How does Rusal export
more metal than it produces?

Russian Aluminium (Rusal) is the third largest producer of primary aluminium in the world, and the largest exporter. Its appetite for bauxite and alumina that are required to keep the smelters running is so voracious that it is pursuing sources of fresh raw materials in Africa, Australia, India and South America. This hunger is beginning to impact on South Africa, as Rusal scouts future coal supplies in that country to fire possible alumina refinery projects in electricity-short Guinea and the two Congo republics.

So keen is Rusal on expanding into Australia, where it has bought a 20 percent stake in the Gladstone alumina refinery from the bankrupt U.S. Kaiser group, and is now trying to win the right to mine the Aurukun bauxite deposit, that it paid a large, but undisclosed sum, to sponsor the promotion of Australia week in Moscow in May. It has been endorsed in turn by an Australian trade official for making what he terms $400 million in ‘direct investment’ in Australia, even though the money was in fact paid to Kaiser. Gregory Klumov, the organizer of this jamboree, is coy about the cash. “Commercial sponsorship of Austrade events and activities are always fully disclosed and are subject to normal Australian government oversight procedures,” he said. Nonetheless, “it is not normal Austrade practice to discuss the specific conditions of these commercial sponsorship agreements.”

For a company to be so large in global commodity trading terms, it is natural for Rusal to promote its weight where it can. But it is odd that Rusal pulls its punches when asked to disclose normal trading and financial data. Privately owned by Deripaska, through his Moscow holding company Basic Element, and others whose stakes cannot be verified, Rusal limits its open disclosures to a gross annual revenue figure of $5.4 billion for 2004, quarterly and annual production tonnage and rough percentages for exports, compared to aggregate output, and percentages for exports by large geographical areas of the world. Tonnage and values for exports have never been disclosed by Rusal. If the international bankers to Rusal know more about the company’s operating performance, costs, tax payments, profit margins, debts and asset values, they are not saying. But if they are not sure that what they know is accurate, with about $2 billion in debt exposure at stake, they would have every reason to tread gingerly around the data problem.

The beginning of Rusal export puzzles

Take, for example, the conundrum that first appeared a year ago in the official Russian Customs data required to answer the fundamental question: how much metal does Rusal export?

Citing the Federal Customs Service (GTK), Interfax said, “Russia boosted unprocessed aluminium exports tentatively 46 percent year-on-year in January-March to 1.0471 million tons.” The same report claims that the value of aluminium exports for the same period was $1.346 billion. A check of the original GTK data confirms both the tonnage and the value figures, but no percentage comparison is provided.

That is where the puzzle begins. In its April report a year ago, the GTK announced that in the first quarter of 2004, primary aluminium exports from Russia totaled 1.201 million tons, worth $1.286 billion. The year-on-year comparison of tonnage should therefore be negative this year by 13 percent. It cannot be positive by 46 percent, as claimed in the Interfax’s report. When GTK first issued the Q1’04 data, Interfax claimed that the tonnage had jumped by 65 percent, compared to the first quarter of 2003. The volume increase for the month of January 2004 had been even more dramatic, up 69.4 percent. The problem the officials immediately faced was that the two Russian aluminium producers, Rusal and Sual, had declared that their output for the Q1’04 totaled in aggregate just 893,600 tons. Rusal said its primary aluminium output for the period had grown by 6 percent to just under 665,000 tons, while Sual said its production grew 3.5 percent to 228,600 tons. Rusal and Sual officials acknowledged at the time that between 80 percent and 85 percent of output had been exported. That exposed a yawning gap of 441,000 tons of phantom metal, which GTK insisted had crossed Russia’s borders, but which the producers were equally insistent had not been produced, and had not come from stockpiles, the existence of which they categorically denied.

The state rail company, port stevedores, and shippers at western and eastern outlets for Russian aluminium also told Mineweb at the time that they had seen growth in the volume of aluminium exports of between 5 percent and 10 percent, roughly in line with the growth of output at the smelters. They claimed that if there had been the extraordinary jump in exports reported by GTK, they would not have missed it. But they had. Pressed to explain, a spokesman for GTK insisted for weeks that there had been no mistake and no change in the counting rules for exported metal.

Rusal’s export figures don’t add up

Then, at the end of the year, when GTK was preparing its annual data, the agency quietly corrected the first-quarter export figure downwards. According to officials queried last month, the correct figure for Q1’04 is now 944,929 tons. If true, the difference between last year’s first quarter and this year’s is a positive growth rate of 11 percent. That’s hardly the announced 46 percent leap. But, at least, it is a movement in the right direction. However, there are still 51,329 tons of phantom metal that were apparently exported without appearing to have been produced. Last month in Moscow, the problem of how to reconcile export with production figures has repeated itself. According to Rusal, smelter output in the first quarter was 668,438 tons, up just 0.6 percent year on year. At the same time, Sual says it turned out 229,200 tons, a gain of just 600 tons. The aggregate figure for both companies is 897,638 tons. That still trails the volume of exports by 149,462 tons.

If phantom metal is in circulation, the two dozen or so major international banks which lend to Rusal, and which securitize their repayment by holding liens on export flows, ought to be concerned. According to documents that have been filed in litigation in various jurisdictions against Rusal, Deripaska operates a vast network of companies, registered all over the world, often with overlapping titles but different registrations, and it is these companies which own the aluminium as it moves. Finding these phantom companies can be as difficult as finding the phantom metal. If Rusal were to default on a debt, getting a court to hold metal to ensure repayment would be problematic if Rusal turns out not to be the owner of the metal it produces.

Russia’s current customs regulations and tax laws allow tolling contracts, according to which aluminium smelted at Rusal’s plants may be the property of offshore companies which are, contractually speaking, the suppliers of alumina imported for smelting. Tolling relieves Rusal of a substantial tax obligation to the Russian treasury. The legality of tolling schemes, and the tax relief they provide, depends on whether or not there is a tie between the offshore and the onshore companies, and Rusal itself. According to an industry source that is close to Rusal, at least part of the reason for the Q1’04 anomaly in the statistics is a tolling scheme, according to which a very large volume of aluminium was declared to GTK as destined to Spain. The source says that when Spanish import data are compared, the metal has vanished. “Never in ten years has Russia sold aluminium to Spain,” the source claims. “Maybe you can find the reason or the destination in Spain.”

But if the phantom metal never made it to Spain, it is likely only that a Spanish or Canary Island-registered company was the consignee in GTK declarations, only to be replaced by others as the metal moved. This may not be unlawful. According to a spokesman for the independent state auditor, the Audit Chamber, “companies have to be legally separate to produce a tolling contract. Unfortunately, under the Russian legislation it is difficult to prove that an offshore company is a part of some Russian holding group. But if it is proved, the tolling contract becomes illegal.”

According to a statement late last year by a Rusal spokesman, “the Russian government is well aware that Rusal is the only Russian metals company whose revenues do not primarily come from the mining of Russian ore. To a very large extent, we are processors of imported raw materials. Thus, a relatively large portion of Rusal’s value added is created outside the country. As a major importer of raw material and a major exporter of processed product, Rusal complies with all applicable legal and tax requirements, securing the appropriate governmental tolling licenses on each and every transaction.” When asked last month to comment on the discrepancy between smelter production and export figures, and on the purported Spanish export deal, a Rusal spokesman had not responded by publication time.

Different export figures at the Russian and U.S. borders

In a calculation reported in The Russia Journal last year, there is a sizeable difference in the value of aluminium declared to GTK on tolling contract, and the market value of the same metal when declared at the U.S. Customs for import to the United States. The average price in the first half of 2004 for Russian aluminium imported to the United States was $1,685 per metric ton. The average price of Russian aluminium exported from Russia in the same period was $1,262. The gap was $423 per ton. According to the U.S. trade data, the United States imported 524,455 tons in the period to July 31, 2004, and most of this metal came from Rusal. The price advantage to Rusal (and Sual) for the limited period in just one market was roughly equal to $222 million. Applying the average LME pricing for Rusal metal exported under tolling contracts, the taxable value protected from Russian taxation through tolling contracts could be between $600 and $800 million per annum.

It is impossible to say for certain which price Rusal uses to produce the revenue and other balance-sheet data that it provides to its bankers. For the second year, it is evident that GTK cannot validate the data issued by the production companies, and may under- or over-estimate the export flow by hundreds of thousands of tons per year. No one in the international trade is confident when trying to explain the discrepancies. The corporate officials who know are sworn to secrecy.