MOSCOW - In a blow to Siberian Ural Aluminum (SUAL), Russia's leading bauxite and alumina producer, Alcoa of the US has withdrawn from a proposed alumina refinery and aluminum smelter project in the Komi republic of northwestern Russia. SUAL's holding company chairman Victor Vekselberg made the announcement on Friday.

The rebuff by the world's leading aluminium producer comes at an awkward time for South African dealmaker Brian Gilbertson, who was recently engaged by Vekselberg to find a foreign equity partner for SUAL, into which Vekselberg may either swap his Russian shares for foreign-listed ones, or attempt to leverage his Russian assets to buy a foreign company.

According to SUAL spokesman, Bill Spears, Alcoa may be replaced by another major international aluminium producer, possibly even Gilbertson's alma mater, BHP Billiton. "The door on negotiations remains open with Alcan [merged with Pechiney], who also have technology that could be of interest to the project," Spears told The Russia Journal. "SUAL is also talking with other prospective partners," he added, "although I can't specify which ones for commercial reasons."

The timing of Alcoa's move against SUAL is a further indication that foreign aluminium companies view the Russian aluminium sector -- dominated by just two men, Vekselberg and Oleg Deripaska, controlling shareholder of Russian Aluminium (Rusal) -- as vulnerable to attack by the Kremlin for a similar pattern of corporate tax misfeasance that has destroyed the Yukos oil company, and landed its principal shareholders in a Moscow prison.

Confidential data gathered by the federal Tax Ministry in a report, sent to the prime ministry on September 6, implicate both SUAL and Rusal in what official sources claim were tax evasion schemes, using transfer pricing, tolling, and tax shelters. a spokesman for Russian prime minister Mikhail Fradkov told The Russia Journal, the report is under study, but no results are ready for release.

In July Vekselberg had said he was confident Alcoa would commit to SUAL's $2.1 billion refinery and smelter project, which has been planned to take bauxite from the new Timan mine, which SUAL has been developing in northwestern Russia. The projected capacity of the alumina refinery is 1.4 million metric tons; that of the smelter, 500,000 tons. According to SUAL, once the refinery and smelter are under way, output of bauxite from the Timan mine would be raised from 1 million tons per annum at present, to about 6 million tons. But without a refinery and smelter, expansion of mine is unlikely to go ahead.

SUAL claims it has so far invested about $150 million in getting the project under way. Alcoa is the third potential partner to withdraw from negotiations for the project. Rusal and Pechiney preceded Alcoa. In May, an Alcoa source had told The Russia Journal, at the same time the US company was announcing its intention to buy aluminum rolling-mills in Samara and Rostov regions from Rusal, Alcoa hinted that it was reluctant to commit to both the SUAL and Rusal projects at the same time. The Alcoa source implied that the Rusal deal, which has been estimated to cost much less at about $220 million, enjoyed a higher priority with the Alcoa management. However, despite a June deadline announced by Alcoa, the Kremlin has so far refused to approve the sale of the rolling-mills. Sources in Moscow told The Russia Journal this week that the approval is "stuck", suggesting that the Kremlin is refusing to approve the sale, without declaring as much. This rebuff to Alcoa may have encouraged the US firm to judge Vekselberg's project negatively, and suspend all plans to enter Russia for the time being.

Alcoa is refusing to comment on either deal for the time being. According to SUAL and Moscow industry sources, the reason for Alcoa's withdrawal from the Komi project is that neither supplier of energy to the project, United Energy Systems, Russia's electricity utility, nor Gazprom, the state gas supplier, would agree to lock in a fixed supply tariff for up to 25 years.

"Failure to settle a partnership with Alcoa for this project will delay its implementation and could increase SUAL's financial leverage," Alfa-Bank metals analyst Maxim Matveyev said on Monday. "The market should not be surprised by this development."

Igor Balobuev, a Gazprom spokesman, told The Russia Journal that the SUAL proposal "was economically ineffective, and Gazprom was not able to accept it." He added that the regional fuel supply unit, Pechorsky Hydroelectric Station, is "a potentially growing enterprise, and cannot be limited with such long-term fixed limits, such as large volume supplies at non-market prices.” The state electric utility, United Energy Systems (UES), has a 51-percent stake in Pechorsky, and a 49-percent shareholding in Komienergo, the regional utility. UES is refusing to comment on the SUAL project. But a source in the Komi regional government told The Russia Journal that Alcoa was excluded by political intervention from Moscow. "As I understand, all negotiations were conducted by SUAL. No claims against Alcoa were made, and I don’t think their decision is connected primarily to the electricity tariffs issue."

In recent weeks, the management of Gazprom, a Kremlin directed enterprise and Russia's largest company, have made increasingly clear that they will not agree to sweetheart gas supply deals with Russian metal producers, and have threatened to cut off gas supplies unless higher tariffs are accepted, and paid promptly.

Last month, SUAL announced that it had won backing for loans of up to $90 million for the Komi project from the European Bank for Reconstruction and Development and the World's International Finance Corporation. The two multilateral lenders had committed to financing of $45 million each, for a nine year term, with additional loans of $60 million to be raised from asyndicate of commercial lenders for a shorter term at 3.25 percent over LIBOR. Spears told The Russia Journal that this financing "remains available to draw down, and is/was never dependent on Alcoa." He explained that about $100 million of the loan "will be used to finance phase I of the project, which foresees brownfield bauxite mine expansion. The funds will be channeled into equipment and machinery, expansion of the railway, automation of blending, hoisting and loading facilities, etc. The remainder will be used to finance the bankable feasibility study and preliminary activities for the prospective construction of the alumina refinery in Sosnogorsk (phase II of the project)."