Clash of the Titans: How Ukraine is finally getting rid of russian influence in the strategic metals industry

Clash of the Titans: How Ukraine is finally getting rid of russian influence in the strategic metals industry

Unique deposits of strategic raw materials leave the russian umbrella. How did they end up there at all?

Clash of the Titans: How Ukraine is finally getting rid of russian influence in the strategic metals industry
Photo: DR

On 22 March 2023, the court seized the assets of VSMPO Titan Ukraine, a company beneficially owned by russian oligarch Mikhail Shelkov. The value of these assets is estimated at UAH 20 million. "At the request of the prosecutors of the Prosecutor General's Office, the court seized the company's assets, whose beneficial owner is a russian oligarch, a shareholder and member of the board of directors of a russian company that is part of the Rostec corporation," the Prosecutor General's Office said in a statement.

As investigators have found, the VSMPO Titan Ukraine managers had been concealing its assets on the company's balance sheet by entering into "fictitious" sale and purchase agreements. VSMPO Titan Ukraine also leased property from a third-party private enterprise that was allegedly sold but was actually used in production activities.

As previously reported by Mind, Mikhail Shelkov's confiscated assets were moved to the State Property Fund for further privatisation or lease. Among the confiscated assets are 100% of VSMPO Titan Ukraine LLC, 100% of Demurinsky Mining and Processing Plant LLC, 100% of Tai Minerals LLC, and 100% of Investagro LLC.

Recently, on February 6, Ukraine reclaimed one of the titanium ore deposits previously owned by managers from the russian state-owned metallurgical corporation VSMPO AVISMA (Verkhnyaya Salda Metallurgical Industrial Association).

As reported by the SBU press centre, the decision of the Appeals Chamber of the High Anti-Corruption Court of Ukraine confiscated all assets of Demurinsky Mining and Processing Plant LLC, located in Dnipropetrovsk Oblast, to the state. Earlier, the HACCU ruling imposed a sanction on russian citizen Mikhail Shelkov, the ultimate beneficial owner of Demurinsky Mining and Processing Plant LLC, and recovered an apartment, 100% stake in the authorised capital of VSMPO Titan Ukraine LLC and the property of this enterprise for the benefit of the state.

Returning the Ukrainian titanium asset is part of neutralising the negative impact that moscow exerts on the global defence material industry, an industry that produces strategic materials for defence and energy. These materials are also sometimes referred to as "strategic resources" or "metals of the future," which emphasises their status and exceptional importance for the defence and energy industries, and in recent years, for the production of household and electronic products for civilian use.

Mind explains how Ukraine found itself in the middle of the battle for titanium.

Who started restraining russia's influence on the strategic raw materials market and how? Even before the start of the second phase of russia's aggression against Ukraine, all industrialised Western countries felt threatened by russia and its allies' further hostile actions in the rare metals market. Titanium is also a rare metal along with others. Together with special steel and aluminium, it is a key material for the defence industry.

The first step towards consolidating efforts was taken by the United States in 2019, by creating a sectoral economic bloc – the international organisation Energy Resource Governance Initiative (ERGI). Initially, the bloc included Australia, Botswana, Peru, Argentina, Brazil, the Democratic Republic of Congo, Namibia, the Philippines, and Zambia; later the list was expanded. The bloc members began to coordinate efforts to reduce risks in the market for strategic raw materials, primarily from russia and China.

In the European Union, the European Raw Materials Alliance (ERMA) was established in 2020 for this purpose. Thanks to the consolidation of the organisation's members' capital, in 2020-2021, new large deposits of rare metals were discovered in Greenland and Norway.

At that time, Ukraine was not a member of these alliances, even though it was the European leader in uranium mining and one of the world's top ten producers of sponge titanium and other rare metals (yttrium, hafnium, octium, germanium, raw zirconium, and some specialty alloys). Most of Ukraine's core assets were placed under the jurisdiction of a newly created agency, the Ministry of Strategic Industries.

The U.S. Department of State's Bureau of Industry and Security (BIS) report titled "The Effect of Imports of Titanium Sponge on the National Security" offers clear options for mitigating russian and Chinese risks. The US government received it back in 2019, but the document was released to the public only in 2021, with a large number of classified provisions.

Did russia and China resist? Of course they did. January 2023 was marked by unprecedented legal proceedings in the USA.

Several high-ranking officials were suspected and accused of working for russian metallurgical tycoons associated with Defence Materials. In general, arrests and investigations of officials for working for foreign businesses are quite regular in the US. However, the accusation of bribery by metallurgical tycoons is perhaps the first in American history.

In particular, the former head of the FBI's New York office, Charles McGonigal, who has now been arrested, is accused of working for Oleg Deripaska, russian silicon and aluminium industry "king."

Nearly simultaneously with the start of the case against the former head of the New York FBI, George Santos, a Democratic congressman from New York, was indicted. He was charged with working for another russian metallurgical magnate, Viktor Vekselberg. The latter has been subject to sanctions imposed by Japan since 2023, Canada since 2022, and Switzerland since 2018. Vekselberg's entire family has US citizenship. He has been on the sanctions lists of this country only since 2022. Vekselberg played an important role in the US ties with the russian titanium industry.

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Where is the "Ukrainian trace" may be visible? After russia's full-scale invasion of Ukraine, the positions of the Ural-based Renova and other Vekselberg’s companies in our country were almost destroyed. Except for the sponsorship of the Babyn Yar memorial.

In Ukraine, in the mid-2000s, Vekselberg's structures unsuccessfully tried to monopolise and divide the national titanium export market. Vekselberg shared the Ukrainian titanium market with Andrey Akimov, the longtime chairman of gazprombank.

During the Soviet era, Akimov served with putin in the First Main Directorate of the KGB and headed the Soviet "banking foreign special institution" DanauBank from Austria. The institution was in fact not a state-owned bank, but a private "wallet" of the Soviet party nomenklatura that sponsored European politicians (so to speak, for "multiculturalism" and "peaceful global coexistence of the two systems"). When Akimov and his partners were able to push putin's group to power in moscow in the early 2000s, he first took control of gazprombank, then defeated the gas nomenklatura group of Viktor Chernomyrdin and Rem Vyakhirev (once the most powerful in russia).

How did Vekselberg and Akimov begin to  carve up Ukraine's strategic resources? After the final defeat of his competitors, in the summer of 2004, Akimov and his nomenklatura group facilitated an agreement between the team of then-President Leonid Kuchma and Dmytro Firtash to lease Ukraine's largest state-owned titanium ore deposits at a ridiculous price.

Vekselberg then initiated a plan to buy out several titanium ore deposits. In particular, he officially announced his intention to merge the titanium metallurgy enterprises of Ukraine and russia into a joint holding company called Titanium of Ukraine, but with moscow management. The holding was supposed to operate under the auspices of the VSMPO AVISMA corporation from Ural, which until 2004–2006 belonged to Vekselberg's circle of banking institutions.

After the first Maidan protests in 2004, the russian tycoon encountered problems with the Ukrainian titanium project. As a result, in 2006, Vekselberg's banks suddenly lost their influence on VSMPO AVISMA, and the corporation was transferred to a new controller. It was the management of the State Corporation Rostec, headed by Viktor Chemezov. He, like Andrey Akimov, is another putin's crony from his service in the KGB's First Main Directorate European branch.

Where did the myth of russia's "global titanium leadership" come from? In 2006–2010, the renewed financial leadership of the russian titanium industry began implementing the most powerful US-russian industrial project to date. Namely, the creation of the Ural Boeing Manufacturing joint venture and the development of russia's largest industrial free economic zone, Titanium Valley, on its basis.

The joint venture harboured predatory intentions towards Ukraine, as it was Ukraine, unlike russia, that had all the necessary resources and technology for such a project. The russians have no commercially attractive ore deposits, no titanium research institutes, no welding design bureaus and plasma-beam melting plants, no large-scale "aircraft-missile" forging and pressing plants for titanium.

The regional market monopolist enterprise for aircraft-missile rolled tubular products of rare metals also operates in Ukraine. But despite all these objective facts, someone in Washington outright ignored them. And Boeing Manufacturing made an investment bet on moscow rather than Kyiv, which has now turned out to be a mistake.

As part of the above projects, russian titanium rolled products of the highest aerospace quality were successfully produced for the US and EU markets. The key facilities of the free economic zone began to use forging and pressing equipment developed and manufactured in Ukraine. This is what "russian might in the global titanium market" consisted of.

Simultaneously, a turbine-building joint venture between Pratt & Whitney and Perm Engines was launched in the Urals, aimed at driving Ukraine's Motor Sich and Ivchenko Progress Design Bureau from the market. In the russia's Volga region, a joint venture of American Alcoa and Arkonik russia for the production of thin rolled aluminium and rare alloys was launched at the same time. This joint venture was aimed at monopolising the market and preventing the construction of a similar plant in Ukraine.

All three of these projects started working only because sensitive US technology was transferred to russia.

What are the ways to compensate for the failure of the US-russian rapprochement policy in titanium projects? After the first – hybrid – phase of russia's attack on Ukraine began in 2014, the US did not impose any sanctions on any of the above russian-American projects. With the exception of sporadic and mild restrictions against the AVISMA VSMPO. But they were also cancelled in late 2020 and January 2021.

Perhaps the American citizenship of the Vekselberg family played a role. Or perhaps it was the fact that in the first phase of the aggression against Ukraine, Vekselberg joined the supporters of the "peaceful resolution of the Ukrainian issue" model that is beneficial to russia and still has certain sympathisers among US officials.

After the full-scale invasion in 2022, the US still had to increase sanctions pressure on russia in the rare metals sector. And not only the United States. Immediately after the war intensified, Ukraine began to seize the property of VSMPO AVISMA on its territory, including a fairly large titanium deposit. Boeing Inc. in its turn announced its refusal to purchase russian processed titanium. This decision was made in spite of the fact that the VSPMO AVISMA's share in the total needs of Boeing Inc. in 2021 was 60%. However, no significant sanctions were imposed on this industry.

Following the American leader in the global aerospace engineering market, in mid-2022, Rolls-Royce and Safran Aircraft Engines announced a similar but phased abandonment of russian titanium products. In their production cycle, the share of russian titanium exceeded 70%.

Another global giant, Airbus in Europe, only announced in early 2023 that it had begun looking for someone to replace russian supplies, which, according to the media, exceeded 80% of its needs in 2022.

Last month, NewsWeek answered this question with an optimistic article that Ukraine could save the United States from its dependence on russia in supplying titanium if Washington helped Ukraine regain its territories. "Ukraine is one of a small number of countries in the world that has titanium reserves and the appropriate infrastructure for its extraction and production. Therefore, it is in the interests of the United States and the EU to do everything possible to ensure that Ukraine can stand up and be an independent supplier of this raw material for the arms, aviation, and space industries of its Euro-Atlantic partners," the article said.

So to summarise: the history of strong relations between the US and russia in the titanium industry lasted for decades, but ultimately failed. And, obviously, it has caused great damage to the economies of the United States and other countries, which must be remedied.

McGonigal's Deripaska: What "Ukrainian trace" does this tycoon have? Until recently, Oleg Deripaska's most attractive assets in Ukraine were three companies.

The first is Mykolaiv Alumina Plant LLC (MGZ); the second is the controlling interest at Dnipro-Bug Sea Port LLC (DBMP) that operates at the entrance to this plant; and the third is the Banitske deposit, that is the largest deposit of raw materials for the production of electronic silicon in Europe located in Sumy Oblast. This deposit, known as the Glukhiv Quartzite Quarry, was operated by Zaporizhzhia Aluminum Plant (ZalK).

As for the silicon deposit, it was left untouched by the then Ukrainian government during the first phase of the russian attack on Ukraine. During the first years of the war, this asset was quietly owned by an investor from the aggressor state, and Ukraine managed to return it only in 2022. The passivity of the Ukrainian state apparatus in 2014–2019 can be explained by the fact that Deripaska pulled off a corrupt deal with Ukrainian assets in Mykolaiv: there was an attempt to transfer ownership of the MGZ from the offshore of Deripaska's Rusal Corporation to the trader Glencore Inc.

The PR efforts for the state-owned port of DBMP were based on the fact that DBMP and MGZ play a unique role for the russian metallurgy industry, as Deripaska has not managed to bring his alumina terminals in Murmansk and Nakhodka to life over the years. Therefore, without russian control in Ukraine, his aluminium empire is on the verge of bankruptcy, as it cannot profitably import and process aluminium ore.

In addition to alumina semi-finished aluminium, which is the basic non-ferrous metal, according to the original privatisation plans, MGZ was supposed to produce this rare metal gallium from bauxite. This is a key component of lasers, LEDs and electronic boards, as well as an indispensable raw material for the military nuclear industry. The raw material for gallium, the so-called intermediate alum liquor, was exported from Ukraine to russia to produce the final product, despite the lack of any commercial benefit.

Have sanctions reached titanium? According to the American press, the former head of the FBI office in New York, Charles McGonigal, was arrested in January 2023 on charges of helping to ease sanctions against Deripaska and Rusal, among other things. It was this arrest that apparently sent a signal to the Ukrainian authorities – only in January of this year did Ukraine manage to expel a representative of the aggressor country from MGZ: last month, most of the russian offshore assets at this enterprise were seized.

Thus, the results of multi-vector sanctions and other pressure on russia are becoming parallel. On the one hand, Ukraine's Western partners and Japan were finally forced to abandon the dream of "peaceful multicultural coexistence" with terrorist states, including russia. Moreover, they were able not only to consolidate their efforts to reduce russian risks, but also to start arresting servants of russian metallurgical tycoons. At least in the USA.

On the other hand, Ukraine has finally begun to eradicate russian assets and preferences in the national rare and non-ferrous metals market. Now, our country will have to at least develop the confiscated russian assets of its non-ferrous and rare metals industry to prevent foreign investors with hostile intentions from entering the country again. It doesn't matter where they come from: the West, the East, or the wilderness.

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