Nornickel and RUSAL Merger: A Sanctions-Proof “National Champion”?

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UK-sanctioned CEO and largest shareholder of the Russian metals giant Norilsk Nickel (Nornickel), Vladimir Potanin, in early July said that he had accepted a proposal from Russian aluminum company RUSAL—also a minority shareholder in Nornickel—to “discuss a merger between the two companies.” A merger would, according to Potanin, provide the new “national champion” company with “sanctions stability,” in addition to a shared commitment to green manufacturing and satisfy the “need to diversify the shareholder structure.”

Potanin’s optimism is probably well-founded. A merger would achieve his, and perhaps Russian President Vladimir Putin’s, goal of creating a metals giant that would be difficult to sanction and could withstand geopolitical and market turbulence thanks to its significant global role in supplying the raw materials needed for the transition to renewable energy and to industries such as aircraft production, canning, construction, and electronics. The new entity would challenge Western policymakers and businesses to determine whether a company can be too big to sanction.

  • A merger between the world’s leading producer of nickel, palladium, and other critical metals with the third leading producer of aluminum would create one of the largest metals companies in the world. RUSAL, whose parent company EN+’s largest shareholder is US, EU, and UK-designated Oleg Deripaska, owns 25 percent of Nornickel; Potanin’s “Interros” Holdings owns 35.95 percent.
  • Market reactions varied. Some Russian economic and sanctions experts agreed that a merger would make the combined company “practically invulnerable to sanctions.” Others were bearish, seeing “limited financial synergy from the merger” and concluded that Potanin and Deripaska “have long and extremely difficult history of relations,” and although a merger would offer some sanctions protection, “it is still not possible to be fully safeguarded.”
  • We assess that the United States would consider the new company too important to the global economy to directly designate. The Treasury Department already has a framework to ensure that globally important companies owned or led by sanctioned individuals do not themselves fall under sanctions or other restrictions via delisting deals, the issuance of general licenses, and tariff waivers. Finally, a merged entity could easily avoid triggering the 50 percent sanctioned ownership threshold by which it would be considered sanctioned by restructuring ownership.

Too Big to Sanction

The United States has been willing to exempt Russian metals companies from sanctions because of their importance for the global market. When Deripaska and RUSAL were sanctioned in 2018, the aluminum market reeled. Less than a year later and under heavy industry and geopolitical pressure, the Trump administration agreed to delist RUSAL and its parent company EN+, as well as Russian automobile conglomerate GAZ group, if Deripaska reduced his direct and indirect stake in the companies. Although US and EU policymakers acknowledge that Deripaska still controls both companies, they have turned a blind eye to avoid further disruptions of the aluminum market.

  • After the owner of Russian mining and metallurgy conglomerate Metalloinvest, Alisher Usmanov, was designated by the United States in March, OFAC issued General License No. 15 which authorized transactions that involved blocked entities owned by the newly sanctioned oligarch to avoid disruption to the metals market.
  • Just this year, the United States exempted key Nornickel and RUSAL products such as nickel, palladium, rhodium, titanium, and crude aluminum from the import tariff rate hike on Russian goods.

In addition to its economic importance, a merged company would be able to avoid sanctions under the current US and EU frameworks which are centered on an entity’s majority control. The corporate structure would probably include Interros retaining a plurality of shares (about 28 percent according to one estimate) and RUSAL owning another 25 percent. Even if Potanin continues to retain majority control of Interros after being sanctioned by the UK last month, the merged company would still fall below the 50 percent ownership threshold which would subject it to blocking sanctions.

If Potanin remains CEO of Interros, reputational risk, rather than regulatory risk becomes a factor for the newly merged entity. Reuters last month reported that “two sources with direct knowledge of the matter said that… until [Potanin] bites the bullet, steps down as CEO and sells down his stake to become a minority shareholder, no deal is possible.” So far, however Western companies have not shunned Nornickel, which is less than 50 percent owned by Potanin, Interros, and RUSAL. The risks which a merged company would raise are the same as those currently presented by Nornickel and RUSAL, which western businesses have considered and largely accepted. And although numerous companies are self-sanctioning and avoiding business with Russian entities altogether, Russian firms in critical sectors, such as metals and commodities, largely have been spared.

Few Business Obstacles?

Despite analysts’ mixed reactions to the possible merger, the obstacles to creating a new company are far from insurmountable. A merger would, as some analysts noted, offer protection from price shocks to particular metals, while the companies’ low stock prices may make a merger easier. Potanin also pointed to broader synergistic green agenda goals for the new entity, which would help enhance ESG investor interest and boost the company’s reputation to help balance the reputational risk presented by transacting with a company in which two sanctioned Russian oligarchs are involved.

In addition, RUSAL has access to cheap and clean hydro energy, thanks to its majority shareholder, EN+, and Nornickel has its own transportation fleet. Both companies are in solid financial shape, and a combined national “champion” would be an obvious target for government industrial subsidies which will increasingly prop up the manufacturing sector as Russian businesses continue to be cut off from global financial markets by Western sanctions. Aside from sanctions protection, the advantages of even a limited merger, where both companies continue to operate relatively independently, but rely on each other for infrastructure and financial stability would be significant.

For western companies, the business opportunities with a “national champion” would also be substantial, but so would be the reputational risks. In addition to de facto company control, one of the key players in such a company—Deripaska—has worked with the Kremlin to conduct aggressive influence operations, allegedly engaged in money laundering and bribery, has links to Russian organized crime, and has ordered the murder of a businessman. US firms should look beyond simple majority control and analyze other available information, including plurality ownership (especially if outsized compared to other owners), the board nomination and election process, and reports on key decisions and day-to-day operations. FiveBy’s analysts possess the experience in assessing ownership and control structures and reputational risk and can help firms make informed decisions about whether to transact with the newly formed entity.

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