THE DEVELOPMENT OF THE DEPOSIT
The Baimskaya Copper Project is a main copper and gold deposit located in the Russian Arctic. Situated in the Bilibinsky district of the Chukotka Autonomous Okrug, the easternmost Russian region, the deposit was discovered in 1972 and it is estimated to be one of the three largest unexploited deposits of raw materials in the world. But since the deposit is located in a remote Arctic region, far away from any major urban centre or transport route and where winter temperatures can reach -40, the actual research work started only in 1984, while the first pre-feasibility studium was carried out in 2017. According to the mine’s official website, the deposit is expected to host 9.9 million tons of copper at an average grade of 0.35%, while the amount of gold held in the deposit should be 16.6 million ounces (1 oz = 28.3495 g), with an average grade of 0.21 g/t. And, while the gold deposits are not as remarkable as the copper one (the Sukhoi Log gold deposit, probably the largest in the world, hosts around 67 million ounces of gold), this would still make Baimskaya as one of the largest greenfield gold deposits in the world.
Originally owned by Aristus Holdings, one of whose shareholders is the well-known Russian billionaire Roman Abramovich, the Baimskaya Mining Company (the company owning the copper deposit, henceforth BMC) was bought in two stages by KAZ Minerals, a Kazakhstani copper mining company owned by Vladimir Kim (the richest man in Kazakhstan) and Oleg Bogachuk. The purchase took place in two steps: the acquisition of 75% of its ownership in January 2019, for $675m, and the one of the remaining shares in May 2021 for $225m. Previously active only in Kazakhstan, where it owns the mines of Aktogay and Bozshakol, and in near Kyrgyzstan, where it owns the Bozymchak open-pit copper mine, the purchase of the Baimskaya Copper Deposit by KAZ Minerals marked its entrance in the Russian mining industry.
One of the main issues initially faced by KAZ Minerals was the need to build massive infrastructures in order to exploit the deposit and transport the extracted material. Apart from the extractive and energy infrastructures, the transport and the commercialisation of the extracted material required a new port, to be built at Cape Nagloynyn, and a new 428 km-long all-weather road to connect the mine with the port. Moreover, in spite of the enormous amount of material, its overall percentage is relatively low, and this makes its extraction difficult. In 2020, the overall cost of the required infrastructures was estimated at $8 bln. Therefore, given also the strategic nature of the deposit, there were several talks between KAZ Minerals and the Russian government about these infrastructures. But, since KAZ Minerals was still expected to pay for the construction works, the launch of an infrastructure building plan in the Chukotka Autonomous Okrug by the Russian government – which includes a mining town expected to host 5,000 people – caused a delay of the feasibility studies to 2021.
But, in spite of its massive mining and infrastructural costs, the deposit is still expected to be highly viable from an economic point of view, especially considering the increase in the gold price of the latest years. According to a report issued by the company in 2021, after all, “the deposit is expected to have a life of 20+ years and will start up by the end of 2027, with an average annual copper production of 300 kt and gold production of 490 koz during the first ten full years of operation”. In fact the construction of the mining and processing plant started in April 2021, in time for its expected starting date of its exploitation, and once at full regime the mine is expected to employ 3,000 people. Given the overall scale of the project, it is not surprising that the Baimskaya Copper and Gold Mine is considered one of the six Arctic megaprojects (and the only one in the Russian Far East) which will drive the further development of the Northern Sea Route in the coming years.
During these years, important agreements in terms of tax relief and accessory infrastructures also have been stipulated. More specifically, the BMC obtained the status of an Advanced Special Economic Zone (henceforth ASEZ) “Chukotka” resident, implying a 7.6% reduction of the insurance premium for 10 years and no taxes on property, land and profits for 5 years. In addition to this, the BMC will benefit from a reduced mining tax rate for 10 years. Furthermore, as per agreement signed between KAZ Minerals and Atomflot (a subsidiary of Rosatom) in September 2021, the latter will supply four floating nuclear power plants to the BMC between 2027 and 2031, each of a power of no less than 106 MWh, and they will be stationed in the new port of Cape Nagloynyn. And this, according to KAZ Minerals, will allow the concern “to produce very low-carbon copper”. Therefore, despite some occasional bumps in the road, the launch of the works seemed to go as it should have been.
The launch of the Special Military Operation affected the development of the Baimskaya Copper Deposit as well. In order to fund the overall $8 bln worth of investments needed, KAZ Minerals took an overall $3.62 bln worth of loans, $1.78 of which from the Russian VTB bank (the other lenders are the Development Bank of Kazakhstan and the Chinese Development Bank). But, in February 2022, VTB was included by the United States in the SDN list, which implies a block of the assets of the bank located under the US jurisdiction and a ban for US residents from any form of dealing with them (previous sanctions, introduced from 2014 onwards, just affected the possibility of buying shares or bonds from the bank). KAZ Minerals is based in the UK, and while the loan was supposed to be paid back only from June 2024, with the settlement of the final 65% in October 2025, the company, while still profitable, risked to find itself in a position of technical default. Several debt restructuration options were discussed, such as payment in non-Western currencies through non-Western countries.
But, in July 2023, KAZ Minerals officially disinvested from the project and transferred its ownership to the Trianon Limited, a Kazakhstani holding owned by KAZ Minerals’ main shareholders Vladimir Kim and Oleg Novachuk. While the transfer was made official in July 2023, it had been approved by Vladimir Putin himself already in December 2022. This change was merely cosmetic: while KAZ Minerals claimed it no longer had any assets in Russia, the Baimskaya Copper Project was still owned by its key people. But, at the same time, it raised important questions about the difficulties to make business both in Russia and the West, especially in strategic sectors. Apart from the impossibility to pay back the credit awarded by VTB in dollars, after all, the main reason of this transfer is risk-hedging: as a London-based company quoted in the London Stock Exchange, KAZ Minerals could still be hit by sanctions, and the risk became even greater when the US started talking about secondary sanctions.
Unlike primary sanctions, which are applied only on the jurisdiction of the country imposing them, secondary sanctions are applied on the transactions in US dollars – or the currencies of the countries which impose them – made outside of their jurisdiction. Their logic is that doing business with the country which implements them (the US, in this case) is normally more profitable than doing business with the country against which they are imposed (Russia, in this case), and that the impossibility to use the US dollar for the transactions with the Russian entities affected by secondary sanctions would make them very difficult anyway, given the role the US dollar plays in the global economy. Such threat, nevertheless, is a double-edged sword. On the one hand, some banks and corporations – including KAZ Minerals – have disinvested from Russia and all the other targeted countries namely because of the threat of secondary sanctions. On the other hand, as the umpteenth act of weaponisation of the US dollar, secondary sanctions are not only increasing the resentment of those countries which don’t want to take side in the geopolitical disputes involving the US, but most of all they are accelerating the ongoing dedollarisation of the world economy, with enormous potential economic and geopolitical consequences (unlike what most laymen think, the main staple of American hegemony is not the US Army, but the role of the dollar in international trade) and some risks for the US economy itself. “With a $1.5 trillion deficit this year, $35 trillion in overall debt, and $1 trillion in interest payments this year”, wrote The National Interest last June, “if the U.S. dollar is no longer the primary global reserve currency… then the entire American financial system comes crashing down”.
While the dedollarisation process is currently accelerating and it is unlikely to be stopped or reversed anytime soon, a collapse in the usage of the US dollar in the international trade is currently unlikely and the overall process is likely to take a few decades. As put by Ray Dalio, reserve currencies tend to survive for a long time even after the fundamentals of their economies stopped justifying their primacy. The case of the Spanish dollar, which remained a reserve currency until the mid-19th century, is somehow emblematic: Spain, at that point, had already lost almost all its colonies and was reduced to a mere regional power, far away from the echoes of Tordesillas and the Conquistadores. What we are assisting to is rather the development of a two-tier world economy. Most international trade is still held in dollars, and by a lesser extent in euro and in the currencies of the other US allies; but, at the same time, a growing share of it is conducted in non-Western currencies, either in national currencies or through those of a third-party (Russia and Saudi Arabia, for instance, may choose to regulate their trade in Chinese renminbi, as Russia and Iran already do). Some of the companies more exposed to secondary sanctions, such as a number of Chinese banks more exposed to trade with Russia, have ditched the greenback altogether in order not to be subject to sanctions or political pressures. And given the advantages of trading in national currencies, for example in terms of economic stability, decreased forex-related risks, minor transaction costs and increased national autonomy and sovereignty, the role of this “second tier” is likely to increase.
What is Kazakhstan’s stance on this dedollarisation issue? During the latest summit of the Shanghai Cooperation Organisation, held in Astana last July, Kazakhstani President Tokayev has defined sanction wars as “a substantial threat to world economy”, with a clear reference to the West and its policy of unilateral sanctions. Moreover, Astana’s application to BRICS in 2023 is indicative of its desire to strengthen its ties with the emerging world and proceed towards dedollarisation. Still, the process is incomplete. 85% of the trade between the Eurasian Economic Union states is currently regulated in national currencies, and the share of the Russian ruble in the interchanges between Kazakhstan and the other EAEU member states has increased from 55% in 2013 to 63% in 2021; but the President of the Federation Council Valentina Matviyenko has invited Kazakhstan to further accelerate the total ditching of the dollar from bilateral trade. As put by the Kazakh economist Rasul Rysmambetov, while the interchange between Kazakhstan and Russia already takes place in national currencies, they still use the dollar course as a benchmark. Therefore, he advises to replace dollar benchmark with yuan benchmark. Moreover, the case of KAZ Minerals is indicative of an excessive reliance on Western locations as HQs and on the greenback, which occasionally affects business ties as in this case.
Since Kazakhstan’s two main trade partners are China and Russia, and China – together with Russia – is one of the main drivers of dedollarisation, as shown by the fact that since 2023 it carries out most external trade in yuan, Kazakhstan may find convenient to fully jump on the dedollarisation train. Kazakhstan’s desire to stay away from the current conflict between Russia and the US (or any future confrontation between the US and China) and keep a multi-vector foreign policy is understandable, but the implementation of secondary sanctions by the US is indicative of an “either with us, or against us” attitude. The recent donation by USAID of the new “Keden” customs servers, officially presented as tools to streamline customs procedures, are actually aimed to monitor the compliance to sanctions by Kazakhstani companies: one of the main routes anti-Russian sanctions are circumvented is namely through Kazakhstan. Moreover, since one of the main aims of the US in Ukraine is to send the message that “any effort to revise the U.S.-led world order is doomed to fail — with serious economic costs”, as put by an American law professor already in 2015, what Russia is facing now – or at least something similar – will inevitably be faced by China in case of a US-Chinese crisis, for instance over Taiwan: the current confrontation with Russia, for Washington, is also a staging ground for the future – and in part ongoing – confrontation with China. And, since Astana is already suffering from the consequences of the Western sanctions against Russia, this may force it to abandon its traditional multi-vector policy and to choose between the Western vector or the Russian-Chinese one.
FUTURE PERSPECTIVES
After KAZ Minerals disinvested from the Baimskaya Copper Project, as we mentioned above, the ownership of the company was transferred to Trianon Limited, a Kazakhstani-based holding owned by KAZ Minerals’ shareholders Vladimir Kim and Oleg Bogachuk. During the latest months, the works and the contracts related to the project have faced some occasional bumps on the road: in March 2024, for instance, Rosatom stated that 14.9 bln rubles are not enough to build the floating nuclear power plant. Moreover, on 2nd May 2024 the BMC was included in the SDN list, and in the end of the same month Trianon Limited sold the asset to Northern Aurora, a Russian-based closed mutual investment fund. The names of the associates of this company are currently undisclosed.
Still, like other megaprojects in a similar situation (like the Arctic LNG 2 one, which has recently started shipping LNG despite its being put into the SDN sanctions list and the official withdrawal of its Western partners), the BMC seems to have fully adapted to the new reality. The credits awarded by VTB to KAZ Minerals have been transferred to the new owners in November 2023. Still in 2023, VTB Bank awarded further loans to the BMC for 4.8 bln yuan (around $700 mln), as well as one of 29 bln rubles. And the contract for the construction of the mining and processing plant and the delivery of the required machinery has been signed in November 2023. Also the construction of the transport infrastructures is currently under way: in March 2023, the Russian Prime Minister Mikhail Mishustin signed a decree for the funding of the construction of the Cape Nagloynyn seaport, which will have a handling capacity around 2 mln tons of goods per year, and its construction is expected to be completed in 2026. The all-season road connecting the port with the deposit is also under construction; and, last but not least, some Chinese contractors are currently building three of the four floating nuclear power plants required to make the plant work (the last one has been commissioned to the Chinese Wison Nantong Heavy Industry in June 2024).
Since the first two floating power plants are expected to start working in 2028, the third one in 2029 and the fourth one in 2031, the Baimskaya Copper and Gold Mine is currently expected to start working in 2028. All the other infrastructures, at that point, are expected to be completed. As a whole, while there were some delays because of the extreme isolation of the region in question and the actual costs and timing required to build the floating power plants, with the sanctions adding further problems, the continued interest for the project from both the investors and the public institutions are making possible the appropriation of this vast deposit. And the likelihood of further delays, let alone of the project being abandoned, is currently very low.
Giuseppe Cappelluti
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Kazakhstan’s Arctic Way
