SOVIET POWER RETURNS TO LIFE

By Dominic O’Connell

It is just above freezing and there is a touch of sleet in the air. For Vasiliy Tatarnikov, engineering boss at the Boguchanskaya hydroelectric dam in central Siberia, this is a mild autumn day. In winter, it can get to -58C. What does he and his 4,000 workers do then? “We work on the dam,” he says, looking puzzled.

Boguchanskaya is a monster in the middle of nowhere. One-and-a-half miles wide and 300ft high, it spans the Angara river, a slate-grey torrent that drains Lake Baikal north through Siberia. It’s 800 miles south to the Mongolian border, and 2,000 miles west to Moscow.

Work on the project started in 1974, when Leonid Brezhnev ran the Soviet Union. It ground to a halt in the early 1990s, when the Communist empire fell apart and the money ran out.

For the past two years, however, it has been full steam ahead. UC Rusal, a metals group that emerged from the chaotic days of post Soviet capitalism to become the world’s largest aluminium maker, is putting $5 billion (£2.7 billion) into completing the dam in partnership with Rus Hydro.

The prize is inexpensive power. You need a lot of electricity to make aluminium, and power from Boguchanskaya and a clutch of similar dams is about the cheapest you can find – 0.69p per kilowatt hour, compared with the 10.45p per kilowatt hour charged by the cheapest retail supplier in Britain.

Rusal’s Siberian power plants and smelters, once forgotten as relics of Soviet planning, have become the company’s ace in the hole.

World aluminium prices have fallen from $2,800 a tonne in April to $2,200 today and are expected to go lower as western economies dip into recession. This is welcome news to chief executive Alexander Bulygin. “If it went to $2,000 and stayed there for three months it would help other aluminium makers to decide more quickly to stop producing,” he said.

At the same time, however, Bulygin and Rusal’s controlling shareholder, Oleg Deripaska, are plotting to make the company less reliant on swings in the aluminium price.

Deripaska, now regarded as Russia’s richest man having, according to Forbes magazine, surpassed his friend Roman Abramovich this year, wants to merge Rusal with Norilsk, a Russian metals group that is the world’s largest nickel and palladium producer.

The plan has run anything but smoothly, with the takeover contest turning into a running battle between rival factions of oligarchs.

At the moment, after months of boardroom wrangles, it’s a score draw. Rusal owns 25% plus two shares of Norilsk, a blocking stake, but another group led by Vladimir Potanin has (probably) a greater stake, and is pressing ahead with plans to merge Norilsk with another group, Metalloin-vest, led by a third metals tycoon, Alisher Usmanov.

For all but committed Russophiles it’s a difficult saga to follow, but one with global implications. Rusal has plans to float next year on one of the world’s big exchanges. London, Euronext, New York and Hong Kong are all in the frame, said Bulygin, although most bankers in the sector think London the most likely.

Rusal would be a big-enough fish by itself, with a likely market value of £20 billion, enough to put it into the top 30 of the FTSE 100 elite group of Britain’s biggest companies. If Norilsk were added, the combined company would be a mining titan, Russia’s answer to the likes of BHP Billiton, Vale and Rio Tinto. Like them, it would control a large-enough slice of the basic materials vital to modern economies to be a serious player in the world economy.

That high-stakes global power game seems a world away on the grey streets of Krasnoyarsk, the Siberian town that is home to one of Rusal’s key smelters. A small frontier town until the second world war, it grew quickly thanks to the decision to move industry east to escape the Germans.

In the 1950s and 1960s, demobbed Soviet border guards were encouraged to come to Krasnoyarsk to help build dams and smelters. They were joined by idealistic members of the Komsomol, the Communist youth movement.

Krasnoyarsk was also a staging post for those who would rather not have been in Siberia – thousands of political prisoners and other “undesirables” sent to labour camps by Stalin. Such was the sensitivity to their efforts in Krasnoyarsk that it was off limits to foreigners until 1992, chiefly because of the military manufacturing that took place there.

After the break-up of the Soviet Union, many in the West thought the Krasnoyarsk smelter and others like it were destined for the scrapyard. There was uncertainty over who owned the assets, with brutal and at times bloody battles for control. Deripaska and Rusal came out on top and have since, according to locals, brought order and investment.

Now the town is bustling with growth. Money is pouring in thanks to the success of the local aluminium and other industries, and that sure sign of a fast-growing economy, the traffic jam, is everywhere.

The smelter occupies 2,000 hectares – about 2,500 football pitches – employs 5,000 people and cranks out almost 1m tonnes of aluminium a year.

It has 24 “pot lines” – rows of smelting units housed in tall, shabby buildings. Inside, the air is smelly and dusty, although the workers say it has improved greatly in recent years. Rusal has spent about $300m cleaning up the plant. It’s not a place to wear your new Rolex. The smelting units use so much electricity they create a magnetic field strong enough to stop most watches.

Krasnoyarsk is at the front line of Rusal’s expansion plans. It has already made one big leap forward, merging last year with Sual (its big Russian rival) and the alumina assets of Glencore, the Swiss trading group. The combined group, United Company (UC) Rusal, is the world No 1 in alumina (aluminium oxide, which is smelted to make the metal), with a 13% market share, and aluminium with an 11% market share. Bulygin wants to boost production from the annual 4.4m tonnes to 5.9m by 2015, hence the investment in projects like Boguchanskaya, which will power a new 600,000-tonne smelter nearby. Rusal is not only interested in hydroelectric power. Bulygin is studying plans to link with Ros Atom, the state nuclear agency, to complete a handful of nuclear power plants begun in Soviet days.

With aluminium prices tanking and financial markets in crisis, it seems an odd time to invest in new capacity. Bulygin is upbeat. The current low prices should drive higher-cost competitors, particularly in China, out of production, and aluminium should boom again. “We’re going to have an 18-month crisis. At the end of next year we’ll be back to $3,500 a tonne, and $4,000 a tonne for 2010.”

China is the big target. It is a net exporter of aluminium, but high power prices and environmental constraints mean this will change, said Bulygin. Rusal is the closest big producer, and ideally placed to sell exports. He does not expect a Chinese slowdown. “I’ve been there recently meeting senior officials and they realise they have to grow at 8%-10% a year or unemployment will kill the economy,” he said.

As some producers are forced out of the market, no new contenders are replacing them. “There aren’t that many places where you can get the power at the right price, and you can’t easily buy the technology any more.” Where the energy can be found, Rusal is normally not far away – last week it signed a memorandum of understanding with Libya to build a new electricity and metals complex.

If the outlook for aluminium is so good, why is Rusal devoting so much energy to pursuing Norilsk? “Every metal has its own cycle. If you have different metals in the group, you have a natural hedge against the cycle, because when one is up the other is down. It makes us more attractive to investors,” said Bulygin.

Like a dog worrying a bone, Rusal is unlikely to leave Norilsk alone. Bulygin says that before the end of the year it will call for another shareholders’ meeting, at which it will try to remove Norilsk’s chairman and chief executive.

The Sunday Times