Russia Tightens Its Grip on Key Mineral Resources
Summary
The Russian Finance Ministry has assumed control of the country's
precious metals and gems. The ministry now has command over 80
percent of the world's palladium reserves - and that will give the
ministry greater leverage over Western governments and multilateral
lending institutions.
Analysis
On Sept. 18, control of the government bodies that manage Russia's
precious metals and gems was handed over from the Economic
Development Ministry to the Finance Ministry. For the first time,
the Finance Ministry - the ministry that represents Russia in its
financial dealings with the outside world - now controls 80 percent
of the world's palladium reserves.
This transfer of authority should be raising alarms in Western
business circles. Russia stockpiles palladium as other countries
used to stockpile gold - but since it controls so much of the
global supply, Moscow can easily manipulate the market to its
advantage, and has done so in the past. In early August, for
example, palladium prices hit a record $859 an ounce after fears of
a delay in promised Russian deliveries to Japan.
In addition, the Russian palladium industry is tightly controlled
by the state: All sales must be approved by presidential decree,
and all information on production, stocks or exports is deemed
classified.
In the same reorganization, the Finance Ministry also assumed
control over the country's platinum and diamond industries.
Information on these industries is classified as well. While Russia
is a major player in these markets - it provides 20 percent of
world platinum supplies, for example - the near-monopolistic
control it holds over palladium is exceptional.
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Unlike diamonds and platinum, palladium has no aesthetic value, but
it's become crucial to modern economies, with a range of uses that
dwarfs the importance of the jewelry market. Palladium's high
conductivity makes it a material of choice in a wide array of high-
technology goods such as cellular phones and laptop computers, but
what makes it truly valuable is its effectiveness as a chemical
catalyst.
Palladium has replaced platinum as the preferred catalyst in
catalytic converters, which reduce motor vehicles' output of
pollutants. Although palladium costs roughly twice as much as
platinum by weight, palladium-based converters require less metal,
making the older platinum-based technology less economical. In the
United States and other developed markets with stringent auto-
emissions standards, almost every new car sold incorporates
palladium as a key component.
Palladium is also the primary catalyst used in fuel cells, a new
technology that could revolutionize the electric power industry
over the next few years. Fuel cells are a type of portable,
environmentally-clean power generator similar to a reusable high-
voltage battery. They can be installed in homes, businesses or cars
- making their users largely independent from the petroleum market
- and should enter the mass market in 2003.
As a result of its increasing practical value, global demand for
palladium in 1999 more than doubled from 1998 with no corresponding
increase in supply, causing stockpiles to be sold down to bare-
bones levels. Now, most of the world's most valuable metal is under
the thumb of Russia's Finance Minister, Mikhail Kasyanov. The
question is: What will he do with his added influence?
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One of Kasyanov's primary duties is to reduce the repayment burden
of Russia's foreign debt, which will total about $160 billion by
January 2001. To do this, he must convince Russia's creditors,
mostly sovereign states, either to forgive debt or to agree to
payment restructuring plans. Until recently he has had difficulties
in doing either, since his only leverage was the argument that a
poor Russia was an unstable Russia. The West has stopped buying
that line; at their June summit, the G7 states flatly rejected
Russian proposals for debt relief.
But now Kasyanov has a very powerful tool: enormous power over the
world's palladium supplies. One flippant remark from the minister
can send the futures markets spinning out of control - as has
happened in the past.
It's unlikely that Kasyanov will be able to use this tool to demand
outright debt forgiveness from the German government and German
banks, which together hold about $56 billion in Russian debt. But
restructuring is certainly in the cards now. The International
Monetary Fund, which Russia owes about $12 billion, will also be
far more pliable, as disruptions to the world palladium and
platinum markets would threaten the global economic stability the
fund was founded to preserve. If the price the IMF has to pay for
market stability is a few measly billion in new loans to Moscow,
the fund will reluctantly step up to the plate. Kasyanov can use
the palladium card to both reduce outstanding debt and garner new
loans.
And the Finance Ministry has no reason to stop there. Already,
Valery Rudakov, the deputy finance minister in charge of Russia's
state depository for precious gems and metals, wants to see the
ministry further expand its control over Russia's gem market. He
envisions extending the ministry's reach to embrace the companies
responsible for extracting, polishing and selling diamonds. Such
vertical integration - along with a series of recently perfected
techniques that allow the production of nearly flawless gem-grade
synthetic diamonds - would make Russia an even fiercer competitor
to De Beers, the only other major supplier of diamonds to the world
market.
Carrying this logic to its next step, the ministry would seek to
complement its control over palladium sales with control over the
firm that monopolizes production: Norilsk Nickel, Vladimir
Potanin's most lucrative holding. It was Potanin who invented the
"loans for shares" scheme that President Vladimir Putin credits
with wrecking the Russian economy in the 1990s. Since Kasyanov is
Putin's right-hand man, his Finance Ministry will take a perverse
pleasure in dismembering Potanin's prize cash cow.
That will make Kasyanov's grip on the global palladium market one
step shy of total, giving Russia's Finance Ministry far more
leverage than it has had in past international negotiations.
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