders of Russian metallurgical enterprises is slowly intensifying. In late June, the UK imposed sanctions on Potanin as part of its ongoing package against Russia for its invasion of Ukraine. The UK’s decision shows that even the most metal-rich oligarchs are not immune to censorship.

Potanin has an estimated net worth of $15.7 billion and faces an asset freeze, travel ban, transport sanctions and a freeze on technical advice as a result of UK sanctions. A senior Norilsk executive says his lawyers are studying the impact of ‘personal sanctions on our chairman and major shareholder’, but the West is unlikely to want to repeat the mistakes it made in 2018 when the LME bans aluminum produced by Rusal.

The ban followed similar sanctions imposed by the United States and created major disruption for businesses in the transportation, construction and packaging industries. It also caused aluminum prices to spike by up to 30% in just days after the sanctions were imposed. Less than a year later, the United States was forced to back down and lift the sanctions.

A similar action against Norilsk Nickel would also backfire by multiplying the pain on nickel, copper, palladium and platinum, all of which are essential metals in the transition to a low-carbon economy.

The Russian gold and rare metals sector is sanctioned

But Western sanctions already appear to be having a devastating effect on at least some Russian mining companies. In July, gold miner Petropavlovsk filed for administration after sanctions against Gazprombank, its main lender and sole buyer of its gold, prevented it from repaying its loans and put it among the top companies listed to face the collapse.

Petropavlovsk was founded in 2009 by British businessman Peter Hambro and Russian businessman Pavel Maslovskiy and quickly became one of the largest gold producers operating in the Russian Far East. By the end of 2021, Russia had become the second-largest gold-producing country in the world with trade worth $15.5 billion from 314 tonnes of mined gold.

Petropavlovsk gold mine
Petropavlovsk’s gold mining operations have been disrupted by export bans to the UK, where most of Russia’s gold previously went. Credit: Petropavlovsk.

Meanwhile, a shortage of Russian titanium is also disrupting the global supply chain. According to Nikkei Asia Japan’s Envision AESC Group, a maker of lithium-ion batteries for electric vehicles has told customers to prepare for price hikes of up to 10%. Kawasaki Heavy Industries is also considering switching titanium sourcing from Russia, the metal’s top producer, to other suppliers.

Fears in Europe over further disruptions to Russian titanium supplies to the West have reportedly led the EU to be cold-blooded about introducing an actual ban on Russian titanium in Europe, despite some political pressure in this regard. meaning. In July, the EU blocked a proposal to sanction Russian metallurgical company VSMPO-Avisma, the world’s largest titanium producer, because Russia supplies up to half of the titanium for the world’s aerospace industry.

A delicate balance

As a global supplier of strategic metals, Russia is in a relatively strong position to resist any sanctions the West may impose that specifically target Russian metallurgical companies. While the West may debate whether or not to impose sanctions on Russian metals, producing companies are maneuvering to stay ahead through targeted mergers and acquisitions. This, they hope, can “buy” them some resilience.

But it is increasingly clear that there will always be a market for Russian metals, regardless of the shareholder profile of Russian metal-producing companies. Buyers in Europe remain plentiful, particularly among large producers like Norilsk Nickel, UMMC and Rusal, which tend to sell under annual or multi-year agreements to large industrial groups.

Trader Glencore has an agreement to buy aluminum from Rusal until at least 2024. The Trafigura Group also has a long-standing relationship with Norilsk Nickel. However, as is the case with Russian oil and gas, Moscow knows that even if the Russian metal is shut out of Europe, there will still be willing buyers elsewhere in expanding Asian markets.

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