Is Norilsk Nickel too big to sanction?

Is Norilsk Nickel too big to sanction? That is a question on the lips of investors and analysts as they ponder which companies might be next on the White House’s Russian sanctions list.

The company, based in the world’s most northern city that gives the group its name, certainly thinks size might be a key factor in deterring US president Donald Trump from placing one of the biggest metal producers on the list.

Like the large banks in the financial crisis deemed too big to fail, the company may be right in thinking that size matters as its nickel and palladium supplies are crucial to western manufacturers for products from cars to batteries.

With 40 per cent of world output in palladium and vast exports that make it a global force as well as one of Russia’s most important companies, chief operating officer Sergey Dyachenko says there is no reason to think Mr Trump is about to target the group.

“People will have to think hard about where they will get metal from,” says Mr Dyachenko, whose company grew out of one of the most infamous of Soviet leader Joseph Stalin’s network of Gulag labour camps before becoming a private business.

“Copper [supply] is quite elastic, you can get it from somewhere,” he says. “Nickel: sure we are a large producer, but you probably could get some substitutes. But with platinum and palladium? People would feel it, immediately.”

“[Sanctions] would also affect major pension funds in the US, for example,” he adds, referring to Norilsk shareholders.

Sanctions have sent aluminium prices soaring to levels not seen since 2011 on worries over shortfalls, underscoring the vast ramifications for the commodity market when major Russian exporters are cut out of the US financial system.

The palladium and nickel markets have also shot up on fears that Norilsk’s supply could be curtailed. Palladium has seen the strongest weekly rally since February and nickel prices have been propelled to their highest levels since 2014.

A ban on trading with Norilsk, or Norilsk branded metal would have profound implications for global carmakers and other industrial users, and the risk of damage to US industry from this may stay the hand of the Treasury Department

Although shares in Norilsk have recovered since sanctions were first imposed on other entities and individuals at the start of the month (April), markets are on high alert as two of Russia’s leading oligarchs, Oleg Deripaska and Vladimir Potanin, have big stakes in the company.

Sanctions were imposed against Mr Deripaska, who owns 28 per cent of the miner, and his aluminium empire this month (April).

And Mr Potanin, the company’s chief executive and owner of 31 per cent of the group, who gained his stake in the company through the controversial privatisations of the 1990s, has been named in US sanctions documents as a prominent Russian businessman.

However, Mr Trump’s decision this week to freeze a new round of sanctions against Russia relating to its support for Syrian leader Bashar al-Assad has raised hopes among Norilsk executives, its workforce and the city’s 180,000 inhabitants that the company will avoid the fate of Mr Deripaska.

Some analysts agree with Norilsk’s chief operating officer Mr Dyachenko that the probability is against sanctions being imposed.

Jonathan Butler, an analyst at Mitsubishi, says the strategic importance of Norilsk, with its mines that run up to 2km below the frozen permafrost, makes sanctions “reasonably unlikely”.

“Nickel and palladium are much more strategic metals for the US than aluminium,” he says.

“A ban on trading with Norilsk, or Norilsk branded metal would have profound implications for global carmakers and other industrial users, and the risk of damage to US industry from this may stay the hand of the Treasury Department.”

To underline his belief that Norilsk will avoid being sanctioned, Mr Dyachenko says the company is pushing ahead with multibillion-dollar investment programmes to improve output and efficiency.

He adds that none of the company’s customers have cancelled contracts or sought to distance themselves from the group in a further sign of hopes that sanctions will be avoided.

If Mr Trump decides not to include Norilsk on his list, it will be welcome news for an entire city, accessible only by plane or boat 320km inside the Arctic Circle, that relies solely on the vast mines, refineries and smelters for its livelihood.

“The city does not exist without the business,” says Lidia Shipko, tour guide at Norilsk’s city museum.

“It’s a symbiotic relationship. One would not be here without the other.”

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