CBS Weekly Review: Kazakhmys rumours

We have Kazakhstan on the brain this week as we power through the inaugural Kazakhstan Quarterly, which will be on your desks next week, or perhaps on your beach blankets.

Kazakhmys and Metalloinvest: Not going to happen

I was in touch with a few of you on Monday after the news about the supposed Metalloinvest bid for Kazakhmys hit the wires. My strong view at this time was that the chances that such a bid would succeed were very close to zero.

This is still my view. And although there are obviously other factors driving the Kazakhmys share price, it would seem that the market agrees: after gaining 10 per cent on the strength of Monday’s rumours, Kazakhmys has now given all of those gains back, plus a bit more.

This is an complicated situation to be sure, particularly given complexities on both sides: the Kazakhmys/ENRC relationship on the Kazakh side, and the cross-shareholding between Metalloinvest and Norilsk Nikel on the Russian side. To provide some grounding for my view, I think it is worth reviewing a few basic points.

Nazarbayev the key

Much of the commentary I have read follows a standard formula of running through the proposed deal from various angles and then adding at the end a short disclaimer to the effect that "the deal would need the approval of the Kazakh government." This statement, of course, should be the starting point for any thinking about Kazakhmys, and not only in a legal and formal sense. Whatever its ownership, whoever is managing it, Kazakhmys is first and foremost a Kazakh national champion, and President Nursultan Nazarbayev is its ultimate decision-maker.

The Kazakh deputy finance minister commented on Tuesday that the Kazakh government was not informed about the possible Metalloinvest bid before Monday's leak. This may or may not be true, but for this statement to be made does at least demonstrate that there had been no formal contact between Metalloinvest and the government. And whether or not Nazarbayev was personally aware of some sort of discussions, I am sure he did not expect that this news would suddenly appear on the front page of the FT. To the extent this is a real bid, it was not a particularly effective kick-off for Metalloinvest.

A Kremlin project?

There are some whispers, perhaps originating from the Metalloinvest camp, that this is in fact a Kremlin project which was raised with Nazarbayev by Dmitri Medvedev during one or both of his two recent visits to Astana (on 22 May and 5 July).

I don’t believe this. Given Nazarbayev’s obvious appreciation of the prestige that comes with Kazakhstan having one or two or three (if we include Kazatomprom) national champions in the mining sector, for Medvedev to propose the incorporation of Kazakhmys into a larger Russian entity would reflect a lack of respect that would be completely contrary to longstanding trends in Russian policy toward Kazakhstan, which has been based on respect and partnership. For a variety of reasons that I don’t quite understand, Kazakhstan is the one post-Soviet state which Russia generally manages to treat almost as an equal. It’s not a perfect parallel, but try to imagine Medvedev proposing that Rosneft or Gazprom acquire KMG EP: it simply would not happen.

The Uzbek issue

I take it for granted that Nazarbayev would not want Kazakhmys to become the junior partner in a Russo-Kazakh mining conglomerate. But even more than that, I don’t believe he would consider for a moment letting Kazakhmys fall into the hands of Alisher Usmanov – not because of Usmanov’s reputation, but simply because he is an Uzbek. In Europe, Usmanov is usually thought of as a “Russian oligarch,” but from Nazarbayev’s perspective he is not only an Uzbek – he is someone with strong links to the Uzbek ruling family who may well play some significant role in Uzbekistan’s future. The idea of him controlling key assets in Kazakhstan would be extremely problematic and probably unacceptable to Nazarbayev.

Then why the leak?

If Metalloinvest cannot acquire Kazakhmys without Nazarbayev’s approval, and if this approval is not going to be forthcoming, than why this week’s excitement? Long-shot takeover attempts do seem to be one of Alisher Usmanov’s trademarks, starting from his early tiltings at Corus and running through his more recent efforts to acquire control of Arsenal Football Club and the Ukrainian conglomerate Industrial Union of the Donbass. It may be related somehow to the complex chess match over Norilsk Nikel which was joined by Metalloinvest earlier this year. Finally, the recent headlines could be seen to be useful in helping to build awareness of Metalloinvest before its planned IPO in London this autumn.

In any case, whatever the reasons behind it, I don’t see this bid going forward in any serious way; and indeed I would not be too surprised if it were to fade from view and memory with relative speed.

Best regards,
Laurent Ruseckas
Director, Eurasia Research
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