A drama is playing out in the US state of Kentucky. It involves one of the country's most powerful politicians, a formerly sanctioned Russian company part-owned by a still-sanctioned Russian oligarch with alleged ties to Russian president Vladimir Putin, a neophyte company led by a CEO with limited experience in the aluminium industry, an impoverished region that hopes the sophisticated aluminium refinery that the CEO plans to build will lift it out of poverty, and a potential risk to US national security.
The drama’s first act opened in 2018 when Craig T Bouchard, CEO of two-year old Braidy Industries, announced plans to construct a greenfield aluminium rolling mill in Ashland, Kentucky, which would become the low-cost provider of 300,000 annual tonnes of lightweight, eco-friendly aluminium sheets for the transportation, food and beverage industries. However, Braidy faced two problems: how to raise the $1.7bn projected cost of the new Braidy Atlas mill, and how to source the aluminium it intended to refine.
In raising the funds, Braidy confronted several obstacles, according to Jorge Vasquez, managing director of the Harbor Aluminum Intelligence Unit, which Braidy retained to audit its financial model. “Braidy has no track record in terms of building a greenfield mill in the US, it is a start-up. And the industry suffered from low prices, low margins and overcapacity until 2017,” he says. Nor was Mr Bouchard considered an industry ‘insider’, with some voicing concerns about his business history: previous deals had led to some of his companies being heavily indebted.
Under these circumstances, Braidy’s attempted $500m stock offering struggled. The company also contemplated $1.2bn in debt financing. One bright spot was what many considered to be an unconventional $15m direct investment from the state of Kentucky (subject to Braidy’s own investment of $1bn) along with $15m in performance-based tax incentives and $7m in other benefits.
The plot thickens
Act two of this drama began in 2019 when Mr Bouchard reached out to UC Rusal, a Russian company that accounts for 6% of global aluminium production. However, Rusal was under US Treasury sanctions – barred from doing business with US and foreign companies, and its assets frozen – because its parent company, EN+, was 70% owned by sanctioned Russian oligarch Oleg Deripaska. The Treasury’s sanctions announcement – contested by Mr Deripaska – stated that he had connections with the Russian state and had allegedly had links to a Russian organised crime group.
However, in January 2019 the Treasury department – despite bipartisan opposition – lifted the sanctions on Rusal, noting that Mr Deripaska had reduced his stake in EN+ to 45%, “severing control”, and that the majority of EN+ directors – including a former member of president Donald Trump’s transition team – would be independent. Mr Deripaska may still nominate four of the 12.
Then, on April 15, Braidy and EN+ announced an agreement under which Rusal will invest $200m – 12% of the cost – in exchange for a 40% stake in the new mill, with the executive chairman of EN+ becoming co-chair, along with Mr Bouchard, of Braidy Atlas. Rusal will also supply 200,000 tonnes of low-carbon aluminium a year for 10 years from its hydropower plant in Siberia.
Foothold in market
It is a deal that Mr Vasquez says was a “no-brainer” for Rusal, giving the company a foothold in the world’s most profitable market and a guaranteed outlet for its product.
Questions have arisen from politicians, national security experts and activists, however, over whether Kentucky senator Mitch McConnell – a powerful Senate majority leader and strong supporter of Braidy Atlas – influenced the Treasury department decision to lift the sanctions on Rusal. Mr McConnell blocked a bill to keep the sanctions in effect a day after a preliminary meeting between the companies, but has denied knowing about a potential deal at the time. “The American people need to have confidence that this deal is in the country’s best interest,” says senator Ron Wyden, noting that former McConnell staffers lobbied Congress on Rusal’s behalf.
“We have never seen this kind of backtracking by the Treasury,” says Philip Urofsky, a partner and sanctions expert at law firm Shearman & Sterling’s Washington, DC office, who predicts that the agreement with the Treasury department could become a model for other companies seeking sanctions relief.
Mr Urofsky believes the Treasury failed to anticipate the consequences of cutting off supplies from Rusal on critical US industries, its foreign clients, and on Rusal’s workforce in other countries such as Ireland. As a result, the Treasury was forced to mitigate the disruption of global aluminium markets by repeatedly authorising affected companies to continue to do business with Rusal.
The Braidy-Rusal deal still faces one more regulatory hurdle. Democratic legislators have demanded a review by the Committee on Foreign Investment in the United States (CFIUS), which can reject foreign investments that threaten national security. The legislators were 'deeply alarmed' by the combination of Mr Deripaska’s remaining stake with the 24% of shares held by the Putin-allied VTB Bank, arguing that the Foreign Investment Risk Review and Modernization Act (Firrma) lists aluminium refining as a “critical technology” that does not require a controlling interest by a foreign investor to be investigated.
CFIUS does not disclose its investigations.
Braidy has vigorously objected to a CFIUS review, contending the project “does not enter or interfere with the committee’s rules or regulations”. However, “any transaction that results in foreign control of a US business is a covered transaction and subject to CFIUS” according to George N Grammas, co-chair of law firm Squire Patton Boggs’ international trade practice.
“Indeed, the buyer generally requests a voluntary review to create a safe harbour for the transaction. Control can be found in a substantial equity interest below 50%. If a sanctioned person is an investor, that would create another strong indicator to file with CFIUS,” says Mr Grammas. If the investment involves a critical technology and falls under the programme for aluminium, a mandatory filing would be required under Firrma, he adds.
Mr Grammas does not believe CFIUS’s findings would be swayed by political interests, such as that of Mr McConnell. However, the final decision rests with the White House. “If the administration wanted the transaction to clear, I don’t think CFIUS would make the recommendation to block it,” he says.
Meanwhile, there is “enormous scepticism” among some industry experts that the mill will be built, according to Lloyd O’Carroll, a senior equity analyst at Northcoast Research and author of The O’Carroll Aluminum Bulletin. He cites the technical complexity of producing the type of refined aluminium used in the automotive, aerospace and canning industries, compared with the aluminium recycling business Mr Bouchard previously headed before being ousted as CEO.
“It requires a lot more advanced equipment and a lot more finishing, and it is unclear to a number of industry observers that Braidy even understands what is ahead of it,” says Mr O’Carroll.