Russian foreign policy
Russian policy in Africa
/

 

GROWING IN AFRICA

The expansion of large Russian natural resources companies in Africa could become a driving force for Russia’s economic development. Projects in Africa are the most natural way of making Russian business, both commodities and machine building, transnational

Andrei Maslov (Editor-in-chief of Af-Ro Russian-African Business Magazine)

Africa is becoming one of the most attractive regions for Russian big business. Low prices for raw materials and devastating wars and draughts have caused some analysts to call Africa the “lost continent.” However, in 2001-2003 global commodity markets improved dramatically and political tensions on the continent declined. The region began to develop rapidly once again. India and China began to pursue an active investment policy in Sub-Saharan Africa, which creates good preconditions for further growth on the continent.

Africa has perhaps the last undivided mineral resource reserves of global significance. Here, Russian large natural resources companies can secure a foothold relatively easily, thereby taking the first step to the globalization of their business. Africa is a real alternative to the haphazard extraction of natural resources in Russia, and it’s a good opportunity for Russian machine builders who work with Russian natural resources companies.

Over the last few years, Russian business has invariably shown interest in this region: several projects have already been launched and implemented, including the package of investment agreements to the tune of $430 million Renova Company recently concluded with the South African government. Today may be the prime moment for Russia to start a planned expansion into Africa and cooperation with African governments and companies could become a factor in Russia’s rapid and sustained development.

Our people in Africa

Today, Russian natural resources companies are implementing a number of large investment projects on the African Continent. RusAl is close purchasing the still incomplete Aluminum Smelter Company of Nigeria, Alscon. The value of the acquisition, including required investments over first few years, will amount to $400-500 million. At the same time, about $350 million in investments will be required to overhaul and expand an aluminous industrial complex in Frie (Guinea) RusAl controls. The complex’s increased capacity will in turn call spark the development of Dyan-Dyan, one of the world’s largest bauxite deposits. The deposit is also located in Guinea and has been ceded to the Russian company. RusAl’s specialists estimate that Dyan-Dyan will demand $1-1.5 billion and are ready to attract outside investors. A few days before the start of another round of negotiations in Nigeria, RusAl’s delegation had a meeting with Joseph Kabila, President of the Republic of Congo, and considered building a $1.2 billion smelter in this country. Another option for the company is to participate in the privatization of a smelter in Tema (Ghana) that, in contrast to the projects in Nigeria and Congo, is operating and supplying primary aluminum to the American market.

The Russian diamond monopoly Alrosa owns 32.8% of the stock in the Katoka Mining Society which manages an industrial complex Angola. Since 1997 Alrosa’s accumulated earnings from this project have totaled about $60 million. The second line of the complex is expected to be put into operation in December, and after that production output will reach $350 million. In 2003, construction of another industrial complex began in the vicinity of Katoka with Alrosa participation.

In late July, Renova announced the opening of its unit in South Africa. According to Viktor Vekselberg’s representatives, the new company under the name of Renova Investment was established to manage projects in ore mining and metallurgic industries in southern Africa. In November, Renova concluded a preliminary agreement for developing manganese deposits in Kalakhari desert. The South African Lonmin Company, the third largest platinum producer in the world, may also be of the interest to Renova. Brian Gilbertson, the new president of SUAL-Holding and former advisor to Lonmin’s Board of Directors, will most likely decide how to deal with Lonmin. Back in January 2003, SUAL and the UK-based investment company Fleming Family and Partners (FF&P) reached an agreement to merge their assets. Most FF&P’s assets are concentrated in Sub-Saharan Africa (for example, tantalum production in Mozambique).

Why more?

According to the plans of just four companies (RusAl, Norilsk Nickel, Alrosa and Renova), Russian investments in the Sub-Saharan Africa’s natural resource industry will amount to at least $5 billion over the next five years. Russian economic relations with this region are already approaching Soviet-era levels. And in contrast to the Soviet period, Russia gains economic benefits and not just political advantages.

The Soviet economic strategy abroad was to carry out explorations and not to develop deposits. For example, there was no point in incorporating African gold and diamonds in the world socialist economy, and therefore, the policy pursued by the USSR was, first of all, to ensure that “no one else gets them.” Today, the situation is different. Russian mining companies are incorporated in the global capitalist system, and they need raw materials sources abroad. It’s impossible now to become a strong and independent player in only one country. Canada, Australia, and South Africa established trans-territorial mining companies long ago.  Today, Norway, Malaysia, Brazil, Saudi Arabia, United Arab Emirates, and Iran are trying to follow their example. Russian companies, too, must follow this path. It’s profitable for Russia to gradually move mining beyond the geographical bounds of Russia and focus inside the country on equipment and technologies manufacturing designed for mining minerals.

Why Africa?

Of course, the question may arise why Africa should be a priority for Russian natural resources companies. Why not Latin America, the Middle East, or South-East Asia?

On one hand, the merger of Russia’s and Africa’s resource potentials would enable Russian companies to control the markets where they are already leaders in the world – first of all, the markets for platinum, diamonds, and primary aluminium. Secondly, Asian and Latin American countries have emphasizing development of processing industries and not mining for quite some time. The economic leaders in these regions—China, India, Malaysia, Brazil, and other countries—are interested in establishing their own vertically integrated industrial companies and moving mining beyond their national borders. This means that Sub-Saharan Africa has the highest concentration of “free” natural resources.

On the other hand, Russian companies have a great advantage versus their western rivals – Russian investments in production of raw materials abroad, with rare exceptions, are not connected with imports. Hence, cooperation with the Russians leads to less economic and political dependence on importers. Given this fact, a list of competitors with the same advantages as Russian companies is getting shorter: Canada, Australia, and South Africa. South African companies are now the main pole of consolidation in Sub-Saharan Africa. However, the South Africans’ weakness is closely tied to its strength. South Africa is part of the region. For this reason, South African investments in other African countries are inherent political.

It is worth mentioning another specific feature of the African raw materials: low production costs that are on average (except for South Africa) considerably lower than in Russia. This is not due to cheap labor, but to the specific characteristics of minerals.

Of course, there will be difficulties. For example, Russian companies’ ore mining joint projects are moving along relatively smoothly, while oil and gas production project prove far more difficult. Russian company officials (first and foremost, from Lukoil) have paid several visits to Nigeria, Congo, Angola, and other Sub-Saharan African countries. However, the most promising deposits of fossil fuels in the region are located on the continental shelf, and Russian companies don’t have competitive offshore production technologies. Large underwater oil deposits are found in Sudan. In 2000-2002, the Russian-Byelorussian company Slavneft tried to operate there but after a change in management, it rejected its Sudan oil ambitions, mostly for political reasons (due to pressure exerted by the US and Israel). The Lake Chad basin is another promising oil-bearing area on the mainland. Lukoil is apparently considering investments in this region.

Risks and challenges

Some think that Russian companies will come to Africa when political stability in the region will be guaranteed. It’s time to admit that it will never come, or at least not in the foreseeable future. It is simply necessary to learn to operate in the context of instability just like, for example, one has to learn to deal with the African climate. This is the way things work on the continent and it is neither good nor bad, because in the context of increased risks, some of the competitive advantages of Russian companies could manifest. In addition, high risks are, as a rule, compensated by high profits. Also, unlike, say, Eastern Europe or Asia, political coups in Africa are rarely accompanied by a change in foreign and economic priorities. With rare exceptions, after they come to power, new leaders immediately hurry to assure investors that their interests will be protected.

Rambler's Top100