History of the Russian Aluminium Industry

ДThe 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 piece of 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 40,000 million 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 piece of aluminium in Siberia. Two years later, on 9 May 1945 - "Victory Day" - the Bogoslovsk Aluminium Smelter also produced its first portion of metal.

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.

Over the same period, the Krasnoyarsk metal works, the Pavlodar Aluminium Smelter and the Dmitrov pilot facility for the production of aluminium tape were commissioned.

Due to the acceleration of aluminium production and poor supply of 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.

But the successes of the aluminium industry in Soviet times were now put under threat with the break-up of the USSR.

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 moved into the 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 активно лоббировала внедрение в России известной во всем мире схемы по переработке на давальческих условиях импортного глинозема с последующим вывозом алюминия из страны. С разрешения российского правительства импорт глинозема и экспорт произведенного из него алюминия осуществлялись беспошлинно. При такой схеме размер прибыли TWG при реализации алюминия на западных биржах составлял около 200 долларов США с тонны металла, в то время как нормальный уровень прибыли на Западе не превышал 5 долларов. В результате TWG быстро вошла в тройку крупнейших игроков на Лондонской бирже металлов.

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 raw materials deficit. 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:
AIOC - the American trading company which bought out Marc Rich’s shares in the Krasnoyarsk smelter,
RIAL - the company that appropriated the Volgograd and Kandalaksha aluminium smelters,
MIKOM - the company that seized control over the Novokuznetsk smelter,
Renova – who controlled the Irkutsk aluminium plants and the Urals Aluminium Plant,
Aluminproduct – who had a stake in the Sayanogorsk aluminium smelter.

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 organised 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 organised 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.

By mid 1998, Siberian Aluminium became the industry's largest vertically integrated structure that not only had 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 modernisation 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.

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.

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.

A modernisation program designed to increase production and reduce harmful emissions was introduced at RUSAL’s smelters and refineries. The company launched the full-scale modernisation 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.

РOver 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 tonnes 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.

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.

In 2007, the consolidation of the Russian aluminium industry was wrapped up by RUSAL merging with its Russian rival SUAL and the alumina arm of the Swiss Glencore to create the United Company RUSAL, the world’s largest producer of aluminium. In 2010, RUSAL accounted for 10% of the world’s total aluminium production and 10% of global alumina output. RUSAL operates in 19 countries on 5 continents and employs over 72 thousand people. The company’s assets include 1 aluminium smelters, 12 alumina refineries, 8 bauxite mines, 3 aluminium powder plants, 3 silicon factories, 3 secondary aluminium plants, 4 foil mills, 2 cryolite and 2 cathode plants