Russian Magnesium was undone by intrigues

22.10.2012 — Analysis

East Siberian Metals Corporation (MBC - a subsidiary of IFC Metropol) has declined to take part in the construction of a magnesium plant in the Sverdlovsk region. The official reason was the sale of a controlling stake in the Urals enterprise to U.S. citizen Mark Lisnyansky, bypassing this investor. But the unofficial motive was the departure of Rusnano from the Russian Magnesium project, which would have guaranteed public funding. Experts told this columnist for RusBusinessNews that Anatoly Chubais's destructive stance has sealed the fate of high-tech manufacturing.

In 2011, 780,000 tons of magnesium were produced globally. Consumption of this lightweight metal has been steadily increasing in recent decades, and according to Anastasiya Redko, an analyst with the information portal Sogra, its use in the automotive industry will further this growth in the future. Almost all experts predict an increase in magnesium production in the medium term. According to Clark & Marron, demand for the metal will grow by an average of 7.9% annually, assuming there are no crises in the world economy before 2019.

However, experts caution that growth is possible only at a low price for the metal - no more than 50% higher than aluminum. China was the first to take advantage of this fact - thanks to its government's protectionist policy, that country was able to claim 85% of the world market by 2008. By that time, many Western companies that depend on complex, power-hungry equipment had shut down, and plants in the former USSR that at one time had held 30% of the magnesium market had reduced their output, shifting to the production of rare-earth metals.

But Russian experts were not prepared to accept Chinese dominance and began to look for ways to reduce the costs of magnesium production. The idea arose to use waste from asbestos production as a raw material instead of natural carnallite (on which magnesium is based). This plan was tested at a pilot facility at the Solikamsk Magnesium Plant. The results of those experiments were encouraging - the production cost dropped from $1,600 to $1,200 per ton. During the electrolysis process a number of other commercial products (silicon oxide in particular) were produced. For this reason, the decision was made to build a plant at the Asbest mining and processing facility, the waste from which can fuel more than just magnesium production.

The project had many advantages from the very beginning: an industrial site surrounded by a buffer zone for health protection, external utility systems and transportation lines, nearby sources of energy, and available skilled personnel. But oddly enough, none of the Russian investors seemed to be in a hurry to invest in this promising industry.

In 2004, the Swiss firm Minmet Financing Company S.A. took an interest in the project, acquiring a 50% stake in Russian Magnesium, OJSC. But the foreigners were not willing to finance the construction of the plant on their own. In January of 2011, East Siberian Metals Corporation agreed to become one of the project's strategic investors. Minmet Financing Company was promised that a loan would be forthcoming from Vnesheconombank.

The bankers in turn requested from the investors that Rusnano provide state backing for the credit. That corporation, which is headed by Anatoly Chubais, approved the project for funding, but did not become a shareholder of Russian Magnesium. The red tape dragged on for months, prompting the representatives of the joint-stock company to write an open letter to Russia's leaders in March of 2012, accusing Rusnano of failure to meet its deadlines for the construction of the magnesium plant. The corporation saw this as public pressure, and in late May it announced its reluctance to provide loan guarantees.

Immediately afterwards, Minmet Financing Company relinquished its controlling stake in favor of the firm Solimag, which belonged to Mark Lisnyansky. In the end, East Siberian Metals withdrew as one of Russian Magnesium's strategic investors.

Ilya Okhtyrsky, East Siberian Metal's CEO, explained to RusBusinessNews that it was a good and necessary project, but those taking part in it needed to have common goals and a coordinated development strategy, because without them the chances of getting the project off the ground were quite slim. Ilya Okhtyrsky noted, "We had no part in the change of ownership. We have no contractual agreements with the new majority stakeholder, and so we decided not to invest in the Russian Magnesium project."

Experts, however, noted that East Siberian Metals backed off from the investment plan, not when the new owner arrived, but waiting until October of 2012 - after the official decision of Rusnano's board of directors to abandon the project to produce magnesium metal and precipitated silicon dioxide with a nanoscale structure.

Vladislav Gorodetsky, the director of the department of regional programs of the executive committee of the Big Ural Association, was initially convinced that the financing of the magnesium plant would end up going nowhere because too many interests were clashing over the project. In particular, the authorities of the Sverdlovsk region were loath to relinquish their grip on the steering wheel, plus lobbyists from the United Russia fraction were seeking to promote their own company, which the expert suggested would work to "divvy up" the funds allocated by the state.

But it was its handover to Rusnano that ultimately caused the downfall of the Russian Magnesium project, not the greed of public officials or the schemes of competitors. The official version of the story claims that the project was abandoned because the co-investors failed to meet their obligations. In response to a request from RusBusinessNews to clarify who was obligated to do what, Rusnano's press office refused to provide an answer, saying "We cannot disclose the nature of our contractual agreements, as this project could be put into operation without our participation."

Vladislav Gorodetsky clarified the situation. He believes that when allocating shares in Russian Magnesium, Rusnano's management refused to take into account previous investments in the project, which were difficult to calculate in terms of money. The original sponsors of the plant's construction did not agree with that position.

Mr. Gorodetsky claims this is not the first time he has witnessed Anatoly Chubais's corporation acting improperly. It's enough to look at what projects are funded and what projects are "snuffed out" by this state-run organization. Case in point - on Oct. 3, 2012, Rusnano's board of directors declared a success the experiment to invest in the creation of a Russian supply warehouse of chemical and biochemical reagents, which can be ordered off the Internet. But at the same time, funding was denied to companies that produce and promote GLONASS/GPS satellite navigation receivers, SiC bulk single crystals, and epitaxial structures on that basis for a next-generation electronic component base.

Experts feel that Rusnano blatantly siphons off technology throughout the country, which is then sold abroad or "gifted" to particularly trusted entrepreneurs in Russia. The corporation is not pursuing its immediate goal, which is to encourage high-tech manufacturing.

The deputy CEO of Russian Magnesium, OJSC, Maksim Shchelkonogov, is not sure Anatoly Chubais was solely responsible for the cancellation of the promising project in the Sverdlovsk region. He thinks the problem wasn't Rusnano, but Russia itself. There is no high-tech manufacturing because the country does not want to build modern factories. Every project announced by government officials ends up as nothing more than hot air, just like the Titanium Valley special economic zone in the Sverdlovsk region. The aluminum industry is at an impasse technologically, which is why the Bogoslovsk Aluminium Smelter in the north of the region will soon be closed - RUSAL's company exhausted its chance to reduce costs, since it hadn't been updated in more than 30 years.

Experts claim that Russian Magnesium will also founder. No serious professionals believe that Mark Lisnyansky will shell out the money to pay for promising technology. This "investor" proved his mettle at the Solikamsk Magnesium Plant in the early 2000s, when he acquired a controlling stake on behalf of the Russia Growth Fund and then sold it without the knowledge of the other shareholders. But before selling, he forced the company's CEO to enter into contracts with firms that were unknown on the market, and also to sell magnesium on an electronic exchange, which he seems to have founded himself. He treated the plant as nothing more than a "cash cow," and an even sadder fate presumably awaits Russian Magnesium. Mr. Lisnyansky has already announced staff layoffs and has begun bankrupting the company.

Vladimir Terletsky