Publication: Monitor Volume: 5 Issue: 210

An attempt by the Russian aluminum industry to acquire control over a key Ukrainian metallurgical firm and avoid Ukrainian law in the process has failed. But though the acquisition of Mykolayivskyy Hlynozemnyy Zavod (NGZ) by Russia’s Sibirskii aluminum group may have been frustrated, the authorities seem no closer to resolving the problems afflicting a key Ukrainian industrial sector.

NGZ is a key CIS producer of alumina, a basic raw material used to produce aluminum by smelters in Russia and Tajikistan. NGZ’s importance is rising as growth in world aluminum demand is outpacing supply. The Verkhovna Rada (Ukrainian parliament) has designated NGZ as a “strategic” enterprise which cannot be privatized without the parliament’s approval. Although some 35 percent of its shares have been sold off, the authorities wish to prevent this equity from being acquired by a single owner, who could then challenge Kyiv’s control over NGZ. According to Ukrainian and Western press reports (Reuters, October 22), the Sibirskii group attempted to illicitly purchase the 35 percent nonstate equity stake from its holders, in order to circumnavigate Ukrainian law and take control of NGZ. When the Ukrainian authorities learned of these sales in early October, they were annulled.

The Russian acquisition attempt was in large measure motivated by the smelters’ desire to vertically integrate, or at least reduce supply uncertainty. This is apparent in that, when their takeover bid for NGZ failed, the Sibirskii group and other Russian producers requested that the Ukrainian government arrange direct contracts with NGZ, in order to guarantee alumina deliveries. From Kyiv’s perspective, however, alumina production and exports have been an important bright spot in Ukrainian industry this year. Although industrial output grew 3.1 percent during the first ten months of 1999, this growth was due entirely to production in three industrial branches. One of these was nonferrous metallurgy, which is dominated by NGZ.

Still, the high costs of transporting alumina essentially limits NGZ’s market to three CIS smelters, two of which are located in Russia. This concentration of sales could result in serious liquidity problems, especially in view of the poor payments discipline in the Russian economy. With time, Kyiv may realize that securing healthy condition for its “crown jewel” could mean allowing foreign interests to take control.