21 January 1995 – The Economist (US)
Trans World Metals head David Reuben controls large portion of Russia’s aluminum output
THE old Soviet Union built an aluminium industry based on three massive plants at Krasnoyarsk, Bratsk and Sayansk. The first two, with annual capacities of 750,000 tonnes and 810,000 tonnes respectively, are the biggest aluminium smelters in the world; and Sayansk can produce 500,000 tonnes a year. Most of the factories’ output was used to make aircraft and missiles. In 1990 only 300,000 tonnes were exported. But the collapse of the Soviet Union at the end of 1991, combined with an 80% cut in Russia’s defence spending the following year, pushed the aluminium industry into crisis.
The trouble also hit David Reuben, the head of Trans World Metals, a London-based metals-trader that had been buying aluminium from the Soviet Union for 20 years. The Soviet buying-monopoly which had previously financed the smelters’ purchases of raw materials, provided working capital and handled exports, disappeared at the end of 1991. Mr Reuben tried going direct to the smelters but, deprived of working capital, they were unable to produce anything. So Mr Reuben took a big gamble.
In the middle of 1992 he put together a group of investors who agreed to provide the Krasnoyarsk smelter with alumina (a raw material, most of which has to be imported) and pay it what is known in the industry as a “tolling” fee for turning it into aluminium. Mr Reuben’s group thus took on all the market risk. Mr Reuben knew how to sell the aluminium in the world market; to manage the Russian end of the operation, he chose Lev Chernoy, a Russian from Tashkent who had first approached Mr Reuben with some aluminium for sale when nobody else could get their hands on the stuff in Russia. TRANS-CIS Commodities (TCC), the Monte Carlo-based partnership that Mr Reuben formed, is a throw-back to an earlier age of trading. It is, he says, based on trust, not written agreements.
For a time it looked as though TCC had made a ghastly mistake. The market price for aluminium plunged below $1,000 a tonne in 1993 as Russia’s exports surged to 1.6m tonnes, or 10% of world consumption. TCC had not foreseen this price fall and could not get out of agreements it had already signed. Undeterred, it decided to double its bet by arranging to produce aluminium through tolling at Bratsk and Sayansk as well. It also bought share stakes in all the plants. By the time the first stage of mass privatisation ended in June 1994, TCC and its associated companies controlled 20% of Krasnoyarsk, around 50% of Bratsk and 68% of Sayansk, calculates Alexei Tarasov, a reporter for Izvestia, a Russian newspaper. These stakes, combined with the tolling arrangements, gave TCC control of two-thirds of Russia’s output of aluminium, according to Mr Tarasov.
The financial aspects of tolling are shrouded in secrecy. The raw alumina costs $500-700 a tonne. If the toll charge is $500-600, as one Moscow stockbroker guesses, then in late 1993 TCC was losing money. But in 1994 the market turned. With aluminium now selling for more than $2,100 a tonne on the London Metal Exchange, TCC seems suddenly to have a licence to print money. TCC’s rivals whisper that it may have netted over $1 billion in profits last year–a figure that a chuckling Mr Reuben scoffs at.
The problem is that such huge profits also attract unwelcome competition, which has been fiercest in Krasnoyarsk. The plant’s directors have been squabbling since October 1993; that was when Ivan Turushev, the general director, was badly beaten up, he claimed by men working for Yury Kolpakov, the plant’s commercial director, whom Mr Turushev subsequently accused of trousering $14m of the smelter’s money. In April 1994 Mr Kolpakov replaced Mr Turushev as general director.
To start with, relations between the new general director and his largest private shareholder, TCC, were good. But then they soured. In October 1994 Krasnoyarsk stopped delivering metal to TCC. In November Mr Kolpakov crossed TCC off his shareholder register, which means that TCC can no longer prove it owns its shares. It was at this point that TCC got embroiled in high politics. The Kremlin connection
At the end of November 1994 Anatoly Chubais, the mastermind behind Russia’s privatisation programme, was promoted to take overall charge of economic policy. He was replaced by Vladimir Polevanov, a little-known geologist who has spent almost his entire career looking for gold in Russia’s Far East. After a month, Mr Polevanov declared that privatisation, as carried out by Mr Chubais, had damaged Russia’s national-security interests and that there was a case for renationalising some enterprises.
It soon became clear that the enterprises Mr Polevanov has in mind are the aluminium producers. “During the first stage of privatisation Russia’s strategic interests were often ignored,” he told Interfax, a Russian news agency, in mid-January; “Even in key industries shareholdings were sold to God knows whom. One can say that Russia practically lost its aluminium industry, which is the foundation of aircraft-making.”
Investors in the aluminium industry spotted the hand of Oleg Soskovets, a first deputy prime minister and Mr Polevanov’s patron in the government, behind these rumblings about national security. A former manager at the massive Karaganda steelworks in Kazakhstan and Soviet minister for metallurgy, Mr Soskovets would like to preside over a new carve-up of Russia’s metals industry. That would enable him to establish the sort of influence that his rival, Viktor Chernomyrdin (the prime minister, who was once boss of the gas monopoly) has over the privatised energy companies. But for a new division of the metallic spoils to take place, the results of the first stage of privatisation must be annulled.
This fight puts Mr Chubais and the handful of other reformers left in the government in a difficult position. If they allow the Krasnoyarsk factory to get away with cancelling TCC’s shares, then they are giving the managers of other industrial dinosaurs a licence to wipe out their shareholders. On the other hand, the reformers are wary of championing the interests of a foreign group. But if the reformers are hoping that TCC will decide it has made enough money and disappear quietly, they are wrong. “I want my shares [in the aluminium producers] to be worth a fortune,” emphasises Mr Reuben, who says he has no intention of giving up in Russia. “I’m a working man,” he pleads. “I know nothing else.”