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Norilsk Nickel takes stock after catastrophic summer as further fines loom

The CEO of Arctic mining group PJSC Norilsk Nickel Co. said Sept. 26 that the company plans to spend an additional US$1.28 billion on industrial safety by 2025 after Russia's Federal Agency for Fisheries revealed further fines over a catastrophic fuel spill at the end of May.

The new spending is intended to prevent similar accidents in future, the group's CEO and largest shareholder, Vladimir Potanin, said in an interview with state-owned news channel Rossiya 24. This will raise the cost of Norilsk's ongoing efforts to reduce its notoriously heavy environmental footprint by about 40% to roughly US$4.47 billion, according to a Sept. 28 note from Moscow Brokerage BCS Global Markets.

SNL Image

The smoke stacks of a nickel refinery in Norilsk release a steady stream of sulfur dioxide into the atmosphere.
Source: Oleg Nikishin/Getty Images News via Getty Images

It will cost approximately 40 billion rubles, roughly equivalent to US$511 million, to restore the aquatic ecosystems destroyed by the oil spill, according to the Federal Agency for Fisheries. The value of biological resources lost due to the accident was estimated to be 3.5 billion rubles and must be paid to the state in the form of a one-time fine.

This would bring the total damages leveled against Norilsk after the oil spill, the first in a series of highly polluting incidents over summer, to 191.28 billion rubles, or about US$2.44 billion.

The head of the Federal Agency for Fisheries, Ilya Shestakov, said in a separate statement that it would take up to 18 years and the construction of three fish farms to restore the aquatic life damaged by the spill.

Potanin said over 600 company facilities would be inspected, including some which have already been decommissioned.

He also denied reports alleging that the company did not alert authorities about the incident in a timely fashion.

"The fact that Nornickel had apparently delayed reporting the spill to the authorities only emphasizes the need to set a precedent with a large fine and heavy slap on the wrist as a deterrent against similar incidents by Nornickel or others," Chris Tooke, associate director of political risk at GPW, told S&P Global Market Intelligence.

"Another part of the context is that some Russian companies — petrochemicals company Sibur springs to mind — are responding to changes in investors' expectations and are slowly starting to pay attention to the need to develop some kind of sustainability strategy," Tooke said. "All this helps explain Potanin's accommodative stance in the interview and his stated willingness to invest large sums in preventing similar accidents in future — even though he disputes the size of the fine."

Norilsk set aside US$2.1 billion in the first half of the year to cover the accident and Potanin expects the US$153 million already spent on cleaning up the disaster to be deducted from the final fine amount.

"The fine comes at a time when Nornickel and other mining companies already face financial pressures from elsewhere — the Finance Ministry is proposing hiking the mineral extraction tax by 3.5 times for most metals and fertilizers. So no doubt the state coffers will welcome Nornickel's contribution if the company does end up paying a fine of this size," Tooke said.

Though the nickel produced by the company is a crucial input for electric batteries set to increasingly replace fossil-fuel power sources, its production has long caused considerable pollution of the fragile Arctic environment.

A landmark study of trees and soil around Norilsk's Arctic base, published Sept. 28 in the journal Ecology Letters, reveals the extent of the degradation caused by the company's emissions of highly noxious substances over the many decades since its founding in the early years of the Soviet Union.

A vast area of 24,000 kilometers of boreal forest has died off downwind of Norilsk's mining complex since the 1960s with a dramatic rise in atmospheric concentrations of sulfur, copper and nickel, according to the group of international scientists.

"Russia is increasingly looking to the Arctic for its future oil and gas production growth, so ensuring tough environmental controls and safety is paramount — the Nornickel fine sets a precedent," Tooke said. "Putin sees the region as important for geopolitical and security reasons as well (not least because there are potential overlapping territorial claims by other states), so environmental issues have greater weight than they might elsewhere, especially as the region is literally becoming more exposed as the ice cover recedes."

As of Sept. 25, US$1 was equivalent to 78.27 Russian rubles.