THE BATTLE FOR RUSSIA’S ALUMINUM COMES TO A HEAD

By Valery Virkunen

Russia’s aluminum industry is one of the most powerful in the world. Boris Yeltsin inherited from the Soviet Union some very modern enterprises and huge hydroelectric power stations in Siberia which produce cheap power for the aluminum industry. In Soviet times, levels of aluminum output were a state secret, and even today Russia publishes no figures on physical indicators for the aluminum industry. The huge volume of exports of this metal, however, which totaled more than 6.1 million tons in 1998, suggest that there has never been a crisis in Russia’s aluminum industry.

As a result of the serious decline in Russia’s aerospace complex, which in the Soviet period was the aluminum industry’s main client, demand for the metal within Russia has fallen almost sixfold. But to offset this, there has been a sharp rise in exports of Russian aluminum, which enjoys a steady demand on the international market.

Rapid growth in exports is always good for the economy of any country–except Russia. Aluminum producers give their metal and almost all their profits to shrewd middlemen, who take it abroad, sell it at world prices and place the proceeds in their bank accounts, usually offshore. Furthermore, the powerful aluminum industry, which was created at the taxpayers’ expense, does not pay taxes to the Russian government.

THE “TOLLING” RACKET

Three-quarters of Russian aluminum production is controlled by a company called Trans World Group (TWG), which–according to some reports–is registered in the United Kingdom. It was founded by the Cherny brothers, originally from Russia, but now citizens of either Israel or the United Kingdom. These wily characters were the first to make the Russian aluminum industry work for them by using the tolling system.

Tolling first made its appearance in Russia in 1992, when industrial enterprises found themselves without raw materials following the break-up of the Soviet Union. As is common knowledge, the largest alumina plants supplying aluminum concentrate within the single USSR-wide manufacturing complex are located outside Russia, mainly in now independent Ukraine and Kazakhstan. It was only possible to meet 40 percent of existing production capacity with domestic raw materials. Russian aluminum producers were forced to switch to tolling, because the choice was clear: Face a massive reduction in production, with hundreds of thousands of redundancies, or accept the new rules of play.

Tolling is based on the principle of so-called “give-and-take” of raw materials: The client buys aluminum concentrate abroad, brings it into Russia, hands it over for processing, takes receipt of the finished aluminum and pays the plant for labor costs only. The contracts stipulate that the metal belongs exclusively to the client, who takes the aluminum out of the country unhindered, without paying any export duty, sells it and places the proceeds in a foreign bank account in his own name. On top of this, alumina brought into Russia is exempt from customs duties and VAT.

THE CREATORS OF THE SCHEME ARE NOW MILLIONAIRES

By the most modest of estimates, the Cherny brothers’ annual income from the sale of Russian aluminum is no less than US$4 billion per annum. The ministry of tax and revenue says that a total of more than US$10 billion worth of metal leaves Russia via tolling schemes. The Russian budget misses out on 400 million dollars each year due to tolling.

The Russian financial and industrial group Siberian Aluminum was the first to declare war on the Cherny brothers’ predatory monopoly. Additional shares were issued in the Saiansk aluminum plant, which also belongs to TWG. As a result, the Cherny brothers’ share in the company was dramatically reduced. However, the Chernys have no intention of capitulating: They wield firm control over raw material supplies to the plant. TWG retains control of alumina extraction in the former Soviet republics of Ukraine and Kazakhstan.

It would appear that their influence stretches even as far as the Ukrainian government. It is difficult to offer any other explanation of why the Ukrainian state commission for securities and the stock market reacted with such obvious displeasure to the news that Siberian Aluminum had bought 30 percent of the shares of the Nikolaev alumina plant. The Chernys used the full force of their might to put a stop to the metal producers’ growing influence on the huge raw materials base. As a result, the decision was taken to issue extra shares in the alumina plant, reducing the Russian share in the Ukrainian enterprise to minimal levels.

It is worth mentioning that the battle for Russian aluminum and the attempts to abolish the tolling system coincided with the arrest in Hungary of the Siberian aluminum magnate Anatolii Bykov, chairman of the board of the Krasnoyarsk aluminum plant. The Russian authorities accuse him of arranging the murder of his competitors and of money laundering. Industry representatives say that only Anatolii Bykov has managed to significantly limit the openly illegal criminal business activities at his plant. Under him, wages began to be paid, tax payments were made, and investment–to some degree–was resumed. Bykov acted as a sort of catalyst, triggering the process to liquidate the predatory tolling system.

WILL THE GANGSTERS WIN?

The tolling system’s chief adversary is the Russian ministry of tax and revenue, which cannot reconcile itself to the idea that hundreds of millions of dollars in taxes are slipping past the budget. However, by no means all Russian aluminum companies want to see tolling abolished. Factory bosses say that it is only possible to save the industry with the help of tolling. Against the background of the hyperinflation which was unleashed in Russia after 1992, when Boris Yeltsin’s team came to power, enterprises spent almost all their floating assets. Of course, they could have applied for bank loans to purchase their raw materials, but high interest rates deterred them from taking up loans. Moreover, Russia’s weak commercial banks did not have sufficient capital to finance the large-scale operations involved in purchasing raw materials and exporting aluminum. Aluminum bosses insist that dispensing with the tolling system will mean that many plants in the aluminum industry will become unprofitable. They will be forced to reduce their investment in the development of production and cut back the number of jobs. A number of governors share this view.

This view is debatable, however. According to figures from the ministry of tax and revenue, aluminum plants show an average profitability of 30 percent. Consequently, abolition would not be the total disaster that tolling’s fervent supporters try to make out. In any case, not all aluminum plant directors object to its abolition. For example, the directors of Siberian Aluminum believe that tolling should definitely be eliminated: Aluminum plants should take out bank loans, buy their own raw materials and enter the foreign market without the help of avaricious middlemen. Nothing terrible will happen. All that will happen is that the profit of individuals will turn into profit for the workforce in the aluminum plants.

TOLLING BOLSTERED BY CORRUPTION

Hope was recently raised that Russian factories would progress from what is known as operating under customs control to the system of processing on customs territory. This would mean that the huge black hole which swallows billions of “aluminum dollars” without trace may be plugged. Those involved in tolling operations would have to pay all their taxes and customs duties in advance.

A special government commission chaired by First Vice-Premier Nikolai Aksenenko has discussed the issue of tolling. As a result, a recommendation has been made to Vladimir Putin’s government to ban the aluminum processing system which has been operating in Russia up to now. It is too early to say what the government will decide, but it cannot be ruled out that the predatory tolling system may well survive for some time to come. The export of Russian aluminum, which happens almost free of charge, produces sums of money large enough to finance the drafting and implementation of any decisions at a federal level. Highly paid lobbyists at the State Duma and within government structures help defend the interests of those who devise and implement tolling systems. Suffice to say that every year for the last six years, the Russian government meets annually to discuss the problem of tolling, states that huge sums of money are bypassing Russia’s budget and … continues with the predatory system for another year.

Valery Virkunen is a correspondent for “Argumenty i fakty.”