The Russian media hastened to dub the latest events surrounding the redistribution of Russia’s aluminum complex as the second great patriotic aluminum war. The cannon fire is already heard in Ukraine: it is not ruled out that the “hostilities” will shortly unfold at the Mykolayiv bridgehead, with its strategically important, from the viewpoint of the aluminum generals, facility: the Mykolayiv Alumina Plant.
ALUMINUM WAR I
The first aluminum war, which peaked in the mid-1990s, divided the spheres of influence in the Russian aluminum production, a super profitable business second only to energy resources trade. At that time, the greater part of aluminum combines fell under the control of the British-registered Trans World Group (TWG) trade group and its representative in Russia and other CIS countries Lev Chernoy. When passions calmed down, the new owners faced the problem of supplying their factories with alumina, the raw material for primary aluminum production, whose yearly world deficit is an estimated 6-700,000 tons. TWG turned its eyes to the Mykolayiv Alumina Plant (MAP) built in 1980 to provide raw material precisely for Russian aluminum combines.
The first attempt to take control of MAP was the early-1998 ultimatum to reduce alumina prices: look, we’re the only ones to ship the raw material to. The then MAP manager, Vitaly Meshin, refused to sell alumina for a song, thus putting the plant under blockade: Russian enterprises began to receive alumina from Austria and Brazil, leaving the Mykolayiv product piling up in warehouses. The face-off continued eight months, only to end when MAP signed a contract with the Tajik Aluminum Works and Siberian Aluminum, a company set up by the businessmen who had broken relations with TWG and proclaimed a new strategy of aluminum business: a complete production cycle from alumina to the finished aluminum items in contrast to the TWG practice of serving as a middleman between the producers and the buyers. Very soon, this also helped resume supplies to the TWG-controlled businesses at MAP prices.
But TWG got factual control over MAP last June, when previous MAP manager Meshin was fired, admittedly with the assistance of Boris Berezovsky, a great friend of various post-Soviet presidents, who “put in a good word.” The post was given Mykola Naboka, a TWG top manager who had worked earlier as general manager of Kazakhstan’s Don Ore-Enriching Integrated Works until he had to quit this office when TWG was banished from Kazakhstan. Various structures are now studying the financial and industrial effect of Mr. Naboka’s work as MAP manager. But his management ended as unexpectedly as it started: on December 25, 1999, the National State Corporate Rights Agency abrogated the contract with him. However, the loss of MAP was not the only displeasure for Mr. Chernoy: his positions in a number of Russian aluminum works had weakened by that time. Switzerland said it was suing him for financial irregularities, and several more countries declared him persona non grata. In addition, TWG announced it was breaking off connections with Mr. Chernoy.
Nevertheless, after a certain informational lull, Mr. Chernoy is again back in the limelight — this time, as one of the participants in a huge deal to sell stock in several Russian aluminum works.
DEAL OF THE CENTURY
In mid-February, Reuters and then most of the Russian media reported on a major aluminum deal which in fact reshuffled the spheres of influence in Russia’s aluminum complex. The point is that Russian tycoons Roman Abramovich, owner of the Sibneft Oil Company, and Boris Berezovsky, LogoVAZ proprietor, acquired controlling interests in the Bratsk and Krasnoyarsk aluminum works, as well as large stakes in the Novokuznetsk Aluminum Works, Achinsk Alumina Combine, and Krasnoyarsk Hydroelectric Station. The total cost of this deal was valued at about $500 million, a record sum for post-Soviet securities markets. Putting the deal in practice means the “partners” have in fact taken control of 70% of the Russian aluminum market.
The participants refrain from any comments or explanations. Only Mr. Berezovsky, answering a question about the purchase of large stakes, confirmed, “This is the bitter truth,” without specifying, however, for whom it is bitter. On the other hand, the deal was again linked with the name of Mr. Chernoy: with due account of the amount of the shares sold, they could not be redistributed without the sale of shares belonging to TWG and Mr. Chernoy personally.
TWG’s standing in the aluminum business has been shaken substantially in the past couple of years: the company was ousted from Kazakhstan, lost control over a number of Russian plants, and now there is the pratfall with MAP. TWG’s not-so-good image was further tarnished by the reputation of its Russia and CIS representative Lev Chernoy compromised by his role in the first aluminum war and unfair business practices. To cap it all, the active growth of its rival, the Siberian Aluminum Group, allowed Russia to make a major step: to reject, from the beginning of this year, tolling — TWG’s basic principle — the scheme under which enterprises are only used as processors of the raw materials supplied by intermediary firms, after which the product sales profit is placed in an offshore account. All TWG-controlled plants, including MAP, worked under tolling. Moreover, the Krasnoyarsk Aluminum Works, which worked to capacity last year, processing the Mykolayiv alumina under tolling, was officially pronounced losing money at year’s end.
Commenting on the deal of the century, Russian weekly Vlast (No. 7) put forward a version that the announced change of TWG plant owners is aimed at pushing Mr. Chernoy into the background and bringing new figures, such as Abramovich and Berezovsky, to the fore.
In an interview with The Day, Eduard Tsukerman, vice-president of Siberian Aluminum, said that the company management, concerned about the situation and a number of vague points in this respect, had turned to Russia’s Ministry for Antimonopoly Policy, asking whether the gigantic deal was really struck and, if so, what are its parties, sources of funding, etc. There has been no answer as yet.
In any case, the Mykolayiv Alumina Plant is also likely to be directly drawn into this story in the nearest future. First, the Russian aluminum works, no matter who owns them, depend on the Mykolayiv alumina; secondly, Siberian Aluminum has an almost 36% stake in MAP, which its rivals are unlikely to look fondly on; and, thirdly, the report on the gigantic deal coincided with a State Property Fund announcement of a tender for a 30% interest in MAP.
MAP PRIVATIZATION: ANY OPTIONS?
The placement of MAP shares that had begun in 1996 soon came to a halt at the 45% mark: 30% of the stock was transferred to plant employees under the privatization plan, and another 15% were sold in small blocks under a privileged subscription plan via the stock exchange, certificate auctions, etc. Out of the remaining state- run 55%, it was planned to leave 25% as state property and to sell 30%, in two blocks of 13% and 17% each, under investment liabilities. They failed: since then the share placement plan has been revised several times, and last May Verkhovna Rada imposed a moratorium on the further privatization of MAP pending the report of the parliamentary privatization commission of inquiry. Incidentally, this report, slated for November 1999, never appeared.
The necessity to complete the MAP privatization was again raised early this year: this is necessary both for the state (the sale of MAP stock is expected to result in substantial budget revenue, and the plant itself has been put on the list of strategic enterprises whose shares are subject to top priority sale). A MAP Joint Stock Company (JSC) shareholders’ meeting, long overdue, is considered illegitimate by law if the firm is less than 60% privatized, and the privatization is expected to attract investments required for the further development of production. In an interview with The Day, chairman of the MAP JSC board of directors, Mykhailo Stoliar, expressed an opinion that the best way to complete MAP privatization is to sell a 30% stake under investment liabilities at a tender and to transfer a 25% state-run stake to the Mykolayiv oblast state administration. This option was supported by both the oblast state administration, the Mykolayiv city council, and the Ukrainian League of Industrialists and Entrepreneurs.
On February 16, the State Property Fund made public the conditions of a commercial tender for the sale of a 30% share in MAP JSC at a starting price of UAH 115 million. Among the conditions being imposed on the buyer, are financing the construction of an aluminum works in Ukraine, switching over to direct import and export operations, and raising the output of alumina to 1.3 million tons a year, with MAP’s current installed capacity being 1.3 million tons.
On March 9 Oleksandr Bondar, chairman of the State Property Fund of Ukraine, told journalists there had been so far no official bids for the 30% MAP JSC package. He is quoted by Interfax-Ukraine as saying that only the Cabinet of Ministers can make a decision to postpone the date of this tender. And, since such a decision has not been made, the tender will be held on the dates set previously.
The only one who had declared by that time its intention to participate in the tender was Siberian Aluminum which already controls about 36% of MAP JSC (26% by way of its controlling interest in TK MAP Ltd. and 10% purchased on the stock market). According to Siberian Aluminum vice president, Eduard Tsukerman, “The group has studied the conditions and made an unambiguous decision to take part in the tender.”
Other potential tender participants remain silent. They may be still engaged in striking more global operations with aluminum stock or awaiting a different turn of events. For example, when Russian first deputy premier Mikhail Kasianov visited Kyiv, some media outlets reported he intended to secure possession of stock in some enterprises, including MAP, as payment of Ukrainian fuel debts. A few days later, Ukrainian Prime Minister Viktor Yushchenko denied this information, saying at a Mykolayiv press conference, “We did not link debt servicing and the interests of Ukraine’s property complex.” Yet, the premier failed to confirm the MAP JSC stock tender either: “A special commission has been formed, headed by a top State Property Fund official. Its purpose is to work out the ways of improving the plant management and proposals for its further privatization.”
Further privatization of MAP has again foundered, but perhaps for a short time: we can suppose that the plant’s further destiny will be determined after the presidential elections in Russia. And while their result brooks virtually no doubt, it is impossible to predict what kind of relationship the new Russian President will have with various aluminum market actors.
COMMENTARY OF THE ECONOMY DESK
Mergers and takeovers, along with the vertical and horizontal integration of companies, have been the dominant business trend in the world economy for almost a century. Can Ukraine, with 80% of its industrial enterprises being intermediary suppliers between those who provide raw materials and those who make finished goods, steer clear of these processes? Obviously, it cannot and should not. It is a different issue what business strategy will be selected to do this. In this sense, the destiny of the Mykolayiv Alumina Plant fully confirms the idea that choosing a path is as hard as the path itself.
The privatization of large Ukrainian enterprises, begun a few years ago, offers only two legal options for integration: sale of stock in exchange for investment liabilities and sale of stock to the highest bidder. Frankly, there also are two more under the table options which are nevertheless taken into account by the state. The question is what form of business or the company representing it (dirty or not) the authorities will prefer. Thus the point is not so much in whether the Ukrainian property is privatized for money or promises but as in what kind of industry the bureaucrats who determine the rules of the game want to see in this country. With due account of all these reservations, MAP is a vivid example of the government going back and forth from one decision to the next. Where will it end? We want to have honest business for big money. But is it possible in our life?