Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

The Norilsk Challenge

When Vladimir Potanin's Uneximbank bought a controlling piece of Norilsk Nickel, it got lucrative platinum and nickel deposits plus an ecological disaster area and a dismal arctic city of a quarter-million people. Is Potanin the manager to turn a dirt-cheap acquisition into gold?

Michael Gordon reports.

NORILSK, Northern Siberia -- Hardship is second nature for the residents of this Siberian enclave.

Winter sends the temperature plunging to minus 45 degrees Celsius and drops the sun below the horizon for months at a time.

It was Stalin who established this arctic city and dispatched hundreds of thousands of political prisoners here to extract the metal ore from mines so deep they seemed to run to the very center of the earth.

Later, Norilsk became a notorious example of wasteful communist planning, a place in which the air and water were fouled with noxious chemicals that even today make breathing a hazard.

But today, the people of Norilsk face what many feel is their greatest challenge: The new world of capitalism.

Russia's most powerful bank, Uneximbank, has bought the gargantuan mining and metallurgical complex that is the city's main employer and plans to slash the company's enormous work force and move more than a third of the city's residents to the south.

The audacious plan illustrates one of the grand question marks hanging over Russia's shaky transition to a free-market economy: whether the businessmen who have bought state enterprises at fire-sale prices have the management expertise to reshape those companies so they can be internationally competitive.

At stake is not only the financial health of the companies but Russia's long-deferred hopes for economic growth, already shaken by recent gyrations in international capital markets.

"Norilsk will be changed completely," boasts Vladimir Potanin, the 36-year-old head of Uneximbank, which has a controlling interest in Norilsk Nickel, as the metal complex is known.

But some experts remain dubious.

"These new bankers are deal makers," said Anders ?slund, a former economic adviser to the government and a senior associate at the Carnegie Endowment for International Peace. "They know something about finance. But they know very little about management.


From the start, Russia's development of Norilsk's vast ore deposits have been a tangled tale of missed opportunities and ruthlessness.

Lying on the remote Taimyr Peninsula, where Siberia meets the Kara Sea, Norilsk lies in a forbidding and isolated zone. When workers here talk about visiting the rest of Russia, they say they are going to "the continent," as if Norilsk were not a sprawling city of 260,000 but an island separated by a frigid ocean.

This region contains more than a third of the world's nickel reserves and two-fifths of the platinum-group metals. It also has significant amounts of cobalt and copper.

Russia's authorities ignored Norilsk's early prospectors. At the end of the 19th century, Kipriyan Sotnikov, a local constable who dreamed of wresting a fortune from Norilsk's hills, sent a sample of copper ore to the tsar's treasury. The tsar's men turned it away, complaining that the copper, needed to make kopeks, was contaminated with nickel, cobalt and platinum.

But as World War II loomed over Europe three decades later, Josef Stalin launched a crash effort to tap the deposits. Political prisoners were hauled by boat to the arctic port of Dudinka, 100 kilometers to the west. They laid the rail lines, dug the mines and manned the factories, where the raw ore was turned into a liquid concentrate and then smelted in huge furnaces.

About 360,000 prisoners toiled away here from 1935 to 1956, according to a report by the Institute for Contemporary Politics, a Moscow-based research center. The institute estimates conservatively that 17,000 died. It is hard to know precisely since officials have yet to declassify most of the camp records. Many of those who died were thrown into unmarked trenches, and their bones are still unearthed by annual spring thaws.

Some of the former prisoners still hang on, like Vilis Traubergs, who recounted his tales of prison life by the eerie glow of fluorescent lights on the windowsills of his small apartment. Like other residents, Taubergs uses the lights to grow vegetables and supplement the supply of food imported from "the continent." In Norilsk's climate, maintaining the traditional Russian kitchen garden requires extraordinary measures.

Many of Norilsk's current residents, however, were lured here after the prison camps closed by promises of higher salaries, free vacations and early retirement. They were workers like Alexander Mironenko, who left the village of Stepnaya in southern Russia with his wife, Lidiya, hoping to put away a nest egg so that his family could start a new life in the south.

His is a common story. Mironenko originally planned to stay no more than a few years but has already lived here for 15 years. He earns 5 million rubles a month (about $850) as a mechanic -- several times the going wage in the rest of Russia -- and still harbors hopes of moving back south to build a new home.

Others consider themselves little more than economic prisoners. Their savings were wiped out by the soaring inflation of the early 1990s even as the cost of food and transportation rose. Add to that the difficulty in finding new jobs, new housing and securing new residency permits, and Norilsk has turned from a springboard into a trap.

The elderly find it particularly hard to leave. They receive a higher pension for their long years of service here only as long as they stay in Norilsk.

The hard times have spawned a new cottage industry. Norilsk is dotted with small shops, where well-tailored businessmen with mobile phones buy on behalf of anonymous clients the few shares of stock that the workers received through privatization. The going rate: half the price at the Moscow stock exchange.


The question now is whether the doddering Soviet-style metal complex can be run along capitalist principles -- and at what cost.

Even with the best of intentions, transforming Norilsk is a herculean task. Changing the mentality of the managers and the workers is a big part of the problem. During Soviet times, all that mattered was production. To produce as quickly as possible, metal was skimmed from the richest ore and much of the remaining metal was discarded as waste.

Foremen never asked themselves if they could get by with fewer men, and many still find the idea of downsizing offensive and even unpatriotic. Some advanced technology was developed, but often little was spent to keep equipment up to date or reduce labor requirements.

"It is difficult to get used to the idea that labor is a commodity," said Yury Filippov, a longtime manager here. "People do not like the idea of hired labor. They think it means they are slaves."

The Soviet system of state subsidies also encouraged the company to expand into unprofitable sidelines, like construction and furniture making. Two-thirds of the company's workers are involved in these types of auxiliary enterprises, despite the fact that it is more cost-effective to import goods from the south.

There were also persistent reports of corruption: metal shipments sold at cut-rate prices to trading companies controlled by some of the managers.

Environmentally, Norilsk became a disaster area. The company's Nadezhda plant spews clouds of sulphur dioxide into the atmosphere at levels that have reached 50 times the permitted dose. Many Norilsk residents believe the noxious fumes inoculate them against disease and flu. But local doctors report a large number of respiratory ills and shortened life expectancy.

Much of the area around the metal complex has become a dead zone of withered trees, poisoned lakes and scarred tundra. The fall of the Soviet Union also saddled the metal complex with the responsibility for maintaining the city of Norilsk, including the wages of thousands of municipal workers and the huge expense of importing food. The cost of supporting the city was a hefty $327 million in 1995.

Unable to meet all of its obligations, the company acquired a huge backlog in unpaid taxes and penalties.

But then Norilsk Nickel found itself with a new owner: Potanin, who heads Russia's most politically potent bank and has already proved himself to be a masterful empire builder.

He began his career at the Soviet Foreign Trade Ministry before going into banking after the end of Soviet power. When the Yeltsin government needed cash, he pioneered a privatization plan under which banks loaned the government money in return for control of choice state assets.

Uneximbank used this procedure to acquire a controlling 38 percent interest in Norilsk Nickel in 1995, cementing its ownership of the share this August. The final purchase price for the shares was $250 million, making Norilsk one of the biggest bargains in Russian privatization.

But Potanin wants to be known as an industrialist and manager, not just a buyer of undervalued state enterprises. Like his fellow banking tycoons, he has touted himself as a harbinger of economic reform, the free market's answer to the Soviet Union's "red directors." He has promised to overhaul Norilsk Nickel, though some experts say he has been slow to make good on that pledge.


Potanin has already taken some steps to tighten financial controls and get the company's books in order.

The old communist-era managers are being replaced with younger ones who worship the bottom line. Nonessential enterprises, like the ill-conceived furniture factory, are bring shut down.

Potanin also helped the company during a short stint in the government as a first deputy prime minister in charge of finance. He drafted a decree enabling companies to restructure their tax debts and defer tax penalties. The broader aim, he says, was to help Russian industry, but he acknowledges that the provision was very good for Norilsk Nickel.

"Of course I thought about Norilsk," he said. "I personally cannot be far away from this problem. I started it and it is very important to me."

In the meantime, Uneximbank has kept Norilsk afloat with $150 million in credits at 12 percent interest, said Lev Kuznetsov, the youthful first deputy general for finance who was installed by Uneximbank. Although Norilsk Nickel lost some $260 million in 1996, financial experts say the company can become very profitable if Potanin's restructuring plan is carried out.

But the toughest steps lie ahead. Potanin plans to reduce the 100,000-man work force at Norilsk Nickel's main operating complex to some 65,000 during the next five to seven years. To cut the crushing cost of maintaining Norilsk, 100,000 of the residents are to be transferred to the south. To update aging equipment, $1 billion is to be invested, much of which is to be raised from international investors and by issuing new shares. Still, critics say Potanin's plan is very vague and occasionally wishful.

For example, he is counting on World Bank help to subsidize the cost of relocating more than one-third of Norilsk's population. But the World Bank says the Russian government never asked it to undertake such a project and it has no plans to do so. The effort to raise $1 billion in funds for overhauling Norilsk Nickel has also been hurt by the capital flight from emerging markets, forcing the company to pare back a planned new stock issue. Workers and mid-level managers say Uneximbank has so far invested little to streamline production or maintain equipment.

"I cannot say I have felt any changes for the better," said Mikhail Knyazev, a top manager at the copper smelter. "Maybe we have even less money."

The graffiti on the walls of his factory let visitors know what some workers think of conditions at the plant. It reads: "Welcome to Hell."

Even veterans of the company, however, say change is long overdue. The most important reform, they say, is psychological, to alter the way employees think. "In the past, the only goal was to produce 100 times more metal," said Filippov, the senior production official. "Now the metal is not a goal in itself. Efficiency is the goal. We have to get used to that because we used to work for a state company."

-- Michael Gordon wrote this article for The New York Times.