An extraordinary business step by Norilsk Nickel.
May 2024
The Norilsk Nickel ( Nornickel ) business plan is an example of a non-standard and justified approach to the problem of increasingly stringent sanctions.
As I wrote earlier, the first fundamental principle of building new business systems in conditions of severe sanctions pressure, although this is far from obvious to many, is the incorporation of a legal, sustainable business structure in the jurisdiction that imposes these sanctions or, at a minimum, in a neutral jurisdiction. Despite the fact that this principle is obvious to people who have worked in Western markets for many years and are familiar with the political and economic structure of Western business systems, it took Russian managers (the best of them) almost two years to understand this simple and indisputable truth. It took the final slamming of the sanctions lid on April 12, 2024 and a complete stop in trading of Russian copper and nickel on the Chicago and London Metal Exchanges for managers in Russia to understand this truth. As a direct result of the sanctions imposed on April 12, 2024 by the US Treasury in coordination with the UK Treasury against international trade in Russian non-ferrous metals, Norilsk Nickel decided to transfer copper production from Norilsk, Russia to China. I note that this Norilsk Copper Plant accounts for up to 80% of Norilsk Nickel’s copper production. According to the president and owner of the company, Vladimir Potanin, a joint venture will be created to build a new plant in China. However, he has not yet specified who will become the partner.
It is amazing how many Russian top managers, raised under the wing of the classical Soviet-Russian economic doctrine, did not believe that “sanctions are serious and for a long time.” And although discussions of the sanctions that led to today’s ban on trade in Russian aluminum, copper and nickel have been ongoing in the West for the past two years, almost from the very beginning of the well-known events in the Ukraine, it seemed to Russian top managers that everything would somehow resolve. Their believe was based on the Russian economic doctrine that the products of the Russian non-ferrous metallurgy are integrated into global production chains in a critical way, and drastic actions towards various restrictions on the Russian non-ferrous metallurgy could greatly undermine production processes in many Western countries, including the United States, as well as destabilize the supply of aluminum, copper and nickel in large regions. By the way, it was precisely the same, to put such incorrect assumptions that led the gas giant GAZPROM to its current state, which is not the best. In any case, it took an almost complete stop in payments for Russian copper, including difficulties with payments that arose even in China, for the top managers of Nornickel to understand that there was nowhere else to delay. Some of Norilsk Nickel's traditional partners have refused supplies altogether. As a result, the company lost up to 20 percent of its pre-war revenue. “If we take our income until 2022 as 100 percent, adjusted for prices, then now we can confidently count on only 80 percent of them. And even 80 cannot be guaranteed to be called the lower limit,” this is a comment from Mr. Potanin himself.
International restrictions affected not only the income of metallurgists. Due to the loss of access to modern technologies, the company faced difficulties in implementing its emissions reduction program. The topic is very painful for Norilsk Nickel. It is well known that, after an oil spill caused by one of the subsidiaries of the metallurgical giant in 2020, the largest environmental fine in Russian history was imposed on the company, which exceeded 146 billion rubles. Due to sanctions problems, Norilsk Nickel was also unable to find the necessary equipment (such equipment, of course, cannot be transferred in a roundabout way through Turkey or the Emirates) to modernize the Copper Plant in Norilsk, and decided instead to close it and restart it in China under the terms of a joint venture.
Although, in truth, the declaration all sorts of environmental problems and problems of some kind of modernization in Russian are simply a kind of clouding of the view of the average person. The main idea, of course, is that, according to the head of the company, Vladimir Potanin, moving production to China will allow one to bypass sanctions restrictions. “Sanction pressure has forced us to think about how best to deliver our goods to markets. And one of these non-standard solutions is to transfer part of the production to these markets,” these are the words of Potanin himself. Interesting, however, are the words from the mouth of Mr. Potanin, who until quite recently, like many others, thought that sanctions were not serious and they did not work. Today, in his opinion, which is absolutely fair, it looks like this: “... the final product will be sold as Chinese. And Chinese goods are much more difficult to sanction in China than Russian goods entering China." It took two years to formulate and publicly voice this obvious truth. I note that all this was seen from the very beginning by people who understand the Western business and political systems.
According to the Norilsk Nickel company, copper produced at the new plant will be sold as Chinese, which largely resolves the issues of financial transactions, and it is really hard to disagree with this. Russia produces about 1 million tons of copper per year, Norilsk Nickel accounts for about a third of this volume, and the transfer of copper smelting production to China will not affect the domestic Russian market. In the reality, the Russian market consumes less than 20% of domestic production, the rest is exported. It is clear to practitioners of business processes that from the point of view of sales of its metal, after moving production to China, Norilsk Nickel will be able to sell copper without fear of further sanctions, will be able to increase revenue and at least somehow make up a long-term business plan. The problem in this particular case lies absolutely elsewhere, particularly in the political and social component of this project. From the point of view of the country's long-term political interests, this is a retreat, a step back, so to speak. Russia is becoming even more of a raw material appendage of China. Despite the fact that jobs and production are being created in another country; these are not foreign, in this case Chinese, investments going to Russia, which are very much needed today, but it’s quite the opposite. Norilsk Nickel invests in China, creates jobs there, creates new production facilities there, but in opposite in Russia it will reduce them. Norilsk Nickel has stated that this is all politically agreed upon, but there are still serious doubts about this, since it contradicts what the Russian state authorities declare as their long-term economy, social and political targets.
Against this background, it becomes especially interesting what advantages, in Mr. Potanin’s opinion, Russia and the Russian state authorities will gain as a result of this “evacuation” project. The head of Norilsk Nickel, for example, shared his plan to gain access to Chinese battery production technologies. Potanin's corporation, together with ROSATOM, promises to launch battery production project in Russia based on Chinese technologies. Of course, batteries are a good thing; drones cannot fly without them and not a single electric car, including Chinese or Russian, will drive on roads. It’s promising, but I immediately remember the fate of the first (and so far last) Russian plant for the production of lithium-ion batteries, which was built by the company RUSNANO in Novosibirsk in 2011. Ironically, it was also built jointly with Chinese partners and using Chinese technologies. In 2018, the company was declared bankrupt, and in July 2023, all the property of this plant was sold for pennies.
The promise of supplies to China for the needs of the new joint venture of approximately two million tons of copper concentrate per year looks somewhat better. What is most important in this promise, these deliveries are planned to be carried out along the Northern Sea Route. Norilsk Nickel promises to invest in additional logistics capacities on this route, and, as you know, this logistics project is personally supervised by the President of Russia and he has high hopes for it. However, the big question remains whether this concentrate, brought from overseas, will be needed by the new Chinese partner, and in general, whether it will be relevant and in demand under the conditions of the Chinese market system.
Also, Potanin’s statement that modern production will be opened in the workshops of the former Copper Plant, including 3D printing of parts for equipment, looks completely comical. This, according to Potanin, “will have an important aesthetic significance: on the site of the old workshops of the Copper Plant. Modern buildings will appear, where people in white coats will be involved in high-tech production.” I would really like to see how the harsh Norilsk men - copper smelters in white coats, released from work when plant moving to China, will work on 3D printers.
This, of course, really captivates the imagination, the picture is super beautiful, but it doesn’t change the essence of the matter. The point is that a large taxpayer and supplier of export earnings will become less large in Russia. Part of the taxes will go to China, and the Yuan will remain there, in China. Moreover, anyone who knows the Chinese and the Chinese business model well, as well as the operating methods of Vladimir Potanin’s companies, has no doubt that Norilsk Nickel will transfer (or try to transfer) to China not only production facilities, but also the financial structure of profit generation at a minimum in order to remove this profit from international sanctions. Honestly, in my opinion, Norilsk Nickel’s steps are absolutely clear and correct for a private company from a commercial point of view. Here, as I wrote above, the question is different: how does all this fit in with the long-term economy, political and social targets of the Russian state authorities and political leadership. This is a very unpleasant precedent for the Russian budget, which will become even more very unpleasant if other metallurgists follow Norilsk Nickel steps. They have no less, and maybe even more problems. Nornickel itself has problems not only with copper, but also with nickel. So the Copper Plant may turn out to be only a kind of “trial ball” in this chain of events.
Well, it’s really interesting whether this partial move of Norilsk Nickel to China will bring to someone in the Russian government and political leadership some analogies with the move of assets and the subsequent physical departure of Roman Abramovich for permanent residence in London. These certain analogies can have a significant impact on the implementation of the Norilsk Nickel project, but, of course, Chukotka Autonomous Region of Russia needs a new businessman - governor and breadwinner, but this is a conspiracy theory.
However, as they say, we'll see.
About the author.
Dmitry Belik, began his work and business career in the former USSR, built several successful businesses during the years of the cooperative movement and the beginning of perestroika, then worked for almost thirty years in various mid- and high-level managerial positions in Western companies, where he managed representative offices of corporations in Russia, countries of the former USSR and Eastern Europe. Among the places of work were such positions as deputy head of the representative office of Newbridge Networks (https://en.wikipedia.org/wiki/Newbridge_Networks), head of the representative office of Wesley Clover International (https://www.wesleyclover.com/), head of the representative office and CEO of the joint venture managing the Mitel Networks business in Russia, the countries of the former USSR and Eastern Europe (https://www.mitel.com/)