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April 19, 2016
Mining in Russia: Growth opportunities in a sanctioned environment
By: Segran Pillay

The Russian economy is being squeezed by low oil prices, inflationary impacts resulting in the ruble sliding against the dollar, and Western sanctions1 owing to actions in Ukraine and Syria. All of these are threatening Russia’s economic stability and attractiveness as an investment destination for the resources sector (see Figure 1) while also impacting Russia’s coal, iron ore, gold and platinum exports (see Figure 2).

Mining and Metal

Russia Mineral Exports

As a result of the sanctions, Russia has become a more difficult operating environment:

  • Government privatizing resource company assets

    • To minimize the impact of the projected 2016 government deficit of 4.4 percent of GDP caused by the drop in crude oil prices,2 Russia is preparing to sell a stake in diamond producer Alrosa as well as oil firms Rosneft and Bashneft.3

    • The threat of resource nationalism has increased as the government potentially seeks to reduce expected revenue shortfall from the planned cuts in oil export taxes.

  • Access to capital is more difficult, causing companies to look elsewhere

    • Norilsk4 has raised its first yuan-dominated loan of $730 million as appetite from other international banks dries up.

    • Russian gas producer Gazprom is looking at a possible Eurobond issue in Swiss francs after a euro-denominated bond it issued last year.5

  • Greenfield projects impacted

    • Rosneft JV6 oil and gas joint venture was scrapped following the sanctions.

Opportunity for Russian miners

These significant challenges, including restrictive regulations and bureaucratic hurdles, will constrict growth in the Russian mining industry. However, miners can help minimize the impact and seek new opportunity:

  1. Work more closely with the government and other stakeholders to increase internal commodity demand consumption (e.g., grow manufacturing sector, boost services sector growth, increase social spending), thus negating the adverse impact of export demand of raw minerals. Miners should also diversify partnerships with other emerging markets that need commodities.

  2. Formulate strategies to capitalize on global commodity positioning to increase competitiveness of local markets through price incentives to stimulate local consumption.

  3. Follow the lead of other resources companies in financing options.

  4. Modernize the sector through digital adoption7 by shifting business models or enhancing operating model capabilities to help mitigate risk.

Russian miners that look for new growth opportunities now will be better positioned to thrive in a future sanction-free environment.


Footnotes:

1http://www.russia-direct.org/things-you-need-know-about-western-sanctions-against-russia

2Ben Seeder, Kremlin planning sale of no more than 19% of ALROSA, SNL Metals and Mining Daily, 1 March 2016. Factiva, Inc. All Rights Reserved.(accessed 12 March 2016).

3Dmitry Butrin, Rosneft, Bashneft, Alrosa in First Wave of Russian Privatization, Bizekon-Russica Izvestia, 5 February 2016. Factiva, Inc. All Rights Reserved.(accessed 12 March 2016).

4Norilsk raises first yuan denominated loan, Trade Finance, 25 January 2016. Factiva, Inc. All Rights Reserved.(accessed 12 March 2016).

5Russia's Gazprom mulls Eurobond issue in Swiss francs, International Financing Review. 20 Jan 2016. Factiva, Inc. All Rights Reserved.(accessed 12 March 2016).

6Exxon, Rosneft scrap Arctic contracts as Russia sanctions bite, Prime News, 01 December 2014. Factiva, Inc. All Rights Reserved.(accessed 12 March 2016).

7Segran Pillay, Strategies to future-proof Latin American mining operations, Accenture.com - https://www.accenture.com/us-en/blogs/blogs-strategies-latin-america-mining-operations

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