In Revue Géoéconomie in 2011
While working in the Russian strategic mining group Norilsk Nickel, one day as I was in the far north city of Norilsk, a colleague scientist gave me a look at the vast eastern horizon of the polar city and described it as the « new mining frontier »: the Russian territory is immense, the strategic resources are innumerable and will one day be exploited.
How to ensure Europe’s mineral independence? This is a question I have often asked myself since the early 1990s when my responsibilities – trading, risk management, purchasing, financing, marketing – within American and European commodities groups took me, before working at Norislk Nickel, to mining territories, markets and strategic metals as varied as: PGM’s (platinum, palladium, rhodium, iridium, ruthenium), rare earths, precious metals (gold, silver), base metals (copper, aluminium, nickel, zinc, lead, tin). One answer to this European shortage is Russia.
Strategic material being resources essential to national defence or state policy: iron ore is strategic for the steel used in China’s urbanization policy ; critical material being high industrial risks linked to a shortage of this material once there is no possible substitution: rhodium is critical for automobile catalysis (not substitutable) but not for jewelry (substitutable); the question is not what strategic resources are in Russia, but rather how can Europe access them? How can we rely on this strategic depth in the East for our current and future needs in critical materials?
The new paradigm of strategic materials
The new global natural resource model revolves around three elements: sovereignty relations between states, state commodity doctrines, and market prices.
The relations of commodity-producing states with natural resource-consuming states are no longer market relations but sovereignty relations.
The producing countries are sovereign over a soil or else a subsoil and exercise power strategies. The consumer countries are sovereign over an industry, over the development of industrial sectors and the associated strategies of influence. Since the beginning of the century these two vectors combined have caused inflation in the prices of raw materials.
The producing countries have, in one form or another, set rules to collect a rent from the exploitation of their natural wealth. Sometimes states are totally disengaged from the capital of private national actors but democratically optimize taxation, as in Australia for example. Sometimes, the emancipation of national companies is encouraged, with the state reducing its presence in the capital of national corporates. With this national color removed, these companies have easier access to capital markets, they gain in commercial dynamism and diversify their deposits beyond their borders. This is the case in Kazakhstan and Brazil.
Other producing countries are granting foreign private companies the exploitation of domestic resources while retaining equity stakes; recently, Mongolia was moving in this direction, and Guinea was revising its mining code to move closer to this. At the extreme, some states have nationalized the rent and favored national actors. This is the case of oil exporting countries.
Finally, producers export critical materials sometimes in dribs and drabs in return for economic or political advantages, to promote harmonious national development or simply to flatter a national ambition or even for all these reasons at once; Chinese rare earths during the Japanese problem of 2010-2011, but no more since then, or a certain Bolivian rhetoric around lithium are examples.
After sovereignty, the other peculiarity of the strategic minerals situation is that they clash with the raw material doctrines of states because they are suddenly strategic for all nations at the same time.
Let’s take the time to digress briefly on rare earths: abundant, they are misnamed. Of the 17 earths, some are described as light (customary) and others as heavy (sought-after). Iterative refining is complicated and the presence of uranium or thorium is sometimes a difficulty. Russia has 20% of the known rare earths reserves and can advantageously mitigate a possible shortage.
« The state of dependence of Western nations on Chinese rare earths will teach them to seek only the lowest cost, » one Beijinger told me. Indeed, just twenty years ago, a Californian mine was profitable, and one of the world leaders was the French company Rhône-Poulenc, whose heir, Rhodia, was bought by the Belgian Solvay. Since then, Chinese export quotas have set prices, the WTO and the media on fire. However that was fake news rare earths have no economic value, the market remains small and very fragile as demonstrated by the sharp drop in prices in October 2011.
Another characteristic of Chinese rare earths is the priority given to processing in the country of production, China, not for export but to supply the domestic market. Soon China will be an importer of rare earths as it is of other materials from which it was a net exporter in the past. It is one of the first so-called critical mineral resources to undergo this circular flow, the counter-example being the extraction of PGM (platinum, palladium, rhodium) from the South African subsoil, which are processed locally into automotive catalysts and then exported to vehicle assembly plants around the world. Between these two extremes, the future lithium federation in the Chile-Argentina-Bolivia triangle (without neglecting the Tibetan deposits) is still seeking its organization.
Based on the consumer side, all of these materials are labeled strategic. But, what is strategic for one is not necessarily strategic for another. Iron ore is highly demanded and strategic in the East because it responds to an urbanization policy while this same demand in the West has passed its zenith. Copper is no longer strategic if the country is equipped with electrical transport infrastructures. Countries that export oil or platinum but are not self-sufficient in food will have different objectives than a country « that has no oil but ideas » and is an agricultural exporter…
The simultaneous development of new technologies around the world is causing a convergence of dependencies on strategic metals. As a result, many bellicose and conspiracy theories are taking hold of minds far removed from these markets.
Indeed, we are not all equal when it comes to the tensions of these markets. Asian countries, such as Japan, Korea and China, are built with possible shortage for industries. They have devised raw materials doctrines, they have imposed planning and centralization of commodities access strategies, they are building international relations dedicated to these accesses, they are building world mining champions and international leaders in physical trading, and they are building strategic stocks. European states, accustomed to flows from south to north and from east to west, are leaving the burden of supply to companies and markets. France sold off its PGM strategic metal stockpile in the mid-1990s. Between these two extremes, the United States and the Middle East are anticipating shortages of listed materials.
After sovereignty and doctrines, the third element of the strategic materials market is price formation. The fundamentals (supply, demand, inventories, and production costs) used to provide a sometimes controllable price stability. But this influence has been regressing over the past decade to the conquering power of finance, to the great detriment of the normative cohesion sought by political power.
It is no longer a producer of platinum or palladium that sets the price of palladium, otherwise it would be higher, it is the « financial vibration » that makes the price: »speculation is Zeus, no statistic can measure his power but he is the master of Olympus. » The danger, of course, is the pre-eminence of financialization over fundamentals, that commodity crises will no longer be filled with each breath of the market: with each planting or harvest for agricultural crises, with stock increases for metals and energy; that financial vehicles investing exclusively in strategic materials will divert these metals destined for consumers to hidden stocks and become industrial safe havens. It is a growing chaos.
Russia and strategic metals
It is in this context that Russia has a significant regulatory potential. Remarkably balanced (about 2% of the world’s population and about 3% of the world’s GDP), it has the chance to produce everything (see: « EDF, Russia, resources and abundant rare earths« ) or almost everything (energy, metals and minerals, agriculture); most of the time, it is self-sufficient and exports, it lacks nothing.
In order to clean up the Russian natural resources sector, the state began after 2000 to pool resources, especially in the energy sector. In minerals, gradually some companies were grouped into conglomerates when circumstances called for them: VSMPO-Avisma (titanium), Rusal (aluminium), MMK (steel), Uralkali (potash), Polyus (gold), etc. The merger of Norilsk Nickel with Rusal did not take place and has little chance of happening in the current context. Then, under the impetus of a private dynamic, some companies planned outside the national territory, especially in Africa.
In strategic minerals, Russia is the leader or has world-class deposits in platinum, titanium, base metals, rare earths, cobalt, uranium, copper, which is so strategic for its Chinese neighbor, etc. Moreover, it is fortunate that its strategic land and sea territories are expanding as the northern waterways offer new opportunities for shipping cargo between Arkhangelsk, Murmansk, Siberia and Asia, between Asia and Europe, and also for reaching, supplying and ensuring territorial continuity between the north-west of the country and the strategic raw material-rich areas to the north and north-east.
However, Russia has not engaged in extensive mining, sometimes for reasons of heritage, sometimes for reasons of necessity: the heritage of Soviet infrastructure that works but needs to be modernized; the need to limit oneself to what one knows how to do or can do because there is a lack of commitment and manpower to do more (about 20% of the Russian population live in the 75% of the territory east of the Urals, where there are still untapped riches). Note that unlike oil production, international mining companies – including Australia’s BHP and Rio Tinto, Brazil’s Vale, South Africa’s Anglo-American, Switzerland’s Xstrata, and others from the US and Mexico – have only recently become giants. At that time, they already had a lot to do on their own territories before they thought of exploiting Russian deposits alone or in joint ventures.
Everyone thinks they know Russian energy policy and its so-called zero-sum game (which has yet to be clarified); everyone thinks it is also valid for so-called critical minerals, but this is an inaccurate thought for anyone who knows the value of energy in the Russian subconscious. The interest of a reflection on Russian strategic metals remains that they were still relatively untouched by the stakes of international politics; the perspectives of state relations and their induced commercial derivatives remain to be traced. Let us specify that it is useless to try to avoid them, moreover they will improve from the observation of the Russian-European relations, in particular in oil and gas.
Democratic Russia seeks alliances
To understand the Russia of the XXIth century is to accept the idea that after the Soviet self-sabotage, which was remarkably peaceful and rapid if one thinks of the fury and length of certain dissolutions of European empires, the new Russia entered into a democratic headlong rush that was hoped to be European. This stage failed to resurrect on the substance more than on a form halfway between the old regime and European democracy, halfway between Europe and historical Russian Asia located not in its East but in its South, all its South, in a Eurasian form.
Certainly, the notion of oligarchy, in the ancient Greek sense of the term – this Greece has always strongly inspired the Slavic mind – questions the observer about popular political culture and the functioning of the state. But it is this Eurasian democracy that allows for the historical stability of Russia, the doubling of the income of a new middle class and the construction of international relations through alliances. This last aspect, the oligarchy does not conceive since it governs empires, not democracies.
Without an empire and with a shrinking working population, today’s Russian democracy must develop the strategic resources of its territories by relying only on itself, or else by relying on international relations based on its historical alliances, those of trust, those from the depths of the ages that it knows how to bring to life when it wants to, and not on political alliances of circumstance open to the ancien Greek stasis.
The first alliance concerns the new states of yesterday’s empire. Some of them are heavy exporters of strategic raw materials and they will soon transit the universe of instability that always interposes between two political regimes, during transitions of power. Russia is encouraging them to integrate with it in a future Eastern European Union. The customs union will be effective with Kazakhstan and Belarus in 2012, possibly also Ukraine.
The other hoped-for alliances of a different nature are obviously European. Europe is the second alliance.
Russian domestic demand has natural limits, it does not push to exploit all its resources. The historical industries do not yet offer innovations that are highly consumptive of strategic materials. The Skolkovo Research and Development Innovation Center expresses both the hope and the shortage of technological innovations.
Russia is also not in the same situation as China: Russian resources are greater than its development needs; its needs are less centralized, less planned; its industry transforming materials into finished products is less developed; its production costs are not as competitive. It also offers different characteristics than Brazil and India.
The exploitation of Russia’s strategic resources will be heavily dependent on exports to an end customer beyond its borders. This mining prospect turns Russia into a land of immigration in the same way that, for example, Australia or South Africa have been. Europe must come to terms with this paradigm: the attraction of a strategic depth in the East requires the evolution of its international relations and alliances; the European response to its needs for strategic materials of Russian origin requires European resources, both human and financial. This is why we must ensure that Europe becomes this natural commercial horizon, that the European Union and Russia gain by being partners, that old limits are overcome, that the cards of « European smart power » are placed above more immediate economic objectives and rents, that working in Russia for strategic raw materials becomes an idea as common as exploiting a mine in South America or Canada. Let’s look into the past, from the end of the XIXe century until the 1920s wasn’t the leading producer of platinum in the Urals a Parisian company, the Compagnie Industrielle du Platine.
Then Europe must be able to transform these strategic materials. In France, it must be noted that one can only be astonished by the disappearance in the early 2000s of the irreplaceable French leader in the trading and metallurgy of strategic materials, the Comptoir Lyon-Alemand, Louyot, victim of a financial trap after two hundred years of existence.
Russia et France
One of the key elements, neglected in the past due to historical and political legacies, remains mutual understanding and putting common goals into perspective. As much as the deeds surrounding recent examples of Russian-European energy joint ventures lose significance when viewed through the prisms of Paris, London, or Berlin alone, they gain clarity under a common light with that of Moscow.
In France one of the aspects to be radically changed is the welcome given to Russian companies that would like to establish themselves in our country. True pathfinders, they are most often poorly accepted: forces sometimes go against the objectives of the two Russian and French Ministries of Economy and Finance, which favor their establishment. Opening a bank account in France for a Russian company is a journey that most often ends up in a non-French bank; once established in France, applying for and receiving administrative authorizations, sometimes every year, remain an ordeal…
Similarly, French companies anxious to expand in Russia encounter both their own unpreparedness and local bureaucracy. The combination leads to the usual misunderstandings and even failure.
In France, the missed rendez-vous between PGM (platinum, palladium and rhodium) and the automotive catalysis industry will remain a good example of all these difficulties.
There is no doubt that access to the strategic materials contained in Russia’s subsoil will require quid pro quos that the neophyte would consider unexpected.
How can one conclude a topic on Russia without touching on its mysticism steeped in tradition and whose ancestral Orthodox rites arouse the emotion of the Slavic mystical bond that connects the human-being to his land, this house of which he is the steward, which identifies him with the richness of its subsoil, with the immense dimension of its space. The whole thing is summed up by Mme de Staël once she speaks geography : « The extent makes everything disappear, except the extent itself, which pursues the imagination, like certain metaphysical ideas from which thought can no longer get rid of, when it is once seized. »
She continues in the same vein about Russian: « What characterizes this people is something gigantic in every way: ordinary dimensions are not applicable to them in any way. Neither true greatness nor stability are met with; but the boldness but the imagination of the Russians knows no bounds, with them everything is colossal rather than proportionate, bold rather than thoughtful, and if the goal is not reached, it is because it is exceeded. «
All is said and done, access to Russia’s critical materials will be with a land and a people, not against them.