Arctic Damages Are Only Half a Green Victory
(Bloomberg Opinion) -- Russia’s ecological watchdog has determined that a diesel spill in the country’s far north has caused nearly $2.1 billion of damage, and asked the miner MMC Norilsk Nickel PJSC for compensation. If that translates directly to what is paid up, it will be one of the largest fines levied for pollution in Russia, and could jolt other heavy polluters to start cleaning up their act.
At best, though, this is a partial win for the environment.
The tough approach is welcome, and it’s true that Russia’s worst such accident since the Komi pipeline ruptured in 1994 could revive long-dormant environmental rules governing aging energy infrastructure. So far, it has certainly highlighted the risks of melting permafrost to the oil and gas industry, as my colleague Julian Lee has written: Sudden subsidence appears to have caused the spill. It has also prompted official checks of potentially dangerous installations on usually frozen ground.
Yet as demonstrated by Russian President Vladimir Putin personally rebuking Nornickel’s billionaire chief executive officer, Vladimir Potanin, in a televised meeting in early June, this swiftly dispensed justice is not all about protecting Siberian waterways. Days earlier, Putin had publicly reprimanded the local Nornickel boss. At least in part, the Kremlin is seizing an opportunity to keep oligarchs in check, at a time when the president is tightening his grip on power.
There’s also no certainty such a big sum will ever get paid in full. Nornickel disputed the number on Wednesday, arguing it wrongly assumes the company did not act to mitigate the damage. The miner has pledged to fully fund the cleanup, estimating that cost at close to $150 million. Russia has a record of far smaller penalties, and even in the U.S. Exxon Mobil Corp. saw punitive damages for the 1989 Valdez spill cut back. Falling far short of the headline-grabbing number would send a worse signal to polluters than if the watchdog hadn't thrown it out there in the first place. Not good news in a country where many production assets are old, and lower-level damage is a frequent occurrence.
Worse, even with Arctic temperatures hitting records and other accidents possible, there is no hint of change in Moscow’s willingness to tackle the underlying climate causes. Nor is there any sign it will reconsider Arctic development plans in a region that has become increasingly important to Russia’s overall oil and gas production.
Nornickel, a producer of nickel, palladium and copper with a market value of $41 billion, has a dismal ecological record. The Arctic city of Norilsk is one of the world’s most polluted. In 2016, a nearby river was dyed bright red by a spill after heavy rain. More recently, the company has been one of Russia’s more progressive when it comes to environmental, social and governance issues. It began a cleanup plan in recent years, and started tackling toxic sulfur dioxide emissions in 2018. This month, it appointed an executive to oversee ecological issues. It has still moved too slowly.
Assuming the eventual penalty is close to the figure detailed by the watchdog, Nornickel should be able to handle it. Such a fine would be equivalent to roughly a third of the forecast for 2020 free cash flow, according to analysts at VTB Capital, and less than half what the company paid out to shareholders last year.
Equity investors have already wiped roughly $8 billion off the company’s market value since the end of May. That’s not just due to anticipation of the fine itself or ongoing compliance costs, but also to more immediate concerns that the company’s generous 11% projected dividend yield may be at risk. Potanin, who owns just over a third of the company, has already tried to cap the payout.
The oligarch has long been at odds with Nornickel’s second-largest investor, aluminum giant United Co. Rusal, over the dividend policy. A 10-year shareholder deal signed in 2012 has made it hard to change, and Rusal has resisted efforts to redirect cash elsewhere because it needs the payouts to service its debt. Pressure on cash will increase the risk of fresh shareholder conflict.
Yet the optics of a $2 billion-plus fine for an ecological disaster could also give Potanin enough cover to funnel cash into areas that ESG investors, relatively silent in Russia’s billionaire-run outfits, may welcome, not to mention a state desperate to create jobs and investment.
For Russia, making Nornickel pay up would be a start. It has certainly been one of the country’s dirtiest industrial heavyweights. Sticking consistently to that greener path will take far longer.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.
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