Editorial: Rusal sanctions sow market turmoil

The global aluminum markets have been in an uproar since April 6, when the U.S. government imposed tough sanctions on Russia’s oligarchs. Caught in the net are aluminum giant Rusal and its parent company En+ Group.

The U.S. Department of the Treasury’s Office of Foreign Assets Control imposed sanctions on seven Russian oligarchs — Vladimir Bogdanov, Oleg Deripaska, Suleiman Kerimov, Igor Rotenberg, Kirill Shamalov, Andrei Skoch and Viktor Vekselberg — and 12 companies they own or control, 17 senior Russian government officials, and a state-owned Russian weapons trading company and its bank.

The sanctions essentially forbid the oligarchs and their companies from doing business with the U.S. government or any U.S.-related businesses, and block any travel to the United States.

U.S. Treasury Secretary Steven T. Mnuchin was harsh in his announcement of the sanctions, and the reasons he gave for the action were many, suggesting the sanctions may be in place for a while: “The Russian government operates for the disproportionate benefit of oligarchs and government elites. The Russian government engages in a range of malign activity around the globe, including continuing to occupy Crimea and instigate violence in eastern Ukraine, supplying the Assad regime with material and weaponry as they bomb their own civilians, attempting to subvert Western democracies and malicious cyber activities.”

Most of these affected oligarchs are involved in Russia’s vast oil and gas industry, but one — Oleg Deripaska — is of interest to miners and metal traders because of his controlling interest in newly sanctioned Rusal and parent En+.

The U.S. Treasury Department said Deripaska “has been investigated for money laundering, and has been accused of threatening the lives of business rivals, illegally wiretapping a government official and taking part in extortion and racketeering. There are also allegations that Deripaska bribed a government official, ordered the murder of a businessman and had links to a Russian organized crime group.”

On April 23 the U.S. Treasury Department extended the deadline for Rusal’s American customers to comply with the sanctions from June 5 to Oct. 23 and said it would consider a petition for the producer to be removed from the sanctions list. Spot aluminum dropped 7.5% following the announcement.

Deripaska’s Rusal produced 3.7 million tonnes of aluminum in 2017, accounting for 7% of world production and 13% of production outside China. Rusal shares have fallen 66% in Hong Kong (its primary listing) since the sanctions were imposed. En+ shares, which only went public in London in late 2017, have plummeted 52%. Rusal bonds are even harder hit, and are no longer given ratings by Moody’s or Fitch Ratings.

Market watchers are still waiting to see whether the Russian government imposes retaliatory sanctions on the U.S., such as cutting off uranium or titanium supply.

The sanctions’ effect on Rusal were many, including the London Metal Exchange barring Rusal’s aluminum from being traded on its exchanges or stored in its warehouses going forward from April 17.

Aluminum prices soared more than 20% to US$2,500 per tonne after the sanctions were imposed, stoking the biggest five-day gain in three decades.

Glencore owns shares in Rusal and buys its output, but is “committed to complying with all applicable sanctions in its business and is taking all necessary measures in order to mitigate any risks.” Glencore chief executive Ivan Glasenberg has resigned from the Rusal board.

Rio Tinto is also in business with Rusal in Australia and Ireland, but said it is “fully committed to complying with the U.S. sanctions” and is “in the process of declaring force majeure on certain contracts and is working with its customers to minimize any disruption in supplies.”

Some have speculated Rusal could collapse without major support from the Russian state, but, for now, the Russian Finance Minister Anton Siluanov has stated that the government may provide short-term liquidity and other measures, although not acquire a stake in Rusal.

Deripaska has already been spotted in China, presumably trying to line up new Chinese customers for Rusal’s output.

In its latest quarterlies released on April 18, U.S. aluminum giant Alcoa scrambled to make sense of the new aluminum landscape, and hiked by US$1 billion to US$3.6 billion its 2018 earnings forecast. Alcoa commented that “considerable uncertainty remains in the global supply chain due to multiple trade actions, sanctions and supply disruptions.”

Before the Rusal news, Alcoa had already been benefitting from the 10% import tariff on aluminum imposed by the U.S. government on many countries, including China and Russia (Canada is exempted).