Russia's non-ferrous metals sector contradicts economic theory about the need for competition in market conditions. The sector's most successful companies have few serious competitors within the country and do battle with Western rivals rather than among themselves. Companies have been less successful in competitive sectors such as the secondary resources industry, the cable industry and production of precious and rolled metals.

At the end of 2000, Russian business made the front pages of the Wall Street Journal and the Financial Times for the first time since the default of August 1998. The event in question was the creation of the Russian Aluminum (Rusal) company. With 80 percent of Russia's aluminum production capacity in its hands, Rusal became the world's third largest aluminum producer, after U.S. giant Alcoa and Canadian-French alliance Pechiney-Alcan (PA).

As with Russia's ferrous metals business, the country's aluminum sector does not have much in common with that of other countries. Russia's three largest aluminum plants – Krasnoyarsk (KrAZ), Sayansk (SaAZ) and Bratsk (BrAZ) – are among the five largest in the world. Neither Alcoa nor PA see the need for plants as big as these.

Russian aluminum production methods – the so-called vertical and horizontal Soderberg technology – are outdated. Only the Pechiney-designed Sayansk plant, the newest of the Russian plants, is as modern as Western plants. Western plants are more compact and produce at a cost price 20 percent lower than in Russia.

Rusal owns the three large Russian plants and also has claims on the Novokuznetsk aluminum plant, which it is trying to secure from Mikhail Zhivilo's MIKOM group. The only thing that saves this aluminum giant from bankruptcy, however, is not so much high labor productivity as low electricity rates.

Officially, nothing is known about just who owns this prominent and – for now – competitive enterprise. But shareholders in oil company Sibneft are said to control half the shares in Rusal. The Sibneft link in turn points to Roman Abramovich, now governor of Chukotka, and his partners who are rumored to include Iskander Makhmudov and even a certain "criminal authority" by the name of Salim. (This Salim is probably Yakub Salimov, a partner in TadzhAZ and a former Tajik opposition leader.)

The remaining shares are owned by Siberian Aluminum (Sibal) shareholders, though they are also not officially named. All that is known is that Rusal Director Oleg Deripaska holds a small stake, while major stakeholders are said to include Mikhail Chernoi and the TWG Group, which has changed business from owning aluminum plants to acting as their trader in Europe and the United States.

Rusal exports up to 85 percent of the aluminum it produces, though Deripaska had at one point wanted to go into producing rolled aluminum and invested a sizeable sum in developing the Sameko plant – Europe's largest aluminum finished-products manufacturer. Deripaska even bought and completed construction of the Dmitrov DOZAKL plant, which produces aluminum cans for beverages. But after Abramovich and Sibal created Rusal, Deripaska's interests in rolled aluminum and beer cans were put on the backburner.

These days, Deripaska is more interested in developing the raw materials base for aluminum production. Rusal's founders quickly realized that Russia did not have much bauxite and alumina ore to feed the country's giant plants.

Formally speaking, however, Rusal is not at all a major Russian company (which it should be, going by its consolidated turnover), but is a modest legal entity registered in Omsk and owning practically nothing at all. This is because Rusal still has not been formally registered as a united holding. Even when the group issued ruble-denominated bonds for 2 billion rubles in September, the official issuer was Bratsk aluminum plant.

With Rusal controlling 80 percent of Russia's aluminum production, almost all the remaining 20 percent is in the hands of the Siberian-Urals Aluminum Company (SUAL), which doesn't have any raw material supply problems.

The company was founded by Viktor Vekselberg, a former KrAZ shareholder who – together with his partner Vasily Anisimov from the Transconsult group – was pushed out of KrAZ by Rusal.

Anisimov also planned at first to take part in developing SUAL, but it seems he could not handle the criminal aspects of the aluminum business. Vekselberg turned out to have tougher nerves and more persistence. He formed an alliance with Alfa-Group, with whom he invested in buying the Tyumen Oil Co. In Alfa's Mikhail Fridman, Vekselberg found a reliable partner without interests in the aluminum sector. (Alfa-Group controlled the Achinsk alumina-ore plant, but later handed it over to Rusal.)

Poor refining facilities

Among other things, SUAL owns the Timansky bauxite deposit – Europe's largest – but the company's secure raw material supplies are offset by insufficient refining facilities. SUAL's Bogoslovsky, Kandalaksha and Nadvoitsky plants are smaller and technologically more backward than those of Rusal. Only its Irkutsk and Urals plants use the same technology as KrAZ and BrAZ, but have less capacity. SUAL, however, controls shares in Irkutskenergo, Russia's largest electricity producer after Unified Energy Systems (UES), and its access to cheap electricity helps to keep profitability at an acceptable level.

The only other aluminum producer of any significance in Russia is North-West Aluminum, controlled by St. Petersburg entrepreneur Alexander Sabadash and the Aimet holding company. North-West Aluminum owns the Volgograd aluminum plant, the Pikalevsky alumina-ore plant and the Volkhovsky aluminum plant. As a rule, attempts by potential players on the aluminum market to build new plants have ended in failure. The existing big Russian companies do not need any competition, and there is already enough competition on the world market.

It is not yet clear how the Russian aluminum market will continue to develop in its current monopolized state. On the one hand, globalization of the aluminum business gives Rusal the opportunity to attract investment to modernize its plants, but on the other hand, the only potential suppliers of new technology are Rusal's competitors – Alcoa, PA and Kaizer Aluminium.

Negotiations with these companies have so far brought no more than vague promises to "be friends." The rival companies usually insist on wanting to buy shares in the Russian plants, but Rusal's owners have so far refused all such offers. SUAL and North-West Aluminum have even fewer hopes of raising the money to modernize their plants – it is easier to simply build new ones.

There is even less competition in the Russian nickel and platinoid sector. There is essentially only one company in the whole country involved in this highly profitable business, and that is GMK Norilsk Nickel, or simply Norilsk Nickel, as it used to be called. Norilsk Nickel is controlled by Vladimir Potanin's Interros Group. In August 2001, Mikhail Prokhorov replaced Dzhonson Khagadzheyev as general director of Norilsk Nickel.

Norilsk Nickel's output contributes 4 percent of Russian GDP, but the company is not just big by Russian standards, it accounts for almost half of world platinoid production and 20 percent of nickel production. It is also Russia's largest copper producer. Only two other Russian companies produce any significant quantity of copper – Yuzhuralnickel and Ufaleinickel in the Chelyabinsk Oblast – though their production is more of a sideline to their copper production activities. All in all, Norilsk Nickel does not have any real competitors in Russia.

Norilsk Nickel is an unusually well-balanced company. It gets its energy from local gas monopoly Norilskgazprom and does not have any serious energy problems. As for raw material supplies, the Norilsk deposits are forecasted to last for hundreds of years. Sales are no problem, either – world markets start trembling when Norilsk Nickel cuts back production volumes.

The Norilsk company also forms the foundation of an entire city within the polar circle, where living standards were falling fast until Interros took over. Living standards in Norilsk are now almost at Moscow level. The only cloud on the horizon is restrictions on Russian precious metals and platinoid exports.

Norilsk Nickel's platinum and platinoid exports depend totally on the Finance Ministry, Gokhran (the state precious-metals repository) and the government, who set quotas and are thus able to regulate the firm's profit-making opportunities. Platinoid exports are handled by export firm Almazyuvelirexport, which is affiliated with Gokhran.

So, Norilsk Nickel faces a certain amount of regulation of its business, and constant threats of renationalization (Interros got control of the company through the loans-for-shares scheme). But this doesn't stop the company joining Rusal on the very short list of Russian enterprises that actually have some weight in the world economy.

Extending domains

Now, Interros wants to extend its domains beyond the Arctic north and is currently holding negotiations on buying a stake in a nickel deposit in New Caledonia. The company also still has hopes of sooner or later taking part in developing the nickel industry in Cuba. The nickel mines and plants in Cuba were built by Soviet specialists, but in recent times, Canadian companies – Norilsk Nickel's competitors – have begun making inroads on the island. This explains why Norilsk Nickel always tries to make sure it has a representative in any official delegation visiting Cuba.

It is not yet clear how much new General Director Mikhail Prokhorov will try to change the company's policy. Prokhorov has said that he wants to make Norilsk Nickel a "world-class company."

The other Russian nickel producers are a lot smaller. Norilsk Nickel exported 185,000 tons of nickel in 2000, while its competitors – Ufaleinickel, the Rezhsky nickel plant controlled by Mark Leivikov's Geolink company and Yuzhuralnickel, controlled by Chelyabinsk steelworks Mechel – each exported 10,000-15,000 tons.

As with nickel, Russia does not have many major producers of copper, another metal with worldwide demand. Copper producers aside from Norilsk Nickel include the Urals Mining and Metals Company (UGMK). Of all the assets ascribed to Iskander Makhmudov, UGMK is the only one he is more or less officially linked to. Makhmudov began his business with UGMK, or rather, with its component company Uralelektromed. Uralelektromed is headed by Andrei Kozitsyn, Makhmudov's long-time partner, who has taken part in most of UGMK's battles for assets, including the seizure of the Kachkanarsky GOK (mining and enrichment company).

UGMK is a holding that unites some 30 copper-producing companies. The largest of these are the Gaisky GOK, Uralelektromed, Svyatogor and Safyanovskaya Med. UGMK is the only company in the non-ferrous metals sector to have launched a program to upgrade its production facilities, which has now been going on for four years.

Like Rusal, UGMK faces a raw materials supply problem, though not on as acute a scale. This is why UGMK is so active in looking for new resources. Together with the Railways Ministry, UGMK owns the Zabaikalsky Mining and Ore Co., which is to develop the Udokansky copper deposit. (It is possible that British company Bateman will also join this project).

For the time being, UGMK makes up for its raw-materials shortfall by buying supplies from other companies. Its suppliers include the Valentorsky copper deposit, which belongs to SUAL, and two companies in Bashkortostan – the Sibaisky GOK and Uchalinsky GOK. Raw-materials processing started a conflict between UGMK and Russia's third biggest copper producer – Kyshtym Medelektrolitny plant (KMEZ).

KMEZ is a purely regional company with no support from Moscow and no well-placed connections. KMEZ General Director Alexander Volkhin and his management team control 50 percent of shares in the company, with the other 50 percent owned by the workforce. When the conflict with UGMK began in May this year, specialists from OPS Uralmash arrived at KMEZ. The OPS in Uralmash's name stands for "public-political union," but the Russian letters can be – and are – read as standing for "organized crime group." It is not yet clear whether Uralmash has taken KMEZ and Volkhin under its wing or bought shares in the plant.

Rare metals

Aside from the companies producing copper, nickel and aluminum, Russia has a whole host of companies producing much rarer and more expensive non-ferrous metals ranging from tungsten to lantanoids. These companies include Dalpolimetal, controlled by Glencore, and state-owned Sevredmet, but none of them are well known. The only exceptions are two large companies that work together – VSPMO and Avisma. These two companies control 70 percent of the rolled-titanium market in the United States and managed to sign a 10-year contract to supply rolled titanium to Boeing.

The problem now is that with the exception of Eastern Siberia, where little development work has been done, non-ferrous metals deposits are not very big. But across the entire former Soviet Union, from Western Ukraine to Uzbekistan, there are plenty of non-ferrous metals plants all trying to find their place on the Chinese export market – the same market that the Russian companies are working for.

The government had been planning to unite all the companies in which it still held a large stake in a state holding this year. A company like this would have had a chance of becoming a serious player on the world rare-metals market, but for some reason, the project did not go ahead. Probably, the explanation is that the country is making enough money by exporting nickel, copper and aluminum.