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The Creation of a Metals Titan

norilsk011609.jpgOver the past few months, many observers have been speculating that bailout efforts by state-owned banks to rescue Russian companies and large industrial interests would result in the nationalization of minority or controlling shares, thus dramatically increasing the government’s participation in the business sector.  It has been called loans for shares in reverse.  Already many of the country’s largest business owners have been snagged in this trap, their fortunes nearly evaporated, and put into a much more humble position before the discretion of the state (not that many of them were particularly independent to begin with).

All eyes have been on the crown jewel of Russian metals, Norilsk Nickel, which before the economic crisis hit with full impact was undergoing a high profile legal battle over control of one of the largest stakes.  All the way back in August, the feuding owners Mikhail Prokhorov and Vladimir Potanin agreed to swap 16.7% of Norilsk Nickel for 35% of Polyus Gold, in what was speculated to be part of a Putin-endorsed plan to create a new metals giant big enough to compete with BHP Bilton (call it the Gazprom of mining).  When Kremlin insider Alexander Voloshin was nominated to board of Norilsk on Dec. 26, these rumors of state takeover accelerated.

Today it appears to be official.  The Wall Street Journal reports that a new metals plan for the formation of a mega-consortium was discussed at a hastily called meeting late Tuesday between President Dmitry Medvedev, other senior officials and metals tycoons including Oleg Deripaska (Rusal), Vladimir Potanin (Norilsk Nickel), and Alisher Usmanov of Metalloinvest.

The merger idea was proposed by Mr. Potanin, the people familiarwith the meeting said. Though the proposal remains vague, it mightinvolve a state stake of 25% in the combined company, which would givethe Kremlin the power to block major decisions but not full managementcontrol. The merger might also involve metals assets fromRostekhnologii, an acquisitive state company run by Sergei Chemezov, alongtime Putin ally. Last month, Mr. Chemezov publicly endorsed theidea of a merger. He attended the meeting on Tuesday, but couldn’t bereached to comment.

Mr. Usmanov said in a statement Thursday that aMetalloinvest-Rusal-Norilsk merger was “a possible scenario” that wouldbe “effective and useful” for the sector. He said it was too early tospeculate about details, however.

It is easy to see the strategic attractiveness to the Kremlin to hold a significant participation in a new metals giant.  Though it would not be possible to withhold the supplies of these commodities to one country, such as they have done with natural gas to Ukraine, there is significant opportunity for a group of this size to make major impacts on international prices by interrupting the output at any of Norilsk’s mines.  Quoted by the Associated Press in August, 2007, one expert warned of the dangers of Russia getting into mineral imperialism:  “A Russian decision, or threat, to cut off supplies of mineralswould certainly drive the world price up – probably significantly.”  Disruptions in nickel or aluminum supplies, he said, “would have a trickle-down effect throughout the global economy.

Photo: A worker serves an electrolysis furnace in the RUSAL aluminium smelterin the Siberian city of Krasnoyarsk November 28, 3008. Russian statebank VEB has stakes in both aluminium major RUSAL and Norilsk Nickel ascollateral for the $4.5 billion loan it provided to RUSAL to re-payforeign debt, a newspaper reported on Friday. (Reuters Pictures)