The plunge in United Company Rusal, the only Russian company listed in Hong Kong, has erased US$6 billion of value from the world's largest aluminium producer outside China while the Ukraine conflict clouds its operations.

Since Russia invaded its neighbouring country on February 24, the stock has tumbled 42 per cent while trading on the Moscow Exchange was halted. Yet, the miner said it remains untouched by a barrage of Western sanctions on Russian entities, individuals and its key exports like oil and gas.

Rusal counts Sberbank as one of its two principal bankers, a state-controlled lender that has since been blocked by the US Treasury Department as part of a broader move to prevent Russia from funding and sustaining its military assault on its neighbour. Its former controlling shareholder Oleg Deripaksa has also been sanctioned.

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The crisis is unfolding at a time when inventories of base metals are thinning, leaving a smaller buffer for importers and consumers to face the sudden price shocks, according to BCA Research. Oil prices climbed to the highest since 2008 last week, while aluminium, wheat and nickel reached their all-time highs.

"Even in the absence of levied sanctions, some non-Russian market players may not interact with Russian companies in anticipation of future sanctions," strategists at BCA Research said in a March 4 report. "Self-sanctions by non-Russian entities, in anticipation of stricter Western sanctions, will prevent valuable Russian metal exports from reaching global markets until suitable freight and financing is arranged."

The slump since the invasion has trimmed Rusal's market capitalisation by HK$47 billion (US$6 billion) to US$8.2 billion. The Kaliningrad-based miner, which made its Hong Kong stock offering in January 2010 at a US$26 billion valuation, said it's business as usual.

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"Rusal or its subsidiaries have not been sanctioned," a spokesman in Moscow said by email to the Post on March 11. adding that none of its exports are affected. "Our ability to process transactions has not been blocked or hindered by sanctions on Russian banks."

Russian tycoon Oleg Deripaska is among Russian oligarchs targeted by Western governments over Russia's invasion of Ukraine. 2015 file-picture by Reuters alt=Russian tycoon Oleg Deripaska is among Russian oligarchs targeted by Western governments over Russia's invasion of Ukraine. 2015 file-picture by Reuters>

The UK government last week sanctioned some Russian billionaires, including Deripaksa, who still owns stakes in EN+ Group, Rusal's controlling shareholder. The move, Rusal said, has no impact as the oligarch had relinquished his control in a 2019 ownership restructuring.

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Rusal's statement could help further calm the global aluminium market, as prices retraced from above US$4,000 to US$3,500 last week, according to Varun Sikka, an analyst based in New Delhi at AlphaValue, a brokerage.

"Rusal has borne the brunt, in share price terms, of the ongoing geopolitical conflict," he said by email. "Rusal is in a much stronger position, having deleveraged over the years. In the event of prolonged geopolitical uncertainties, the potential of another survival crisis seems limited."

Sikka will continue tracking the stock, while Goldman Sachs has suspended its rating following a decision to withdraw from the Russian market. Two other brokers put their ratings under review, according to Bloomberg data.

The stock has a 12-month price target of HK$9.90, implying a 136 per cent upside from current level.

Rusal has two outstanding dollar-denominated bonds in the market: a US$500 million note due in February 2023 and a US$491 million bond due in May 2023. Both have fallen to distressed levels of 45 cents on the dollar from par last month. The company did not reply on whether it would be able to service their upcoming coupons.

Rusal's key production data for 2021: Source HKEX filing February 2022 alt=Rusal's key production data for 2021: Source HKEX filing February 2022>

Rusal accounted for about 6.5 per cent of the aluminium market, based on its annual capacity of 3.8 million tonnes in 2020, according to company statistics. Only the Aluminium Company of China and China Hongqiao had bigger capacities among the world's top 10 players that include Xinfa, Rio Tinto and Alcoa.

It derived about 37 per cent of its sales from Europe, 31 per cent from eastern European and central Asian nations, and 22 per cent from Asia and 9 per cent from the US, according to its report to shareholders in August.

Rusal has been there before in terms of facing Western sanctions. The company was designated by the Treasury Department's Office of Foreign Assets Control in 2018 because of its ties to Deripaksa.

That designation was removed in 2019 following a shareholding revamp that handed control of Rusal to the EN+ Group. A move to reorganise Rusal's international business was mooted last year. The Hong Kong stock exchange operator was reported to be looking into the reorganisation plan.

Some semblance of normalcy in the stock price behaviour is welcome, said AlphaValue's Sikka.

"While Rusal is faced with near- tomedium-term uncertainties, its pivotal aluminium market positioning implies that a turnaround may happen eventually," he said. Still, "it would be tough to put a timeline as to when a complete recovery or normalisation could happen."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

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