Could Manafort-Russia probe look to Indonesia?
Investigations into Trump's ex-campaign manager's links to Russian industrialist and Kremlin confidante Oleg Deripaska could gain certain insights from the latter's business activities in Indonesia
Oleg Deripaska, the Russian industrialist and Kremlin confidante linked to Paul Manafort, US President Donald Trump’s embattled ex-campaign manager, made repeated visits to Jakarta in 2013 to persuade the Susilo Bambang Yudhoyono government to stick to its proposed ban on raw mineral exports.
As it turned, Yudhoyono maintained his protectionist ban aimed at boosting value-added production. But if Deripaska and his United Company Rusal, then the world’s biggest aluminum company, ever seriously intended to invest in Indonesia’s bauxite industry, or was simply taking Indonesia for a ride to pump up global aluminum prices, is still a matter of debate.
Manafort’s alleged offer to give Deripaska a personal briefing on the 2016 presidential campaign has caught the attention of US investigators probing collusion between Trump associates and Russia as part of the Kremlin’s efforts to influence the election’s outcome.
With the aluminum and nickel markets then at a four-year low, Indonesian media reports in mid-2014 that suggested Rusal and fellow Russian conglomerate Norilsk Nickel were the big winners from Yudhoyono’s export ban were off the mark.
In fact, when current President Joko Widodo met his Russian counterpart Vladimir Putin in Sochi, scene of the 2014 Winter Olympic Games, in mid-2016, smelting wasn’t mentioned at talks about potential Russian investment in infrastructure, oil refinery and power projects.
The only country that has answered Indonesia’s call for smelting investment is China, in part due to its policy of moving high-quality production offshore to relieve saturated domestic markets and, in Beijing’s words, “improve the quality and efficiency of the Chinese economy.”
The Yudhoyono government denied it had been unduly pressured by the Russians, despite Deripaska’s efforts to impress on then chief economic minister Hatta Rajasa the importance of keeping the export ban intact if Indonesia wanted to accelerate its industrialization.
A backward step, Deripaska warned, would be a blow to the government’s credibility, telling one interviewer: “We’re hoping (it) can be implemented because it would ensure certainty for companies already constructing smelters in Indonesia and attract others to come in.”
A rags-to-riches tycoon who lost an estimated US$22 billion of his wealth in the 2008 financial crash, Deripaska warned in the same interview: “If (the ban) is not imposed, then the market will face disaster. The prices will be very low and there will be no certainty.” In hindsight, his reference to prices was telling.
The oligarch was warmly received by Indonesian officials weary of hearing from Western mining companies and their own economists that the value-added mineral policy was ill-conceived, overly nationalist and ultimately doomed to failure.
“Russia is our true friend,” said Suryo Sulisto, chairman of the Indonesian Chamber of Commerce and Industry, whose company, PT Arbaya Energi, subsequently signed an MoU with Rusal to build a US$3 billion alumina plant in West Kalimantan. Sulisto did not respond to a request for comment.
Rajasa, the National Mandate Party chairman who later became opposition leader Prabowo Subianto’s running mate in the 2014 presidential election, was a true believer as well, touting the policy as a significant accomplishment during the election campaign.
Deripaska’s close links to the Kremlin were first reflected in his 2007 appointment by then president and later prime minister Dmitry Medvedev as chairman of Russia’s Asia Pacific Economic Cooperation Business Advisory Council.
Later, as vice president of the Russian Union of Industrialists and Entrepreneurs, Deripaska was part of the delegation which accompanied Putin to the October 2013 Asia-Pacific Economic Cooperation (APEC) summit in Bali, cementing his place as one of the reputed top three oligarchs in Putin’s inner circle.
Throughout 2013, both Rusal and Norilsk had warned the Indonesians they would only consider investing in multi-billion-dollar processing plants and related power stations if the export ban proved to be watertight.
Deripaska claimed to be studying a project in bauxite-rich West Kalimantan, saying he wanted to supply the Pacific region with two million tons of alumina, a powdery intermediate-stage material which is then transformed by electrolysis into the finished product.
But he also complained about the heavy up-front cost of building an alumina plant – still a major impediment to any new investment it was envisioned the 2014 export ban on raw minerals would attract – a lack of geological data and paucity of skilled workers.
Rusal’s track record was not inspiring. It may have signed an MoU with Arbaya Energi, but it had also done the same with state-owned mining company Aneka Tambang (Antam) in 2008. That agreement came to nothing—and neither did the second deal.
By mid-2014, the global nickel price had jumped by 40% as Chinese and Japanese buyers who had been heavily dependent on Indonesia for their bauxite looked for alternative sources of supply.
Aluminum was a lot more stubborn, rising from US$1,700 to US$2,100 in mid-2015, then falling back to as low as US$1,500 before making a gradual climb to its current level of US$2,200. That’s still far from a peak of US$3,200 in 2008.
Significantly, Norilsk spent the rest of 2014 in cost-saving mode, selling off assets in Australia, South Africa and Botswana to focus on mining lucrative deposits of nickel, copper and palladium in Russia’s Arctic region.
Rusal, for its part, was in such financial straits that, not long after it signed the MoU, it was disclosing 2013 losses of US$3.2 billion due to low aluminum prices, higher costs and write-downs. It later asked creditors for relief on half of its US$10 billion debt.
Mining accounted for 14% of Indonesia’s total export revenues in 2014-2015, a figure the government hoped would multiply when new smelters and processors came on line over the next three or four years.
Indonesia was previously Beijing’s biggest supplier of nickel and bauxite. With the Philippines and New Caledonia, the only other sources in the region, unable to fill the gap, Chinese firms were left with little other option than to move some of their processing to Indonesia.
In May 2015, the export ban produced its first real tangible result with the inauguration of the first stage of the Tsingshan Group’s US$2.5 billion, 1.2 million-ton nickel pig iron complex at Morowali, a port town on the east coast of Central Sulawesi.
Ironically, Morowali is where vast amounts of nickel ore were shipped illegally to China before the export ban was imposed and Sulawesi’s four effected provincial governments proved surprisingly effective in ensuring it was enforced.
Tsingshan has also announced plans to build a US$4 billion carbon steel plant on the same site, while China’s Virtue Dragon Nickel has opened a new US$1 billion 800,000-ton smelter at Konawe in Southeast Sulawesi.
As with nickel, refining bauxite also makes sense when the sole local aluminum smelter, PT Asahan Aluminium (INALUM), has used imported alumina for the 30 years it has operated in Sumatra, despite Indonesia having the world’s sixth largest bauxite reserves.
But investment has been slower because the profit margins are lower than nickel. Antam and Japanese partner Showa Denko KK launched the first 300,000-ton processor at Tayan, east of the West Kalimantan capital of Pontianak, in early 2015.
So far the biggest investor has been China’s Shandong Weiqiao, the world’s largest aluminum producer, which last year opened the first stage of a two million-ton refinery at Ketapang, south of Pontianak, with Singaporean and Indonesian partners.
Earlier this year, reflecting on revenue losses of US$12.5 billion since the boom was lowered in 2014, Indonesia relaxed the ban on raw bauxite and nickel ore exports, ostensibly to help local cash-strapped miners boost the revenue needed to fund future development of processors.
But it kept in place content conditions and export duties to ensure the renewed flow of unprocessed ore didn’t turn into a flood and to offer partial protection to the Chinese ventures that have been willing to invest – even if Deripaska and the Russians haven’t.