Zee Beam News

// Unlimited Rosoboronexport
Oct. 19, 2007 - Kommersant by Yakov Pappe, Ekaterina Drankina - Rosoboronexport is the federal agency entrusted with ‘pinpoint’ nationalization, while neither industry sectors, nor enterprises, nor grounds, are determined in advance. Consequently, the intermediary in armaments trade is becoming a gigantic multi-profile structure with unclear development logics and unlimited appetites. The cycle’s last article is devoted not to an industry or a sector acting as an object of federal expansion, but to one of its leading enterprises, Rosoboronexport (which is now transforming into Russian Technologies state corporation). Much is entrusted and allowed to it. Besides creating Helicopters of Russia company and participating in the aircraft engine building consolidation, Rosoboronexport’s activity spread onto car building, non-ferrous metal industry, iron industry, and other sectors.
AvtoVAZ: For the Success of a Hopeless Affair
Last five years have somewhat clarified the absolutely vague situation in the car industry. Most enterprises have either disappeared, or started reviving due to the actions of new owners and management or to the partnership with foreign car makers. For instance, Moskvich went bankrupt, while UAZ reached the level of the world’s best producers in car cost-effectiveness. It is still unclear about AvtoVAZ, the Russian car industry’s largest and most complicated enterprise. For many years, the factory surrounded by shadow and overtly criminal structures, having an extremely intricate management and sales system, was losing its positions on the market under competitors’ pressure. Ruble’s depreciation in 1998 gave just a short period of respite to the factory. Yet, that period was not used well. Until recent years, the factory was under indisputable control of Vladimir Kadannikov’s team (Kadannikov was director general, and then the chairman of board). That team possessed a surprising tenacity. Even Boris Berezovsky, whose plans to take over AvtoVAZ went quite far, had to retreat. AVVA (All-Russia Car Alliance) company, which he created, owned AvtoVAZ’ blocking shareholding (32 percent), but eventually became the factory’s subsidiary. Another subsidiary, COAFK (the Automobile Financial Corporation’s Central Department) had been the factory’s large shareholder (20 percent) as well. Thus, the ‘enclosing’ asset ownership scheme, which later became so popular in Russia, was for the first time implemented on a large scale in AvtoVAZ. It was ruled simply: the subsidiaries and the management issued proxy cars to Kadannikov personally, and he voted with the dominating parcel at the board meetings. The system prevented outsiders from getting close to the factory, and secured control for the conglomerate of managers, dealers, and suppliers over the flows of production-generated profits (officially, however, the factory has almost always been unprofitable). Yet, no one spoke of developing or simply restructuring the factory. AvtoVAZ would go bankrupt just like Moskvich, if not for its larger-scale production and a very large, though not transparent, sales and service network. SOK Group of Samara became more and more important for AvtoVAZ with years. It produced car spare parts in its own factories, supplying them to AvtoVAZ and the dealer network, and participated in distributing the produced cars. That fact further complicated the actual relations between the factory’s authority and property. Experts believe that the authorities insistently offered to Oleg Deripaska to take charge of the factory in the early 2000s. However, the businessman chose to ‘save’ GAZ after taking a closer look at the situation. In 2005, Rosoboronexport’s team was entrusted with the anti-crisis work for AvtoVAZ. Formally, it went absolutely simply. AVVA and COAFK issued proxy cards for voting with their shareholdings not to Kadannikov, but to those chosen by the government. Then, a new board of directors and a new management of the factory, already out of Chemezov’s team, were elected in full accordance with the strict corporate procedures. For Rosoboronexport, AvtoVAZ is the first challenge on its new industrial arena. The challenge is difficult, but not too risky. Apparently, if the task is failed – there will be no punishment, because hardly anyone believes in the success. Meanwhile, at least some success will give hope that the authorities might ‘grant’ more interesting assets as a reward. Anyway, there is no reason to decline the challenge: a functioning enterprise of national importance with a nearly $4-billion production generates considerable financial flows even if it is low-effective. So, the matter needed a qualified management team. However, the first two attempts to create that team failed. The first Director General, Igor Esipovsky, was obviously not a large-scale figure enough. The second Director General, Vladimir Artyakov, was promoted to become the Samara region’s Governor. The current president of AvtoVAZ Group is Boris Aleshin, former deputy prime minister, and then head of the Federal Industry Agency. Rosoboronexport head Sergei Chemezov had to undertake the functions of the director board chairman. Certainly, it was impossible to achieve impressive success in just two years with all that management ado. Yet, something has been done. Most odious partners were replaced by more civilized ones. The car lineup is undergoing changes (although according to the former management’s plans). At the same time, the ambitious projects for creating new car models have been suspended. It must be good, because AvtoVAZ has had no opportunities to independently produce a competitive car. The new management also attempted to close down the joint venture with GM, created by the old management on the conditions later proclaimed not profitable enough. After a while, the JV resumed work along new, allegedly better, conditions. Meanwhile, AvtoVAZ is traditionally looking for new foreign partners and new foreign models for assembly work. Magna of Canada is viewed as the main partner now. A car worth under $12,000 is being developed together with the company. AvtoVAZ is also undergoing the first stage of the project aimed at getting rid of the ‘enclosing’ asset ownership scheme. The factory invited Troika Dialog, one of Russia’s stock market leading teams, to help implement the project. AvtoVAZ has already placed offers for buying the shares of the enterprise itself and of its subsidiaries from the minority shareholders. After they are bought out, the subsidiaries will be merged with the parent company. Consequently, their shares will become treasury stock and will be discharged. So, AvtoVAZ will form a normal property structure, while Rosoboronexport and partners will become the official owners of the controlling stock, which will enable the factory to start looking for an important foreign or Russian investor. Also, the current management is not making any extra-ambitious plans now. They admitted it is inevitably necessary to reduce the production of VAZ models, and hope to compensate the production fall by carrying out the assembly of foreign car models in AvtoVAZ facilities under JVs or license agreements. That way seems to be the most realistic one. By the way, Rosoboronexport’s appetites in car industry were not limited to VAZ only. About 2 years ago, the federal agency suggested it should buy out the state shareholding in KamAZ and create a certain unified structure on the basis of the two car industry giants. However, the government delays selling its shares, while KamAZ management headed by Sergei Kogotin is gathering the controlling interest in their hands. However, AvtoVAZ Group’s president Boris Aleshin said several days after assuming office: “I still believe that the merger of AvtoVAZ, KamAZ, and GAZ is an inevitable process.” Yet, Aleshin added right away that “the issue of corporate merger is preliminary yet”.
VSMPO-Avisma: Good Thing, Better Buy it
Apparently, the situation with the world’s largest producer of titanium products, VSMPO-Avisma, is directly the opposite. There is nothing except Rosoboronexport’s private interest covered up by rhetoric in the process of changing VSMPO-Avisma’s owner. VSMPO-Avisma is nearly the only Russian high-tech enterprise which is economically successful and which is the world’s leader in its sector – making titanium products. It is one of the few such producers in the world. Most VSMPO-Avisma’s products are exported, approximately at halves to Boeing and Airbus. By the way, some of their key models, like Boeing 787 (dreamliner), cannot be effectively produced without the supplies of Russian titanium. The enterprise owes its post-Soviet success mainly to its Director General Vladislav Tetyukhin and to Board Chairman Vyacheslav Bresht. They managed to save the production and to establish relations with foreign partners in the period when domestic cooperation in the former USSR collapsed. They also united the two enterprises which existed separately in the Soviet times. First is VSMPO (Verkhnesaldinskoe Metallurgic Production Association, the Sverdlovsk Region). It produces final output. Second is Avisma (of Berezniki town of the Perm Region). It supplies titanium sponge. The tandem’s control over the company was first endangered in 2003, when Renova, controlled by Viktor Vekselberg, began buying up the company’s shares on free market. After two years of counteraction, Tetyukhin and Bresht reached agreement with Vekselberg on ending the conflict and on fixating the status quo: the first two have about 30 percent of shares each, while the third has over 13 percent. At the same time, a ‘Russian roulette’ option was launched. It means each participant can offer to the others to buy out his shares at a certain price. If the other participants refuse to buy, the one who makes the offer acquires the right to buy out their shares at the same price. Vekselberg launched the option in 2006 in hopes that Tetyukhin and Bresht will not find the money to buy out his shareholding. However, they borrowed the sum and bought Renova’s package. Vekselberg disputed the loans’ correctness, unleashing litigation. Here is when Rosoboronexport interfered, saying there is nothing to argue about because it will buy all three packages of shares of the “strategically important defense-industry enterprise”. That is precisely what happened by early 2007. Reportedly, the shareholders behaved differently. Tetyukhin agreed at once and consequently kept his position of director general and 4 percent of shares. Bresht tried resisting, but received a tough explanation that he’d better not do it. Consequently, he seized being the shareholder. Moreover, he received less than the market price for his package. Out of Renova’s package, 2-3 percent went to portfolio investors, and the rest was bought by Rosoboronexport. It now owns 66 percent. There are no economic grounds for nationalizing VSMPO-Avisma. Political reasons are unclear and doubtful. The declared pretext is obviously absurd. On the one hand, there is not an owner capable of depriving Russia of its technologies developed over the years and its competence in the titanium industry while there is stable demand. On the other hand, even with CIS natural gas wars in mind, one should have an over-excessive imagination to think that Russia might someday use titanium supplies to the U.S. and Europe as a political argument. It is also hard to state that Rosoboronexport will make a priceless positive contribution to managing the titanium company. An observer loyal to state regulation might have supposed that Rosoboronexport could secure budget support for expanding the production of titanium sponge, for instance, which is essential for VSMPO-Avisma. Yet, there is no urgent need to draw budget funds here. The company which has export orders until 2030 worth almost $20 billion in total can easily obtain any loans necessary for its technical development.
Special Steel, Composites, Hereafter
Under the same win-win slogan “Everything strategically important – under the state control!”, Rosoboronexport disclosed in 2007 its further plans. First, it wants to create Russian Special Steel Holding, which is to unite Russian producers of special steel and alloys. Alloys are produced by a number of small enterprises independent of major metallurgic companies. Their independence is partially due to the current lack of sufficient demand for alloys, -- neither domestic, nor foreign. However, it must be just temporary. So far, Rosoboronexport managed to gain control over two enterprises: Red October Volgograd Factory and Stupino Metallurgic Production Association. Moreover, the federal agency has officially declared it is interested in Kulebaksky Metal Factory in the Nizhny Novgorod region. Rosoboronexport now formally owns 25.3 percent of Russian Special Steel. Its partners here are Troika Dialog and Red October’s former owners, -- Midland Group offshore of Alex Schneider and Eduard Shifrin. Sergei Chemezov said that after the holding is formed in 2008, Rosoboronexport will own 50 percent, and the rest will be among the former owners of its constituent enterprises. Rosoboronexport needs to take into account two circumstances while estimating the new project’s prospects. On the one hand, the issue of special steel and alloys is becoming important and will remain such for many years more. On the other hand, there are strong competitors. First, it is one of the major metallurgic enterprises Mechel Group, which includes famous Izhstal. Second, it is ESTAR (Electric Steel of Russia) company, created by State Duma deputy Vadim Varshavsky. It includes two special steel enterprises: Zlatoustovsky and Nytvinsky metal factories. Mechel and ESTAR are quite tough competitors, and their positions now look more preferable. However, Rosoboronexport, due to its administrative resource, might eventually become the leader in the sector, either by means of buying most profitable assets from the competitors, or by establishing a certain system of agreements with them. Moreover, Rosoboronexport deserves the credit for having not just the administrative resource, but also a vast experience as trader. As for Russian Composites, Sergei Chemezov said that about ten enterprises will be merged to create it. Rosoboronexport might need luck here: the USSR was behind the developed countries in that sphere, and the last 15 years have not improved the situation. Naturally, it would be wonderful if that lagging behind reduced at least a little. Other projects are at a more advanced stage. For instance, the JV with Inter RAO—Industry and Energy Company, which will supply energy, and TS-aero (Fuel-Filling Airport Service) company, which accumulates fuel in airports. Rosoboronexport’s share is 50 percent in each JV. Besides, it is worth mentioning some subsidiaries of Rosoboronexport’s subsidiary Oboronprom. They are Oboronpromstroi and AutoComponents Industrial Holding. At last, Rosoboronexport also has a blocking package in Motovilikhinskie Factories, the major producer of oil-and-gas equipment and artillery systems. There are rumors the asset will be the first stone in a new holding’s foundation, and the holding will be producing either tank armor or rocket artillery. On the whole, Rosoboronexport’s expansion logic is absolutely unclear for an outsider. Does it exist at all? However, each step looks quite reasonable from the viewpoint of specific short-term interests. Using its administrative resource and covering up by patriotic rhetoric, the agency expands in a growing number of industry sectors. Consequently, it is transforming into something like multi-sector tycoon groups of Russia’s 90s, state industrial holdings in some west-European countries of the mid-20th century, and the Soviet heavy industry ministry of the 30s. Chemezov is now changing the name and the legal status of his empire. In late September, the president is to introduce to the State Duma the law on creating Russian Technologies state corporation. It will be a non-commercial organization which will also include Rosoboronexport itself and the assets it now controls. It is hard to tell yet what this shift of dress will bring. However, the new name and status formally justify the acquisition and the following sale of any assets, maybe except for just the Big Theater. Beside the economic risks accompanying a holding like that, there also are some dragon’s teeth hidden there. In fact, the Russian state is not strong enough yet to create super-powerful structures subject neither to economy legislation, nor to the country’s government.