Sources in Moscow told STRATFOR that two of the more influential personalities in Russia's mining and metals sector are in negotiations to start merging their firms: steel giant Metalloinvest and nickel giant Norilsk Nickel. Metalloinvest is only the fourth-largest iron and steel company in Russia, but Norilsk Nickel is a true prize, with facilities around the world that account for approximately 20 percent of global nickel production. Metalloinvest owner Alisher Usmanov and Norilsk Nickel owner Vladimir Potanin are discussing swapping a 25 percent stake in Metalloinvest for a 10 percent stake in Norilsk Nickel, and allowing a full merger in the next few years. The Kremlin has been a full partner in the negotiations, with hopes that the company formed by the merger will eventually turn into Russia's national champion for mining and metals. The Russian government is consolidating its major industries, including energy and defense, into a small number of companies in the hands of either the government or those with close ties to the Kremlin. These so-called national champions, reminiscent of the Soviet-era national champions, have allowed the Russian government to squeeze foreign-owned companies out of Russia and use the consolidated industries for political purposes domestically and abroad. The mining and metals industry is the Kremlin's next target for consolidation. There is much potential in Russia's metals and mining sector, because the country contains some of the world's largest reserves of precious metals, iron, platinum group minerals, nickel and other metals. Russia is also the fourth-largest steel producer in the world (behind China, Japan and the United States). Russian metals and mining companies are already international players, with projects in Africa, East Asia and Latin America. Thus, the sector has potential as a political tool, and the Kremlin is anxious to control it. Russia uses its energy companies, such as Gazprom and Rosneft, as tools, but those firms have difficulty competing with their Western counterparts because of outdated technology. Russia's metals and mining firms do not need such modernization; they depend only on cash and drive to take on new projects. A metals and mining champion would be a much easier tool to wield in the international arena. Moreover, considering the continued high cost of commodities, the mining and metals sector could be another large cash cow to feed the Kremlin's bank account. Thus far, Russia's government has tried to stay out of the metals and mining sector, not only because it is so large and diverse, but also because it has a bloody and vicious past. In the post-Soviet era, the metals and mining industry — specifically steel — went through a series of battles in which seven major company owners were killed and countless employees caught in the crossfire. Those who now own major steel, metals or mining companies are the ones who survived the "steel wars" — not because they played nicely, but because they fought the hardest and most ruthlessly. But as Russian Prime Minister Vladimir Putin is wrapping up his consolidation of other key economic sectors, he is now working on the difficult task of consolidating the metals sector and pulling it into the Kremlin's orbit. The talks between Usmanov and Potanin — with the Kremlin's participation — are a step toward consolidation. But there is one man standing in Usmanov and Potanin's way: metals leader Oleg Deripaska, who has a separate agenda. Deripaska recently bought a 25 percent stake in Norilsk Nickel from Potanin's former-partner-turned-adversary, Mikhail Prokhorov. Deripaska is interested in merging Norilsk Nickel with his own company, RUSAL — the world's largest aluminum company. Under direction from the Kremlin, Usmanov and Potanin have invited Deripaska to join their project, which would leave the three oligarchs sharing the super-metals company formed by Norilsk Nickel and Metalloinvest. The problem with merging Norilsk Nickel with either Metalloinvest or RUSAL (or both) is that each firm is in a separate field. Merging two or three of them will not come naturally because steel, nickel and aluminum are separate ventures. Any merger would be more about control than about trying to expand business. More fundamentally, the egos of these three men who ferociously battled each other in the past are getting in the way, and Deripaska is refusing to consider the proposal. However, if Deripaska does not take part in the deal, he will be left holding a minority stake in Norilsk Nickel and will be unable to carry out his own merger plans. Moreover, Deripaska knows that rejecting an offer that is being orchestrated by Putin and new Russian President Dmitri Medvedev can be dangerous, particularly for someone in Deripaska's position. Deripaska is now Russia's richest man and has been greatly expanding his and RUSAL's role inside Russia and around the world. There are also hints that the young billionaire has eyes for politics as well — though Deripaska knows that other oligarchs in the past, like Mikhail Khodorkovsky, have gone down for attempting to get involved in politics. Some within the Kremlin are already wary of Deripaska's growing influence. Deripaska has worked hard thus far to stay on Putin's good side, but keeping the Kremlin from its goal of a metals supercompany could turn that tide. The Kremlin is sweetening the deal for Deripaska to join in on the merger plan by offering RUSAL a bonus should its owner get on board. The operating license for the Udokan copper deposit in the Chita region is up for grabs, and many Russian and foreign heavyweights are eager to win the large reserves. The auction for Udokan, which is estimated to be able to produce 15 million tons of copper per year, has been delayed in order to give Deripaska time to decide whether he will work with the Kremlin or against it. Deripaska is anxious to expand RUSAL's operations, and copper is definitely on the list. Gaining the Udokan reserve would be a major leap into this field. Having Deripaska locked into a merger with two other oligarchs could curtail some of his power. But whether he accepts or refuses, each outcome could spark new violence within the Russian metals industry. If Deripaska and the Potanin-Usmanov duo decide to declare war, it would be a dangerous one, but if they merge and a Kremlin-backed metals supercompany is created, there is no doubt that the new company would soon go after other metals firms within Russia — and there are quite a few metals companies backed by some very powerful and ferocious oligarchs. Most of these other firms are in the steel business, and Metalloinvest is only the fourth-largest Russian steel firm. Even with the weight of the other metals companies behind it, Metalloinvest will have to depend on the might of the Kremlin to move in on other steel firms — and even then, those moves will be messy. Some of Metalloinvest, Norilsk Nickel's and RUSAL's largest competitors have very familiar owners, such as:

• Evraz, owned by Alexander V. Frolov, Roman Abramovich and Alexander Abramov. Evraz is one of the world's largest steel-producing firms, but it also has subsidiaries specializing in vanadium, iron and coal. The firm has operations in South Africa, China, Southeast Asia, the United States and Eastern Europe.
• Severstal, owned by Alexei Mordashov. Severstal is Russia's second-largest steel and iron company and also has large operations in Italy.
• Novolipetsk Steel, owned by Vladimir Lisin and Alexei Lapshin. Russia's third-largest metals company, Novolipetsk is also one of the world's most profitable steel and iron companies.
• Mechel, owned by Vladimir Iorikh and Igor Zyuzin. Mechel is Russia's fifth-largest metals firm and produces coal, iron ore, nickel and steel. The company has operations in Russia, Romania and Lithuania.

If the Kremlin succeeds in consolidating the metals and mining sector — and success is the norm for the government's pursuit of business and political takeovers within Russia — it will have yet another powerful champion inside the country. The new metals and mining champion could take advantage of the soaring global commodity prices and become yet another powerful tool for the Kremlin to use around the world.