It’s not too early to see in this month’s clash between Saudi Arabia and Russia over oil supplies to the market the first real sign that the Kremlin sees a future for itself as the world’s alternative source of crude whenever the OPEC swing producer tries to make other producers dance to its tune.
Playing swing producer takes time, practice and nerve. Unbeknownst to the oil world, Russia has spent almost two years learning how to do it in another international commodity market – platinum-group metals.
In Soviet days, Moscow’s precious-metals traders disliked sharp upward price swings because they made it difficult to forecast the volume of sales required to meet revenue targets. The Soviet traders also understood that speculative price swings upward were always followed by sell-offs and sharp price declines. Soviet strategists preferred stability.
When the Yeltsin administration encouraged privatization of state assets, that discipline was lost. Those who controlled Norilsk Nickel, the Central Bank, and Almazjuvelirexport, the state pgm trader, made huge windfall profits at the state’s expense. The State Duma tried in vain to do something about it in 1999, but was brushed aside. Restoring stability and the state interest in the precious-metals sector has taken the Kremlin two years. During that interval, however, uncertainty about Russian supply strategy and export moves drove platinum and palladium to their highest prices ever.
This in turn has caused global consumers of pgm to prefer platinum to palladium and South African suppliers to Russian. Even though Russia has tried to demonstrate its new discipline by cutting sales this year by about 12 percent compared to last year, the price of palladium has collapsed under pressure of reverse speculation, falling electronics production in Asia and automakers’ worries in the United States. In the future, it is looking as if South Africa will reap the rewards, producing more platinum and palladium from new sources and mine expansions that Russia cannot find, manage or afford.
If this looks like a case of the moral difference between the industrious ant and the foolish grasshopper, the Kremlin can reply that there is still time. What must happen next from the Kremlin’s perspective is that, having placed Norilsk Nickel and other sources of pgm back under tight central control, a single coordinated policy of production and export must be adopted. The policy of saying no to Norilsk Nickel and the Central Bank must be replaced by a new level of cooperation.
This is why, after months of sniping at each other, Russian government officials and Norilsk Nickel executives have kissed and made up in a show of goodwill.
Speaking at the annual conference on precious metals organized by Gokhran, Russia’s stockpile agency, Valery Rudakov, the Gokhran chief and deputy finance minister, said: “We have a coordinated policy for Russia’s presence on the pgm market. In accordance with the agreement we have with Norilsk Nickel, Russia has left the palladium market now that it is in a period of depression, and no sales from any Russian sources are being made now. Our return to the market will also be coordinated with all the Russian participants.”
Reversing the policy of the past year, Rudakov also said he now favors allocating multi-year export quotas for platinum and rhodium to Norilsk Nickel. “We hope that Norilsk Nickel will get multi-year quotas for platinum and rhodium before the end of this year,” he announced.
Responding to Rudakov, Norilsk Nickel’s chief pgm policy-maker Yury Kotlyar said: “We are very grateful to the people who have lobbied for the interests of the precious-metals industry.” He then mentioned Rudakov and his deputy at Gokhran Vladimir Rybkin.
“Of course, quotas for pgm still remain, but I think that after joining the World Trade Organization, this will have to be dropped. Now we see that Russia is moving much faster on the way to the WTO.”
Norilsk Nickel is still at odds with the government on export duties, Kotlyar said. “Although they are being abolished for gold exports,” he added, “the same should be done for silver and pgm, as well as for non-ferrous metals – not only aluminum, but copper, nickel and cobalt as well.”
This year, according to Kotlyar, is the first in which Norilsk Nickel drew more than half of its sales revenues from the precious-metals trade, including pgm, gold and silver.
Rudakov disclosed that strong centralized control of pgm exports will continue to be the government’s policy, hinting that the concessions to Norilsk Nickel have been made on condition the company does not attempt to break out of the government’s selling limits.
“Multi-year quotas for platinum and rhodium will only be provided for Norilsk Nickel,” Rudakov said. “Other platinum producers and owners will get only one-year quotas for platinum in 2002. These are likely to include [alluvial producers] Koryakgeoldobycha and Amur, the Central Bank and Vneshtorgbank.”
This marks the first time Rudakov has publicly revealed all quota holders. The new policy enlarges those authorized to export platinum in 2002 to include the Amur group in the Russian Far East. The Central Bank also appears to be returning to the export trade after missing out on a quota for two years.
“Almazjuvelirexport will also get a consolidated quota,” Rudakov said, “that it will be able to use for exports of platinum produced by the secondary platinum producers, if they wish to export the metal.”
This remark appears to refer to the Urals Mining and Metallurgical Co., run by Iskander Makhmudov, which is the largest copper producer in Russia after Norilsk Nickel. Makhmudov has said that as a by¬product of copper mining, his group produces 10 metric tons of gold, 250 tons of silver, 1 ton of palladium and 13,440 kilograms of platinum.
Other secondary producers of pgm in Russia include the Kyshtymsky Copper Electrolytic Plant, which recently announced that its pgm output is about 1.5 tons a year. Scrap producers of pgm produce another ton annually.
Kotlyar said: “We do not have any disagreements with the state. The task we have to solve is how to get larger profits in the current difficult situation. We coordinate between ourselves everything that is done,”
The new spirit of coordination isn’t exactly the end of the old state secrecy. When asked to explain the Russian strategy of using palladium as collateral for loans from German banks, Rudakov and Kotlyar refused to comment on the redemption of these loans and the transfer of metal to Zurich.
According to Swiss import data, just over 3 metric tons of palladium identified as Russian landed in Switzerland in August. From Jan. 1 to Aug. 31 this year, Swiss import statistics claim that a total of 88.6 tons of palladium have been landed; of this total, Russian metal is reported to amount to 75.3 tons.
Russian and international market sources deny that the Russian metal which recently landed in Switzerland has been sold on to the market. They believe the metal remains in Russian possession, and will not be sold in the foreseeable future.
We are now entering the season when belief in what Russians say about pgm exports goes down, and prices go up in response to the uncertainty. By January or February, when Swiss metals usually begin to affect the supply/demand balance, we’ll know whether the belief this time around is reliable.