Graham Stack, for Radio Free Europe / Radio Liberty
Defence sector restructuring into sector-based holding companies was on the cards right from the start of Vladimir Putin’s presidency. What is striking is that the plan to establish holding companies largely failed to get off the ground during Putin’s first term. Apart from the establishment of the Almaz-Antei tactical missile and Sukhoi aviation holdings, the 2002 project to set up 74 state-controlled concerns and holdings remained entirely on paper due to bureaucratic infighting, conflicting visions, and above all widespread resistance from enterprises. Then even the Almaz-Antei merger plan hit an iceberg when new Kremlin-appointed manager Igor Klimov died in a hail of bullets in Moscow.
Put simply, the reasons for consolidating individual plants into sectoral holdings were also the reasons why there was so much resistance against this happening: the managements of the defence plants, both state-owned and private, feared losing control of ‘their’ companies and the connected financial flows. However, without consolidation, and separation of ownership from management, these enterprises would remain unable to attract the financial resources they desperately needed to develop.
Wholesale renationalisation was still firmly off the agenda during Putin’s first term. Restructuring plans were mostly connected with further privatization – but there was no political will for this.
The stalemate ended abruptly in 2004. Putin’s radical reshaping of government on dismissing the Kasyanov government one week before reelection saw a Federal Agency for Industry emerge with a remit for the entire defence sector, headed by Boris Alyoshin, an ardent proponent of the holding policy with an aviation industry background. The newly-created Federal State Property Agency was run by a contingent of Petersburgers committed to transforming federal state unitary enterprises into joint stock companies.
Moreover, in the course of 2004, federal power was considerably strengthened at the expense of business interests by the Yukos case, and at the expense of regional interests by the post-Beslan transition to appointed governors. In addition, the surge in oil prices, and the start of Putin’s second and final term in office shifted economic policy away from long-term institution building to state-accelerated economic diversification aiming at short-medium term results.
Rosoboronexport: More than just an arms exporter
Most importantly, in mid-2004 Sergei Chemezov took over as head of state arms export intermediary Rosoboronexport (ROE). He had long recognized that the company’s control over arms exports gave it enormous leverage over the defence sector, that could be used to achieve restructuring ‘by the back door’.
Two competing arms export organisations had been merged into ROE right in 2000, immediately following Putin becoming president. By 2004, ROE had a monopoly of export sales, except for four companies with their own export licences – including the aerospace legend MIG. In 2005, ROE sold $5.2 billion worth of arms, about 85% of all arms sales. However, Chemezov set about lobbying for a complete monopoly on arms exports for ROE, which was granted in 2006.
Since the Soviet collapse, arms exports had been the lifeline of the Russian defence industry, the only internationally competitive sector outside minerals and mining. Russian state arms procurement died during the nineties, and only slowly revived under Putin.
Because ROE assigned export orders to defence sector plants, it enjoyed potential leverage over the sector. Adding to this leverage was the Soviet system of internal competition in the defence industry, whereby a number of plants had duplicated production to stimulate competition. This means that ROE often has a real choice between plants when assigning export orders.
In addition, surging defence procurement later in Putin’s second term now provides the state with further means of persuasion for recalcitrant companies. Chemezov has clearly been able to influence defence ministry order assignment to facilitate renationalisation of companies.
Apart from these political levers, ROE takes 5-15% commission on arms sales, which rose from 5.5bn in 2005 to $7bn in 2007, meaning the company has considerable cash flow.
On the other hand, the company is formally merely a federal unitary state-owned company, and as such subject to a large amount of bureaucratic supervision and regulation: answering directly to the Federal Agency for State Property, the Federal Agency for Industry, the Ministry of Economic Development and Trade, the Ministry of Energy and Industry, the Ministry of Defence, and the Military-Industrial Commission.
The Chemezov Code: Back to the future
This is where the person of 56 year old Sergei Chemezov plays such a crucial role. Chemezov is an official Friend of Putin, and has a direct line to the Kremlin. It is this personal relationship, in the final analysis, that allowed ROE to act as an unofficial ‘Ministry of Deprivatisation’ independent of the government.
Putin and Chemezov’s acquaintanceship goes back to the time as KGB agents they lived in the same apartment block in Dresden in the 1980s. When Putin moved to work in the Kremlin administration in 1996, Chemezov moved to work under him, and has worked for him ever since.
Chemezov was involved in industrial espionage against the West, and his interest in industry, and catching up with the West in terms of technology, permeates his activities today: Chemezov is an ardent proponent of developing high tech production to diversify the economy away from its reliance on commodity exports.
“Our mineral deposits,” said Chemezov, in an interview with news magazine Itogi, “are finite. There are few remaining undiscovered gas and oil deposits in Russia. And they are non-renewable. But high tech, including for military use, can be refined without end, and its price is stable and predictable, whereas oil has fluctuated from $8 to $60 a barrel in the last ten years.”
“A state of the art fighter jet costing around 50 million dollars: This is the price of two and half tonnes of gold. Russia produces 166-180 tonnes of gold per year, enough for 65 fighters. Our Irkutsk plant alone will turn out 32 Su-30s in 2007– i.e. worth half of the gold mined in the country in the course of the year!”
“Everyone knows that we have to get away from our country’s dependency on commodity exports. We have to diversify our industrial production. Reforming Russian industry is simply a question of national security.”
Chemezov thus shares with many liberals the view that Russia has to diversify its economy, increase added value, and become globally competitive. However, the means he proposes to use are very different, and potentially mutually exclusive. Instead of long-term institutional reforms, he favours a state-led restructuring and repositioning of the technologically advanced defence sector as being the key – a restructuring based on renationalisation of much of the sector.
Chemezov sees the defence sector as crucial in this respect because of its potential for economic diversification and high tech. Chemezov’s goal is globally competitive Russian high-tech production – both military and commercial, He is not a militarist intent on turning Russia into a military superpower again.
Chemezov does not seem to regard the West as an enemy, but he views Western companies as competitors on global markets, enjoying strong backing from their respective states, which Russian companies should thus also enjoy.
Indeed, Chemezov sees Western markets as a huge untapped potential market for Russian commercial high tech, and the West as a crucial source of both investment and technology. ‘Diversification’ thus also involves diversification from military use into commercial use technology to access western markets closed to Russian arms.
Cutting the Gordian Knot
Chemezov’s political trademark has been to cut the Gordian knot in defence sector restructuring by renationalizing.
Whereas in Putin’s first term, talk of restructuring the defence sector envisaged ongoing privatization, Chemezov has done the opposite: buying back assets privatized in the 1990s from private owners or the stock market. This is partly due to desire to reassert state control over the sector, but also because it is simply the path of least resistance for restructuring the sector.
Inefficient and unstable insider ownership by management, often via complex cross-ownership of companies by their subsidiaries, was clearly throttling the development of the sector.
In many cases, management control of enterprises depended on the state as a minority shareholder playing a passive role.
However, when political will appeared, it was easy for the state to unseat management, simply by increasing the retained minority stake to a controlling one by ‘market methods’: by acquiring free-float shares; buying out private investors and management-owners or implementing asset swaps for ROE assets, especially with regional government stakes.
This is what ROE and its subsidiaries have set about doing, with the cooperation of further state instances, such as the Federal Agency of State Property.
Many of the plants ROE has taken control over had low market capitalization, so relatively small cash payments have been needed, especially where the state retained a share packet. For instance, to reassert state control over the famous Moscow Milya Helicopter Plant, all it took was to acquire the 20% stake held by Interregional Investment Bank for a mere $20m. The Tatarstan regional government was persuaded to simply swap its 30% stake in Kazan Helicopter Plant for 15% in ROE subsidiary Oboronprom.
ROE has acted with a minimum of publicity to avoid driving up prices of assets it wants. Secrecy has been a hallmark of its activities, in keeping with the KGB background of many of its managers, with the ‘unofficial’ nature of ROE’s restructuring activities. This means that the details of many details have remained unknown.
Vertical take-off for renationalisation
Only three weeks after Putin’s reelection in March 2004, Boris Alyoshin, as new head of the new Federal Agency for Industry, submitted a project for ROE subsidiary Oboronprom to unite all companies developing and building Mil-class helicopters in a special holding. This remit then broadened into creating a holding for all Russia’s producers of helicopters.
Oboronprom is the vehicle used by ROE to piece together its helicopter, and aviation engine, holdings, originally 51% state owned, 49% state owned. Its youthful former manager, 38 year old Denis Manturov, promoted in 2007 to deputy minister for industry and energy, enjoys Chemezov’s full trust, and is rumoured to be a former intelligence service colleague, who however had been working in the helicopter sector for almost ten years.
At the start of the process, the state had retained at the most blocking stakes in Russia’s main helicopter producers. The main producer of attack helicopters, Rostock helicopter plant (Rosvertol), was completely private, controlled by its management, and the legendary Kamov holding was owned by financial-industrial group AFK Sistema.
This is where ROE came into play, with the task of creating a holding ‘outsourced’ to the arms trader. In the predominantly state-owned plane-building and ship-building sectors, consolidation into holdings was official government policy. Helicopter sector consolidation, on the other hand, was ‘unofficial’ policy since it comprised large-scale renationalisation.
It was also a test case for renationalisation “by market methods”.
2004-2007 Oboronprom worked hard at gathering the helicopter industry under one roof. It acquired 31% of the Milya Moscow Helicopter Plant, 29.9% of the Kazan Helicopter Plant, 63% of Ulan-Ude Aviation Plant, 60% of the Stupino Machine Production Plant and 50.5% of Vpered Moscow Machine-Building Plant, and bought first a blocking, then a controlling consolidate a controlling stake in Rostvertol. It purchased from AFK Sistema 100% of the shares of Kamov-Holding, including the Kamov Design Bureau and the Kumertau Aircraft Building Plant and Arsenev Plant.
Integrating the major Kamaz Helicopter Plant (KVZ) proved to be the greatest political challenge, due to resistance from management owners backed by Tatarstan’s government. Only after President Shaimiev’s reappointment by Putin, wielding his new powers, in 2005, did Tatarstan cede its 29.92% stake to Oboronprom in return for a 15.7% stake in Oboronprom. It was not until 2007 that Oboronprom finally bought out the management stake, resulting in the abrupt departure of KVZ’s director of 17 years standing, its chief owner, and opponent of Oboronprom, Aleksandr Lavrant’ev.
The icing on the cake was an August 2007 presidential decree transferring the state’s stake in Bashkiria’s Kumertau plant and in the ‘Progress’ plant that produces the ‘Black Shark’ attack helicopters to Obronprom.
The operation was accomplished without any public scandals breaking out or overt pressure applied, and to the general satisfaction of stock market analysts. Oboronprom could thus call itself a model of how to create a state-run holding from out of privately-owned defence enterprises.
Oboronprom’s helicopter assets are now being integrated into a single company called “Russian Helicopters.” A new phase of integration was launched at the start of February, 2008: the management of Russian Helicopters took over running the Moscow Milya Plant, with the same to happen for all other companies in the holding in the course of the year. The goal, by 2010, is a single share, international accounting standards, and an IPO, leaving the state with just over 50%, and bringing in foreign investors.
On the same day in August 2007 that Putin signed a decree transferring the remaining state assets in the sector to Oboronprom, he inked a decree calling for four state-controlled holdings for producers of aviation engines.
This decree specifically tasked Oboronprom with setting up the largest of the holdings. The three other holdings comprises state-owned companies, but Oboronprom’s holding was to integrate the Saturn plant in Rybinsk, Ufa’s UMPO and Perm Motors – all of which are privately-owned companies.
Analysts regard Saturn as an exemplary thriving management-owned company, with large investments in R&D and retooling making it the technologically most advanced company in the sector. Saturn, in partnership with Snecma, a member of France’s Saffran aerospace group, developed the SaM-146 engine to be used for the much-hyped Sukhoi Superjet 100.
However, despite these services, first deputy chairman of the Military Industrial Commission Vladislav Putilin stated unambiguously, commenting the presidential decree: “Oboronprom must take control of companies where there is currently no state control.”
Titanium tempation
ROE has also taken control of plants in the metallurgy and mining sector it believes to be of strategic importance for the defence sector.
In late 2006, ROE subsidiary OboronImpex acquired 66% of Russian titanium producer VSMPO Avisma, which as supplier of 65% of Airbus titanium needs and 30% of Boeing’s has strategic significance for the global aviation industry.
VSMPO- Avisma, the result of a merger in 2005, had a rocky history in terms of ownership, with an ongoing dispute between Renova and Renaissance Capital over a 13.4% share packet. Soviet era management held a controlling stake, with 73 -year old general director Vladislav Tetyukhin and chairman Vyacheslav Bresht each with 30%.
In an interview with Vedomosti in February 2008, OboronImpeks director, the 40 year old Mikhail Shelkov said “ROE entered VSMPO Avisma and (car producer) AvtoVAZ for the same reason. Both companies are strategically important for the economy, and both had problematic ownership structures. At VSMPO there was a conflict between Tetyukhin, Bresht and Vekselburg, and the company was suffering.”
Chemezov has also argued that VSMPO-Avisma’s dependency on Boeing and Airbus meant there was a great risk of the company being acquired by foreign aviation concerns, to the disadvantage of Russian plane producers.
The real reason may have been to increase Russia’s leverage over Boeing and over Airbus producers EADS in order to deepen collaboration and technology sharing. Ultralight titanium components are crucial to the new generation of airliners, such as Boeing’s Dreamliner and EADS’s next generation Airbus – and global titanium supply is stretched. Both companies depend on Russia for supplies – and Russia depends on them for technologies and partnership.
The ROE takeover has thus strengthened the titanium producer’s partnership with Boeing. In August 2007, VSMPO Avisma formalised a joint venture with Boeing, Ural Boeing Manufacture (UBM), to manufacture components for the Dreamliner. Pressed titanium components made by a new UBM plant in the Urals, with startup slated for late 2008, will then be finished at a Boeing factory in Portland, Oregon. UBM will also supply titanium components to Airbus.
Oboronimpeks management claims the new owners have brought order to the plant implementing SAP for most business processes. A $1bn investment programme is intended to diversify production by 2012 and increase its added-value, ending production of titanium sponge in favour of higher-grade titanium ingots and also milled products. Market capitalization has grown following the company’s renationalisation.
In autumn 2007, the ROE acquisition conveyor belt started moving again – into mining. Citing a shortage of carnalite used in titanium production, ROE’s subsidiary OboronImpex acquired Kama Mining Company on parity basis with Silvinit. The JV plans to acquire a licence to develop the Polovodosk potassium and magnesium salt deposit, and to built a $1.5bn plant to supply VSMPO-Avisma on an exclusive basis with 500,000 tonnes of carnalite annually. It was also reported at the end of 2007 that ROE had engaged British-owned mining concern Aricom, a subsidiary of Peter Hambro Mining as advisers to help them develop mining assets.
The move into mining is indicative of the way ROE’s core business of weapons exports seems to effortlessly pan out like spilt beer across a table – from defence export, to producers, to metallurgy, to mining. There was thus little surprise when in early 2008, it was reported that ROE was laying claim to a 49% Russian state stake in Mongolian company Erdenet, Asia’s fifth largest copper producer.
ROE has not just staked a claim on exotic ultra-light materials like titanium. ROE started targeting ‘special steels’, i.e. high grade steels suitable for use in armour and other defence applications, in 2007. The vehicle for this is a specially created holding RusSpetStal holding, 100% owned by ROE. Its first acquisition was 100% of the Krasnyi Oktyabr metallurgical plant in Volgograd early in the year, and a couple of more minor purchases followed
Even Chemezov sometimes loses track of all he is after. Speaking at the Paris Airshow at Le Bourget in June 2007, Chemezov said RussSpetsStal had approached the Kulebaki metallurgical plant, the Volgograd machine-building plant, and Stupino Elektrostal plant. But this, Chemezov said, was by no means an exhaustive list. “In fact, I cannot even remember them all,” he admitted.
Saving private AvtoVAZ
Most controversially, ROE took control over giant car producer AvtoVAZ, based in Tolyatti in Samara region, in 2005, and analysts rubbed their eyes in disbelief at seeing the state arms exporter intervene in domestic car production.
A new ROE management team quickly took over running AvtoVAZ, replacing 65 year old Vladimir Kadannikov who resigned, apparently after a meeting with feared Kremlin deputy chief of staff Igor Sechin. The new management came backed by battalions of police dispatched from Moscow to eradicate of organised crime from the plant.
The car giant AvtoVAZ, valued at $2.270bn, with a workforce of 165,000 producing about half of Russia’s needs in passenger vehicles, was adrift in dire straits, with rapidly receding market share, as imports flooded into Russia.
The AvtoVAZ plant, ever since late Soviet days, has been a feeding trough for organized crime, with a death toll nearing 100. The new AvtoVAZ’s first task, apparently successful, was to put an end this. Chemezov claimed that in one year the new management was able to cut costs by almost a third and increase profit by 40% year on year simply by ending crime and theft.
Furthermore, a cross-ownership share structure crippled management incentives: Kadannikov controlled the plant without owning it. This structure also made it easy, given political backing direct from the Kremlin, for a new management team to come in and take over, with the aim of “unlocking” cross-ownership and attracting external investors.
Two years later, cross-ownership is on its way out, and will be wound up by June 2008, facilitated by the technical expertise of investment bank Troika Dialog, ROE’s partners of choice. Share price has spiralled, but not profits or sales.
In the course of 2007, a number of personnel changes cemented ROE’s role in AvtoVAZ’s future. Most notably, Putin appointed the new AvtoVAZ CEO Vladimir Artyakov, a close associate of Chemezov, governor of the wealthy Samara region. Boris Alyoshin, head of the Federal Agency for Industry, then took over as general director of AvtoVAZ.
2008 will see AvtoVAZ’s reanimation move onto a new level. In December 2007, AvtoVAZ and Renault signed a memorandum of understanding declaring the intention to “to renew the lineup, exchange technologies and promote the Lada brand.” Renault is likely to pay over $1.3 billion for a blocking stake in AvtoVAZ.
In February 2008, it was declared that Carlos Ghosn, CEO of Renault would join AvtoVAZ as chief operating officer, with members of his Renault team becoming CFO, managerial accounting director, product planning director and chief engineer: the same team that turned around Nissan’s operations effectively.
Raiders of the lost rotorcraft
Vladimir Putin signed off November 26th 2007, on a bill setting up a state corporation Russian Technologies, to be headed by Chemezov, Two days later Putin signed a bill transferring ROE and all its assets to the new corporation, and ordering the government to draw up a list of further state assets to be transferred.
One week later, hitherto unknown businessman Oleg Shvartsman gave an interview Kommersant business daily that detailed his role in a dirty tricks campaign that was an integral part of renationalisation “by market methods’.
Shvartsman described the renationalisation crusade as a state-sponsored ‘velvet revolution’ aiming in particular at defence-related enterprises. In language reminiscent of Chemezov’s, he called this “a state task to develop the innovation sector, to transform Russia from a raw materials producer into a progressive innovation power”. He also claimed to have been acting under direct orders from the Kremlin hawks known as ‘siloviki’, to which Chemezov belongs.
Much of the credibility of what Shvartsman said comes its strong fit with observable trends:
“Generally we use voluntary-compulsory instruments to lower market capitalisation, by blocking growth, and using all sorts of administrative methods,” Shvartsman explained in the interview. “But, as a rule, people understand where we are coming from. In fact, usually we are talking about conflicts that are already smouldering somewhere, already the centre of attention for existing companies. They only need to come to an arrangement with our older colleagues and reach some sort of agreement. As a rule, it is the lower rung of the market value. But we’re not talking about another YUKOS case – the people do get reasonable money.”
The impact of the Shvartsman interview was due to its plausibility, as many commentators observed. The ROE deprivatisation campaign features use of ‘administrative resource’ , i.e. law enforcement and tax organs, and courts, to exert pressure on recalcitrant owners – and these are only the rare cases that come to light.
In August 2007, long before the Shvartsman scandal broke, Konstantin Makienko of Moscow’s Centre of Analysis of Strategies and Technologies (CAST) wrote baldly that “basically the story of the nationalisation of VSMPO Avisma and plane producer Irkut and of the helicopter producers shows that if the state takes a fundamental decision to restore control over specific assets, this will happen, sooner or later. Private owners display two reactions to nationalisation. The first is the “Tetyukhin reaction”, the second the “Bresht” reaction (the two former majority shareholders of VSMPO Avisma). The first reaction offers to cooperate with the nationalisation plans, as a result of which the owner retains a management position, a small share packet and financial compensation. (…) The second reaction leads to the private owner or his close relatives finding himself in trouble with the law enforcement organs, and ultimately his share packet reverting to the state and him being forced out of the business without adequate compensation.”
An obvious instance of such pressure while buyout negotiations were under way in 2006, was, for example, that tax inspectors suddenly filed back tax claims against the company. A judge handling the case expressed perplexity at how Avisma might be credited with R10.6m of tax overpayment on March 13, 2006, and then, out of the blue, significant tax arrears all of two weeks later.
However, analysts agree that in the case of helicopters producers, ROE did not employ much coercive pressure, since it already had strong levers of influence through control of export orders and state procurement. According to analysts, not only foreign export orders, but also state procurement orders stopped going to companies with less than 50% state ownership.
Yury Lastochkin, owner-manager of the Saturn aviation engine producer, is publicly resisting renationalization, as demanded by the August 2007 presidential decree on setting up state-owned holdings for engine plants.
As a counter move, Lastochkin is pursuing a voluntary merger with Ufa’s UMPO, while stalling on talks with Oboronprom. He argues that this fulfils the spirit, if not the letter, of Putin’s decree. When, however, Kommersant asked Denis Manturov if he agreed with this interpretation, Manturov called Lastochkin’s position ‘destructive’ and said threateningly, ‘I advise Mr Lastochkin to read what is set down black on white in the presidential decree about who is to do what and when.” He stated Oboronprom would ultimately require 100% control over Saturn, although the state’s current stake is 37%, with management holding 57%.
The conflict escalated in late December 2007 with Saturn’s purchase of 20% of UMPO, and start of buyout talks. Lastochkin told Vedomosti that state ownership was irrelevant. “The state already has all the levers of influence it needs. The main thing is the efficiency of the consolidated companies being created.”
In the same interview, Lastochkin discussed the fact that the Yaroslav regional section of pro-Putin party Edinaya Rossiya ‘only’ took 53% of the vote in the December 2 Duma elections, 11% less than the national average. This caused Yaroslav governor Anatoly Lisitsyn, a Lastochkin ally, to resign days later. Lastochkin is himself a member of the regional party council, demonstrating how entwined the “Putin party”, the economy and the state are becoming.
Saturn is Russia’s largest and most technologically advanced aviation engine maker, with a workforce of 40,000. Lastochkin said stingingly that “to hand over assets we have been developing and structuring for over 10 years to complete nobodies is beyond a laughing matter.”
Asked by the interviewer if he did not fear law enforcement or other state agencies would attack the company’s market capitalisation a la schvartsman, Lastochkin hoped the state would be clever enough to avoid such “experiments” that could disrupt the finely-tuned process of designing and producing advanced technology.
An second major headache for Oboronprom in setting up the engine-producer holding is the case of Motor Sich, the Ukrainian plant that supplies 80% of Russia’s helicopter engines, and 80% of Motor Sich production is exported to Russia. Oboronprom has held acquisition talks with Motor Sich, but they were broken off without results in August 2007.
Referring to Ukraine’s Nato membership bid, on February 5, 2008, Industry and Energy Minister Viktor Khristenko called for future substitution of Motor Sich imports by Russian-produced equivalents. 80% of Motor Sich components come from Russia.
Many analysts agree that the immediate motive here was to attack Motor Sich’s capitalisation and facilitate a Russian buy out: duplication of production would costg $300m-400m and take 5 years.
Immediately following the announcement, Motor Sich shares lost 14% of their value. One week later, Denis Manturov, former Oboronprom CEO, now deputy minister of energy and industry, again proposed that Motor Sich join the future Russian state holding.
Russian Technologies: L’etat, c’est moi
In June 2007, Sergei Chemezov first publicly spoke of fitting ROE a new legal status, “disposing of the full legal rights of an integrated economic subject, plus the rights of state procurement for certain types of military exports. Something between a unitary enterprise and a joint stock company.” He referred surprisingly in this context to the ARKO agency set up in 1999 to restructure banks following the 1998 financial crisis. Specifically for this purpose, a peculiar legal form called “state corporation” was created in 1999 as a non-commercial organisation, and had since fallen into disuse.
Putin, in his state of the nation address in April 2007, mentioned setting up a state corporation for the nuclear sector. However, it was assumed this meant a state-owned joint stock company analogous to the United Aircraft-builders Corporation or United Ship-builders Corporation created 2006.
It turned out that ‘state corporation’ meant precisely ‘state corporation’ as legislated for in the obscure 1999 amendment to the 1996 “Act on Non-commercial Organizations”, and mentioned nowhere in the Civil Code.
‘State Corporation’ (SC) went on to become the hit of the year, with SCs being founded for nanotechnology, Winter Olympics, housing reform, road building, the entire nuclear sector, both military and civilian – and for Russian Technologies (RT), aka Rosoboronexport: with its purpose defined as assisting the development, production and export of high-tech industrial production by supporting Russian organizations on domestic and foreign markets, and attracting investment to different industrial sectors, including the defence sector.
Nowhere in the special law on setting up RT is there any definition of what constitutes high-tech production. In this way, RT has carte blanche to intervene in any sector of the economy.
RT will also perform state functions “in the implementation of the state’s export and import policy and state policy concerning military-technological cooperation with foreign states. The list of functions can be extended by other acts or presidential decisions.”
In fact, the whole ‘state corporation’ concept is riddled with anomalies that create huge accountability and corruption issues:
Bizarrely, a “state corporation”, as laid down in the law, is neither state-owned nor a corporation: it is a non-commercial organization established by the state for a specific purpose – social or “managerial”. It is, however, not owned by the state. Property transferred to the SC belongs forthwith to the SC, and the state has no further claims to it.
An SC is strictly speaking not for profit, but there is a lot of leeway allowed; any profit it makes must be reinvested towards the purpose for which it was created, which however is vaguely defined. Similarly, an SC can act entrepreneurially if this serves the goals for which it was established.
In contrast to federal unitary enterprises such as ROE, SCs have the right to borrow domestically and internationally, to issue bonds and give guarantees. A SC can also establish joint ventures and other partnerships with the private sector.
On February 20, 2008, the Russian Federation Council published a devastating critique of SCs as part of its annual review of federal legislation. Among the points listed were: There is no restriction placed on the purpose and function of SCs; property and funds transferred to the SC become its property and the state has no further rights or claims on them; each corporation is regulated by a separate law, meaning they exist outside any unified legal framework, in a legal grey zone.
Most significantly, according to the Federation Council report: the law contains virtually no control over the activities of SCs. There are no evaluation criteria for SC goal fulfilment; no procedures for medium or long term planning; no sanctions for non-fulfilment of goals.
Astonishingly, considering the ROE story has been all about bring the defence sector back under state control, SCs are explicitly freed from all government oversight and intervention, excepting the power of the president to appoint management and supervisory board.
As stated above, SC assets do even not belong to the state, which makes a mockery of the ROE mantra of ‘bring defence assets back under state control’. In order to transfer ROE to Russian Technologies, it will be de jure privatised. In preparation for this, the state arms export monopolist was removed from the list of strategic state-owned companies in late 2007.
The Federal Council report concludes that SCs create “the perfect chance to transfer state property to the non-state sector with no financial benefit for the state and at the risk of uncontrolled use and alienation of assets.”
Less diplomatically, Kommersant wrote in December 2007, referring to the fact that SCs are formally non-profit organizations, that 2007 had seen “a $20bn donation to charity by the Russian state, the largest ever in human history.”
In fact, the complete lack of government oversight apart from presidential appointment, combined with far-reaching rights of disposal over assets, means that Chemezov’s claim to have restored state control over strategic assets only holds water if he claims ‘l’etat c’est moi’. Given the personalisation of power and property that has taken place under Putin, this claim would not be far from the truth.
There has been no government explanation for such wide use of the SC legal form in the last few months of Putin’s presidency. Chemezov has adduced a couple of reasons: that taking ROE outside the state allows him to pay managers a market-level salary, and that it reduces risk of US sanctions applied to ROE affecting ROE subsidiaries, which will probably now be transferred to direct ownership by RT.
These reasons hardly justify the sweeping and unsupervised disposal of property, and coercive power over whole swathes of the economy, that Chemezov will now enjoy.
However, it could be much worse. Even Chemezov has not seen all his wishes come true. He originally lobbied for ROE to implement the state arms procurement programme, which would have given him control of around $20bn revenues per year, turning RT into a Gazprom of the defence sector, but with even less accountability. This proposal was excluded from the RT bill. However, it is still open for the future – along with the option of transfer to RT of the state’s controlling stakes in the United Aircraft-builders Corporation and the United Ship-building Corporation.
Chemezov has until now worked mostly to nationalise private business, but the establishment of RT indicates he is increasingly set on privatising the business of state. The extent he achieves this under a Medvedev presidency will be a test of whether the incoming president’s public commitment to liberalism holds any water, and whether he can break with his predecessor.
