Aluminium industry in Russia
Encyclopedia
The Aluminium industry in Russia
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...

was arguably founded on 14 May 1932 when the Volkhov
Volkhov
Volkhov is an industrial town in Leningrad Oblast, Russia, situated east of St. Petersburg, on the Volkhov River. Population: -History:...

 smelter in the Leningrad Oblast
Leningrad Oblast
Leningrad Oblast is a federal subject of Russia . It was established on August 1, 1927, although it was not until 1946 that the oblast's borders had been mostly settled in their present position...

 produced its first batch of aluminium
Aluminium
Aluminium or aluminum is a silvery white member of the boron group of chemical elements. It has the symbol Al, and its atomic number is 13. It is not soluble in water under normal circumstances....

. 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
Tikhvin
Tikhvin is a town and the administrative center of Tikhvinsky District of Leningrad Oblast, Russia, located on both banks of the Tikhvinka River in the east of the oblast, east of St. Petersburg. Tikhvin is also an industrial and cultural center of the district, as well as its transportation...

 Alumina Refinery
was put into operation (today known as the Boxitogorsk Alumina Refinery), and in 1939 the Uralsk
Kamensk-Uralsky
Kamensk-Uralsky is a city in Sverdlovsk Oblast, Russia, located at the confluence of the Kamenka and Iset Rivers . Population: 173,000 ; 51,000 .The mayor of the city is Mikhail Astakhov.-History:...

 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
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

 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
Siberia
Siberia is an extensive region constituting almost all of Northern Asia. Comprising the central and eastern portion of the Russian Federation, it was part of the Soviet Union from its beginning, as its predecessor states, the Tsardom of Russia and the Russian Empire, conquered it during the 16th...

 where it was used to construct the Bogoslovsk and Novokuznetsk
Novokuznetsk
Novokuznetsk is a city in Kemerovo Oblast, Russia. It serves as the administrative center of Novokuznetsky District, but it is not administratively a part of it...

 aluminium smelters. In 1943, the Novokuznetsk smelter produced its first aluminium in Siberia. Two years later, on 9 May 1945 – the Victory Day
Victory Day (Eastern Europe)
Victory Day or 9 May marks the capitulation of Nazi Germany to the Soviet Union in the Second World War...

 – 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
Kandalaksha
Kandalaksha is a town in Kandalakshsky District of Murmansk Oblast, Russia, located at the head of Kandalaksha Gulf on the White Sea, beyond the Arctic Circle. Population: 40,564 ; -History:The settlement has existed since the 11th century...

 (1951), Nadvoitsy
Nadvoitsy
Nadvoitsy is an urban locality in Segezhsky District of the Republic of Karelia, Russia, located on the shore of Lake Vygozero, north of Petrozavodsk. Population:...

 (1954) and Volgograd
Volgograd
Volgograd , formerly called Tsaritsyn and Stalingrad is an important industrial city and the administrative center of Volgograd Oblast, Russia. It is long, north to south, situated on the western bank of the Volga River...

 (1959) smelters were commissioned, as well as the Belaya Kalitva
Belaya Kalitva
Belaya Kalitva is a town and the administrative center of Belokalitvinsky District of Rostov Oblast, Russia. Population: -External links:*...

 metals production facility (1954) which specialises in aluminium alloy-based products. In 1960, the Samara
Samara, Russia
Samara , is the sixth largest city in Russia. It is situated in the southeastern part of European Russia at the confluence of the Volga and Samara Rivers. Samara is the administrative center of Samara Oblast. Population: . The metropolitan area of Samara-Tolyatti-Syzran within Samara Oblast...

 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
Pavlodar
Pavlodar is a city in northeastern Kazakhstan and the capital of Pavlodar Province. It is located 350 km northeast of the national capital Astana, and 400 km southeast of the Russian city of Omsk along the Irtysh River. , the city has a population of 331710...

 aluminium smelter in Kazakhstan
Kazakhstan
Kazakhstan , officially the Republic of Kazakhstan, is a transcontinental country in Central Asia and Eastern Europe. Ranked as the ninth largest country in the world, it is also the world's largest landlocked country; its territory of is greater than Western Europe...

 was put into operation; in 1970, the first batch of products was released by the Achinsk
Achinsk
Achinsk is a city in Krasnoyarsk Krai, Russia, located on the right bank of the Chulym River near its intersection with the Trans-Siberian Railway, west of Krasnoyarsk. Area: . Population:...

 alumina refinery.

The 1960s and 1970s saw construction of the Irkutsk
Irkutsk
Irkutsk is a city and the administrative center of Irkutsk Oblast, Russia, one of the largest cities in Siberia. Population: .-History:In 1652, Ivan Pokhabov built a zimovye near the site of Irkutsk for gold trading and for the collection of fur taxes from the Buryats. In 1661, Yakov Pokhabov...

, Krasnoyarsk
Krasnoyarsk
Krasnoyarsk is a city and the administrative center of Krasnoyarsk Krai, Russia, located on the Yenisei River. It is the third largest city in Siberia, with the population of 973,891. Krasnoyarsk is an important junction of the Trans-Siberian Railway and one of Russia's largest producers of...

 and Bratsk
Bratsk
Bratsk is a city in Irkutsk Oblast, Russia, located on the Angara River near the vast Bratsk Reservoir. Population: Although the name sounds like the Russian word for 'brother' , it actually comes from 'bratskiye lyudi', an old name for the Buryats.-History:The first Europeans in the area arrived...

 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
Dmitrov
Dmitrov is a town and the administrative center of Dmitrovsky District of Moscow Oblast, Russia, located to the north of Moscow on the Yakhroma River and the Moscow Canal. Population: -History:...

 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
Guinea
Guinea , officially the Republic of Guinea , is a country in West Africa. Formerly known as French Guinea , it is today sometimes called Guinea-Conakry to distinguish it from its neighbour Guinea-Bissau. Guinea is divided into eight administrative regions and subdivided into thirty-three prefectures...

, India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...

 and other countries. The Nikolaev alumina refinery in Ukraine
Ukraine
Ukraine is a country in Eastern Europe. It has an area of 603,628 km², making it the second largest contiguous country on the European continent, after Russia...

 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
Bauxite
Bauxite is an aluminium ore and is the main source of aluminium. This form of rock consists mostly of the minerals gibbsite Al3, boehmite γ-AlO, and diaspore α-AlO, in a mixture with the two iron oxides goethite and hematite, the clay mineral kaolinite, and small amounts of anatase TiO2...

.

In 1985, the Sayanogorsk
Sayanogorsk
Sayanogorsk is a town in the Republic of Khakassia, Russia, located on the left bank of the Yenisei River, south of Abakan and about east of the railway station on the line Kamyshta which goes from Abakan to Abaza. Population: -Economy:...

 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
Hungary
Hungary , officially the Republic of Hungary , is a landlocked country in Central Europe. It is situated in the Carpathian Basin and is bordered by Slovakia to the north, Ukraine and Romania to the east, Serbia and Croatia to the south, Slovenia to the southwest and Austria to the west. The...

 and Yugoslavia
Yugoslavia
Yugoslavia refers to three political entities that existed successively on the western part of the Balkans during most of the 20th century....

 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
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....

 aggravated the shortage of raw materials. Alumina refineries located in the Ukraine
Ukraine
Ukraine is a country in Eastern Europe. It has an area of 603,628 km², making it the second largest contiguous country on the European continent, after Russia...

, Kazakhstan
Kazakhstan
Kazakhstan , officially the Republic of Kazakhstan, is a transcontinental country in Central Asia and Eastern Europe. Ranked as the ninth largest country in the world, it is also the world's largest landlocked country; its territory of is greater than Western Europe...

 and Azerbaijan
Azerbaijan
Azerbaijan , officially the Republic of Azerbaijan is the largest country in the Caucasus region of Eurasia. Located at the crossroads of Western Asia and Eastern Europe, it is bounded by the Caspian Sea to the east, Russia to the north, Georgia to the northwest, Armenia to the west, and Iran to...

 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
Yegor Gaidar
Yegor Timurovich Gaidar was a Soviet and Russian economist, politician and author, and was the Acting Prime Minister of Russia from 15 June 1992 to 14 December 1992....

 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
Marc Rich
Marc Rich is an international commodities trader and entrepreneur. He is best known for founding the commodities company Glencore. He was indicted in the United States on federal charges of illegally making oil deals with Iran during the late 1970s-early 1980s Iran hostage crisis and tax evasion...

 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
Michael Cherney
Michael Cherney is a Uzbekistan-born Israeli entrepreneur and industrialist. He is known for his significant role in the 1990s Aluminium in Russia, and his business ventures in Israel...

 and Lev Cherney.

While selling the Russian aluminium independently on the London Metal Exchange
London Metal Exchange
The London Metal Exchange is the futures exchange with the world's largest market in options, and futures contracts on base and other metals. As the LME offers contracts with daily expiry dates of up to three months from trade date, along with longer-dated contracts up to 123 months, it also...

, 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
Oleg Deripaska
Oleg Vladimirovich Deripaska is the Russian Chief executive officer of Basic Element company and a member of the Board of Directors and CEO of United Company RUSAL, a Russian aluminium industry company...

 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
Mykolaiv
Mykolaiv , also known as Nikolayev , is a city in southern Ukraine, administrative center of the Mykolaiv Oblast. Mykolaiv is the main ship building center of the Black Sea, and, arguably, the whole Eastern Europe.-Name of city:...

 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
Reynolds Metals
Reynolds Group Holdings is an American packaging company with its roots in the Reynolds Metals Company, was the second largest aluminum company in the United States, and the third largest in the world...

 (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
Achinsk
Achinsk is a city in Krasnoyarsk Krai, Russia, located on the right bank of the Chulym River near its intersection with the Trans-Siberian Railway, west of Krasnoyarsk. Area: . Population:...

 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
Oleg Deripaska
Oleg Vladimirovich Deripaska is the Russian Chief executive officer of Basic Element company and a member of the Board of Directors and CEO of United Company RUSAL, a Russian aluminium industry company...

 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
Kandalaksha
Kandalaksha is a town in Kandalakshsky District of Murmansk Oblast, Russia, located at the head of Kandalaksha Gulf on the White Sea, beyond the Arctic Circle. Population: 40,564 ; -History:The settlement has existed since the 11th century...

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.
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