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RFE/RL Business Watch
Vol. 3, No. 17, 13 May 2003
"RFE/RL Business Watch" is edited by Daniel Kimmage (DK).
Where Business, Economics, Politics, and Foreign Policy Intersect in Russia and the Former Soviet Union
* MONEY IS BACK
* WHERE DOES THE MONEY COME FROM?
* WHO CONTROLS THE CASH FLOW?
* SOVEREIGNS OR PROPRIETORS?
'POWER AND THE MONEY, MONEY AND THE POWER...'
1. MONEY IS BACK
Despite the popular insistence on blurring the distinction between money and power, some states afford their more ambitious citizens a formal choice between striving for one or the other. Not Russia under the Bolsheviks. There, the only recognized lust was for power. The Soviet Union had one general secretary. It had no billionaires.
At least one prominent scholar identifies the preeminence of power as the defining element in Russian history. Richard Pipes opens his seminal work "Russia Under the Old Regime" with the following observation: "Russia belongs par excellence to that category of states which...it has become customary to refer to as 'patrimonial.' In such states political authority is conceived and exercised as an extension of the rights of ownership, the ruler (or rulers) being both sovereigns of the realm and its proprietors."
Russia now has billionaires. Are they the new sovereigns of the realm? Or merely the proprietors of its constituent money-making parts? Do they represent a departure from the patrimonial legacy, its post-Soviet continuation, or perhaps a refutation of the theory itself? What can they and their billions tell us about how Russia is ruled in 2003?
Cruder questions command our attention first. For there to be billionaires, there must be billions. Where does the money come from? And who, or what, controls it?
2. WHERE DOES THE MONEY COME FROM?
Most of the money in Russia comes straight out of the ground. Marshall Goldman writes in "Demokratizatsiya" (Winter 2003): "Russia's blessing -- and its curse -- is that, historically, under the tsars, the Soviets, and now Putin, the mainstay of the economy has been its overreliance on raw materials production and exports.... Today it is petroleum and metallurgy."
A cursory review of Russia's most important cash-generating companies, both state-owned and privatized, neatly illustrates the dominance of petroleum and metallurgy. Banking, telecommunications, and heavy machinery are islands dotting a sea of oil, gas, and molten metal. The following overview, intended to be broadly representative rather than exhaustive, is based roughly on rankings presented in "Dengi"'s 28 August 2002 (No. 33, 2002) lists of Russia's most profitable and largest companies. Unless otherwise noted, factual information is drawn from what the companies themselves have made public or from previous issues of "RFE/RL Business Watch."
(One final caveat: Russian statistics have a poor reputation. Most of the companies listed here, however, are in the process of integrating into global capital markets. They are adopting internationally accepted accounting standards, issuing stocks and bonds, and establishing contacts with potential investors. In the majority of cases, it would appear that an accurate balance sheet is in the company's own best interests. The last year for which full results are available is generally 2001.)
YUKOSSIBNEFT (HTTP://WWW.YUKOS.RU, HTTP://WWW.SIBNEFT.RU)
The new leader of the Russian oil industry emerged from the 22 April merger of Yukos and Sibneft. The tentatively named YukosSibneft commands reserves of 19.4 billion barrels, the largest in the world. At 2.3 million barrels per day, it is the world's fourth-largest oil producer. Worth $35 billion, the new company will bring together two of the country's most impressive balance sheets: Yukos pretax profit in 2001 was $3.6 billion, Sibneft's $1.4 billion; Yukos came away with net profit of $3.59 billion, Sibneft $1.3 billion ("Dengi," No. 033, 2002). YukosSibneft hopes to create synergy by merging two very different corporate styles. Yukos CEO Mikhail Khodorkovskii, who will lead the new company, has of late come to symbolize progressive entrepreneurship and a concern for corporate governance. Sibneft, allegedly controlled by Chukotka Governor Roman Abramovich, is seen as a far murkier company with powerful political ties. The dynamic Khodorkovskii hopes to use the new company's resources, his own status as a rising star abroad, and his partner's Kremlin clout to create Russia's first true global powerhouse.
Led by veteran oilman Vagit Alekperov, LUKoil produces 1.5 million barrels per day and has reserves of 15.5 billion barrels, making it the second-largest oil company in Russia. The company's 2001 pretax profit was $2.8 billion, $2.1 billion after taxes. Management has a reputation for conservatism and internal intrigue, and the company is firmly entrenched as a mainstay of the Russian oil establishment.
CEO Vladimir Bogdanov's preference for remaining in his company's distant headquarters has earned him the sobriquet Hermit of Siberia, a description that fits the company as well. With 6.8 billion barrels of reserves ("Forbes," May 2002), Surgutneftegaz posted a pretax profit of $2.2 billion in 2001, $371 million after taxes. The company has drawn criticism for a stingy dividend policy and a refusal to invest some $4 billion in cash reserves. Management recently consolidated its control over the company amid rumors of a possible hostile takeover bid.
TNK-BP (HTTP://WWW.TNK.RU, HTTP://WWW.BP.COM)
TNK-BP was created in February 2003 when Britain's BP agreed to pay $6.75 billion to create a joint venture on the basis of the Tyumen Oil Company and its own Russian interests. The resultant group has 9.5 billion barrels of petroleum reserves, RFE/RL reported on 14 February, and will be the third-largest oil producer in Russia behind YukosSibneft and LUKoil. Widely hailed as breakthrough in foreign investment, the move can also be read as an attempt by BP to combine Western capital with local know-how in a country where new production capacity is still relatively cheap.
RAO EES (HTTP://WWW.RAO-EES.RU)
The state-run utility is the world's largest electricity-generation and -distribution company. It posted a pretax profit of $2 billion in 2001, net profit of $1.4 billion. A planned five-year restructuring would split off the transmission and distribution grids to create a competitive generating business, although implementation is less than certain. Chairman Anatolii Chubais's leading role in the reform has drawn criticism from observers who point to his involvement in dubious privatization schemes of the 1990s. Recent attempts by industrial concerns to buy up publicly traded shares in RAO EES and its generating assets have sparked fears that interested parties are jockeying for influence over the reform process.
The state-run natural gas monopoly remains a cash cow and a headache. With a pretax profit of $6.9 billion in 2001 and a net profit of $392 million, Gazprom accounts for 8 percent of industrial output and 25 percent of the Russian budget's tax revenues, RIA-Novosti reported on 17 February. Putin ally Aleksei Miller took the helm in May 2001 with the stated aim of putting the house in order after years of rumored asset stripping and fiscal mismanagement. Miller has restored state control over some wayward shares but failed to contain Gazprom's now $15 billion debt. The debt burden hinders the massive new investments needed to develop new production as old fields run dry. Plans to reform the monopoly and create a competitive market have thus far foundered on the social perils of raising artificially low domestic gas prices and Gazprom management's resistance to change.
The state-owned pipeline monopoly recorded a $1 billion pretax profit in 2001. It is currently the only company empowered to build and maintain oil pipelines, making it a mechanism of state control over exports. Privately owned oil companies are champing at the bit to expand the overburdened transport system so that they can export as much oil as possible to take advantage of high prices, however. Recent comments by Energy Minister Igor Yusufov indicate that a more flexible position may be in the works so that future pipeline construction can benefit from private-sector funds.
NORILSK NICKEL (HTTP://WWW.NORNIK.RU)
Norilsk Nickel accounts for more than 20 percent of all the nickel produced worldwide, 10 percent of cobalt, and 3.1 percent of copper. Within Russia, its market shares are 96 percent for nickel, 95 percent for cobalt, and 55 percent for copper. The Norilsk Nickel Group's 2001 financial statement lists a $1.6 billion pretax profit, $1.2 billion after taxes. The company's ongoing $341 million acquisition of U.S.-based Stillwater Mining Company, which still requires the approval of U.S. regulators, represents a rare instance of Russian investment in the U.S. economy.
RUSSIAN ALUMINUM (HTTP://WWW.RUSAL.RU)
RusAl is Russia's largest, and the world's second-largest, producer of primary aluminum. The company reports annual sales of $4 billion for 2001 and 2002, providing no further information. RusAl's recently announced development strategy aims to make it the world's largest aluminum producer by 2012. The company is currently lobbying to maintain external tolling arrangements, which allow it to avoid paying customs duties and value-added taxes, despite recent moves by lawmakers to eliminate the practice.
The state-run savings bank, which controls more than 70 percent of ruble-denominated savings accounts, posted a pretax profit of $1.3 billion in 2001, $940 million after taxes.
MTS (HTTP://WWW.MTS.RU)/VIMPELCOM (HTTP://WWW.BEELINEGSM.RU/VC/)
With nearly 10 million subscribers in Russia, Belarus, and Ukraine, Mobile TeleSystems (MTS) is the largest cellular operator in Eastern Europe. The rapidly expanding company posted a $302 million pretax profit in 2001, $207 million after taxes. With 6.2 million subscribers, Vimpelcom is another dynamic operator. Its 2001 pretax profit was $66 million, and its net profit $47 million. Many observers consider the mobile telecoms one of Russia's best run, fastest moving, and most competitive sectors.
Svyazinvest is the umbrella holding company for Russia's fixed-line local and long-distance operators. The state owns a 75 percent-minus-one-share stake; a consortium of private investors owns a blocking stake of 25 percent plus one share. The company's seven regional operators account for 90 percent of Russia's telephone capacity. Svyazinvest's aggregated net profit for 2001 was $260 million. An additional 25 percent stake may be privatized in 2003.
Russia's largest automaker notched a pretax profit of $623 million in 2001, $473 million after taxes. Used imports have eaten into sales, however, triggering an overproduction crisis in 2002 that saw the carmaker idle conveyor belts for nearly a month, scaling back production from a planned 770,000 cars to 702,000. Despite the introduction of protective tariffs that make used imports less attractive, AvtoVAZ still faces an uphill battle with buyers who find the company's price/quality ratio less than appealing.
Russia's largest heavy-engineering corporation, United Heavy Machinery (OMZ) posted sales of $313 million in 2001, although net profit was only $6 million. The company's recent investments in Atomenergoexport and Zarubezhenergoproekt mark a significant expansion into the field of nuclear-power engineering.
The state-owned arms export firm pulled in $4.2 billion in revenues in 2001, $4.3 billion in 2002, and expects similar revenues in 2003, "The Moscow Times" reported on 14 January.
3. WHO CONTROLS THE CASH FLOW?
As the Russian state mucked about in the 1990s in search of priorities to replace the failed project of world revolution, it hemorrhaged control of just the right assets -- oil companies and the like -- in just the right conditions to propel a small group of ambitious young men from total obscurity to the "Forbes" list of billionaires. One of the vehicles that helped them make the trip in comfort and style is the financial-industrial group, or FIG. We offer the following definition: A FIG is a network for the effective control of a significant money-making asset(s), a reliable mechanism for funneling cash flows where one would like, a safe place to store the money, and a means of defending the asset(s) against hostile takeovers.
Peter Boone and Denis Rodionov, two analysts for Brunswick UBS Warburg, showed just how important the phenomenon had become with a 2002 report that identified eight FIGs that controlled 85 percent of the top 64 privatized companies. Their main finding was that the oligarchic apex of the private sector out-earned the state in 2000. The biggest state-controlled companies -- Gazprom, RAO EES, Sberbank, and Svyazinvest -- posted revenues of $47 billion; the top eight FIGs hauled in $62 billion.
Our abbreviated survey of top FIGs leaves out companies that are largely self-contained structures with ownership concentrated in the hands of management, even if those companies are FIGs in their own right. So, for all their heft, we pass over LUKoil, Surgutneftegaz, AvtoVAZ and OMZ. Similarly, we ignore state-controlled Gazprom, RAO EES, Svyazinvest, Sberbank, and Rusoboronexport, which we included primarily to demonstrate the ongoing, direct involvement of the state in the moneymaking economy.
This leaves an elite club of:
Although his early successes (and setbacks) came in banking, Khodorkovskii brings a convert's zeal to his newfound vocation of oilman. "Forbes" estimated his personal fortune at $8 billion in the magazine's list of the world's billionaires. As the CEO of Yukos and holder of a 36 percent stake in the company, Khodorkovskii's status would seem to gain from the recent merger of Yukos and Sibneft, as it puts him at the helm of a new company in which Yukos's shareholders will together retain a controlling interest. Though Khodorkovskii has mounted a masterful campaign to make himself and his company synonymous with good governance, cynics with inadequate faith in the power of redemption have questions about the first few hundred million. Recent comments about quitting the oil business in the next five years have sparked rumors that Russia's richest man might be considering a future in politics.
Chukotka Governor Roman Abramovich, who started out as an oligarchic cub in the pride of exiled eminence Boris Berezovskii, directs his financial operations through the firm Millhouse Capital. Millhouse Capital controls Sibneft, as well as half of RusAl. The other half of the metals giant belongs to Oleg Deripaska, whose own Basic Element finance company is making a bitterly disputed bid for control of choice assets in Russia's paper and pulp industry. Deripaska also owns the GAZ auto factory. Abramovich is seen as part of the Yeltsin-affiliated financial and political group that was dubbed "The Family" (in which regard one notes the following symmetrical synergy: Deripaska's wife is the daughter of former Yeltsin chief of staff Valentin Yumashev, whose own wife is Yeltsin's daughter Tatyana Dyachenko). A 6 December 2002 editorial in "The Russia Journal" noted that Abramovich's and Deripaska's "dubious reputations, though well-known in Russia, never seem to make it onto the page of a U.S. newspaper."
Alfa Group's main assets are the Tyumen Oil Company (TNK), cellular operator Vimpelcom, the Perekriostok chain of stores, and Alfa-Bank, Russia's largest private bank in terms of assets ("Kommersant-Dengi," No. 14). Alfa-Group shares ownership of TNK with Renova, which controls the Siberian-Ural Aluminum Company (SUAL), Russia's second-largest producer of primary aluminum. Key figures include Alfa-Group CEO Mikhail Fridman, Alfa-Bank President Petr Aven, and major TNK shareholder and SUAL head Viktor Vekselberg. Vekselberg is the common link in recent deals that pair Alfa-Group/Renova with heavyweight international partners. Britain's BP will pay $6.75 billion for half of TNK, and Britain's Fleming Family & Partners is teaming up with SUAL in a deal that could, according to Vekselberg, give FF&P up to a 23 percent stake in the new company.
Vladimir Potanin's Interros holding company controls Norilsk Nickel, the Power Machines machine-building consortium, top-10 commercial bank Rosbank, and the Prof-Media publishing house, which includes newspapers, magazines, and radio stations.
The aptly named Sistema, Russian for "system," grew out of the Moscow city government to become an arguably independent structure. The holding company's chief assets lie in telecommunications -- it is the largest shareholder in Mobile TeleSystems and the majority shareholder in Moscow City Telephone Network (NGTS). Sistema also has extensive interests in various other sectors of the Moscow economy, from real estate to commerce to gasoline. Its director is Vladimir Yevtushenkov. Sistema successfully placed a five-year, $350 million bond offering on 4 April, a first for a Russian holding company since the 1998 financial crisis.
MDM GROUP (HTTP://WWW.MDMGROUP.RU)
Created in 2000, MDM Group belongs in equal parts to Andrei Melnichenko and Sergei Popov. It boasted total income of $3 billion in 2002 ("Profil," No. 11, 2003). The group's chief assets are its controlling stake in coal producer Siberian Coal Energy Company (SUEK), full ownership of the Evrokhim chemical company, and a blocking stake in the Pipe Metallurgical Company. MDM Group controls roughly 70 percent of Russia's coal production. Melnichenko and Popov have recently bought up enough shares in state-controlled electricity monopoly RAO EES to stand as candidates for the board. MDM Group has a clear interest in the future of RAO EES, a major coal consumer.
4. SOVEREIGNS OR PROPRIETORS?
Though schematic and abbreviated, the information presented here covers a surprisingly large part of the Russian economy. And it drives home a key feature of the system that took shape in Russia in the 1990s: the concentration of moneymaking assets in the hands of a relatively small number of financial-industrial groups. The phenomenon attracts the attention of optimists and pessimists alike.
In a 23 August 2002 op-ed in "The Moscow Times," Peter Boone and Denis Rodionov, whose research has underscored the tremendous importance of FIGs, took cheer in their findings. Despite the danger of "abuse by politically connected groups," Boone and Rodionov give three reasons the FIG-inflected future looks bright: 1. "These groups have an interest in promoting global economic integration"; 2. "We expect a gradual dissolution of these partnerships as the owners age and individual partners' interests diverge"; and 3. "Now is the time for Russia's small and medium-sized businesses to take off."
Political scientist Lilia Shevtsova drew a gloomier picture in a November 2002 briefing for the Moscow Carnegie Center. Noting that "oligarchic capitalism" serves as the foundation of the "system" that emerged in Russia in the 1990s, Shevtsova remarks on Roman Abramovich's (Sibneft) and Aleksandr Khloponin's (Norilsk Nickel) forays into the political realm: "The example of the oligarchs Abramovich and Khloponin in the role of governors indicates that a part of big business is ready to exercise independently -- without intermediaries -- the functions of authority. However, as the history of similar bureaucratic-authoritarian regimes in Latin America shows, the alliance between the [bureaucratic] apparatus and the oligarchy is never stable."
The two scenarios fall on opposite sides of the sovereign-proprietor divide. Boone and Rodionov's optimistic predictions of gradually dissolving FIGs and ascendant small businesses require the emergence of genuine proprietors who are confident that the only overarching sovereign is the uniform law that guarantees their rights. The alliance Shevtsova describes is unstable because of the clashes that arise between numerous would-be sovereigns in the absence of an impartial higher authority to moderate their squabbles.
We began with a question about the significance of billionaires and financial-industrial groups for a country where, to return to Richard Pipes, "political authority is conceived and exercised as an extension of the rights of ownership."
Do Russia's billionaires and financial-industrial groups act to strengthen or weaken the patrimonial tradition? No easy answer presents itself. For now, the evidence only confirms the centrality of the question. DK