Engineering Industry 2000-2004
Engineering remains one of Russia's key industrial sectors. It unites more than 2000 large and medium companies (including metalworking) employing nearly 4 million people, or 36% of all industrial workers. In 2003, engineering was the leader in industrial production growth rates – 9.4% vs. an average of 7% for companies in other sectors. Railway engineering and instrument making recorded the fastest growth rates (more than 30%). A slight positive trend was observed in the electronics industry, car manufacturing, and metallurgical engineering. Output decreased in the machine-tool sector and at companies producing agricultural machinery and chemical and oil and gas equipment. Nevertheless, engineering still accounts for 19.5% of all industrial output, just slightly behind the fuel industry (19.6%). In amount of fixed assets (914 billion rubles), engineering and metalworking rank third behind the power and fuel industries. Total investments in the industry in 2003 amounted to 46.3 billion rubles, behind only the fuel, power, and food industries.
History: 2000-2004
You could literally count the number of notable events in the engineering industry in the past four years on the fingers of one hand. Nevertheless, redistribution of property in the industry was almost completed in that time. Assets have been distributed among large owners who are now trying to put them in order.
Agriculture
Control of the industry's largest enterprises, Rostov-based Rostselmash and Krasnoyarsk Combine Factory (Krasnoyarsky kombainovy zavod), went to their present owners, the Novoe Sodruzhestvo and Sibmash Holding financial and industrial groups, after the presidential elections in 2000. Since then, both structures have consolidated their positions at the factories, and you could call their history successful – stabilization and even growth of sales volumes, modernization of production, and the appearance of new models. Of course, the owners have chosen radically different development strategies for their assets.
Novoe Sodruzhestvo limited its engineering assets to Rostselmash and never laid claim to other companies in the sector. On the other hand, in 2003, the plant was restructured and nearly 20 companies based around various nonspecialized facilities were separated from it. All that remained of the head company – OAO Rostselmash – were divisions involved in assembling and painting finished equipment, as well as the production of basic units and components. Last December, Rostselmash (following an additional share issue, Novoe Sodruzhestvo controls 84% of its shares) announced the formation of a subsidiary, OOO Rostselmash Combine Factory (Kombainovy zavod Rostselmash). Combine production facilities of other companies were transferred to it. Management's idea was that setting up legal entities that were not burdened by debts should guarantee access to cheap credit from foreign banks.
Sibmash Holding was initially formed out of a number of companies, including AO Altai Diesel (Altaisky dizel), AO Altai Tractor Factory (Altrak), and AO Krasnoyarsk Combine Factory. Nazarovsky Engineering Works (Nazarovsky MZ), Krasnoyarsk Trailer Factory (Krasnoyarsky zavod pritsepnoi tekhniki), and Krasnoyarsk Shipyards (Krasnoyarsky sudostroitelny zavod) were joined to them later. Altrak left the holding in fall 2003 and again became an independent company. But the assets of the other members of Sibmash Holding were merged in 2003 to form the basis of the new OAO Krasnoyarsk Combine Factory Production Association (PO Krasnoyarsky kombainovy zavod), which was also part of the holding.
The next step in the consolidation of Sibmash Holding was the formation of OAO Agromash Holding in Almaty (Kazakhstan). Sibmash Holding owned 50% of the new structure; and Kazakhstan's Kaspiisky Commercial Bank (KB Kaspiisky) and Dostar Holding, owned by Kostanaisky Diesel Plant (Kostanaisky diselny zavod) Group, held the other 50%. Last summer, the Industrial Investors (Promyshlennye investori) Group became a co-owner of Agromash Holding and added to it the Volgograd Tractor Factory (VgTZ) – Russia's largest caterpillar tractor plant – recently acquired from MDM Group. In the end, Industrial Investors acquired 50% of the holding's shares.
Mikhail Bolotin, the head of Moscow-based ZAO Most, began gathering the remaining Russian tractor factories under his wing. Bolotin started with Promtraktor of Cheboksary, and within four years had gained control over the Vladimir and Lipetsk tractor factories; the Cheboksary Assembly Plant (Cheboksarsky agregatny zavod); and through the Tractor Factories (Traktornye zavody) concern, the Butyakov Shipyards (Zvenigorsky sudostroitelny zavod imeni Butyakova) in Zvenigorsk (Republic of Mari El), Kamyshinsky Foundry (Kamyshinsky kuznechno-liteiny zavod) in Volgograd Region, Gryazinsky Cultivator Factory (Gryazinsky kultivatorny zavod) in Lipetsk Region), the Tula Combine Factory (Tulsky kombainovy zavod), and the applied research branch of the State Motor Transport Institute (Moscow). As a result, Most now has nearly total control over wheeled tractor production in Russia.
Of the three main industrial groups in the agricultural machinery sector, only Mikhail Bolotin's successes are directly connected with Vladimir Putin's presidency. But the main spur to the industry's development was undoubtedly the establishment of OAO Rosagro Holding in 2001 and the resulting change in the system of providing state funds for leasing agricultural equipment. Between February 2002 and December 2003, the holding signed nearly 1000 leasing agreements worth a total of 15.3 billion rubles. This injection of state funds provided stable sales for engineering companies by stimulating interest in the industry from investors and new owners.
Railways
The surge of investor interest in the railway engineering sector in the last few years is directly connected with reform of the Ministry of Railways (MPS) and the formation of OAO Russian Railways (RZhD) on its basis. President Putin was the undisputed winner after dismissing Nikolai Aksenenko, one of the last Yeltsin proteges, as Minister of Railways and betting on career railwayman Gennady Fadeev. The reform of MPS was completed almost exactly on target and, as it appears today, without serious losses for the industry. Furthermore, the formerly ownerless railway engineering industry has been divided up among large-scale owners.
The transport company Severstaltrans was the first to show an interest in railway engineering companies; it foresightedly bought nearly 40% of the shares of Kolomensky Engineering Works (Kolomensky MZ) in 2000 and now has full control over it.
Transhmash Holding made its appearance in 2001; its first project was the Bryansk Engineering Works (PO BMZ), which manufactures diesel locomotives. During BMZ's bankruptcy, Transmash structures in partnership with Transgroup and OAO Kuzbassrazrezugol, a subsidiary of the Urals Mining and Metallurgical Company (UGMK), became the company's primary investors after taking it from businessman Petr Baum's Galls Group. Today Transmash and its partners control PO BMZ and have moved the factory's specialized assets, most of its subsidiaries, and its management company, which markets BMZ's products, to it. In 2002, firms close to Transmash acquired nearly 25% of the shares of the Tver Railway Car Works (Tverskoi vagonostroitelny zavod) and a controlling interest in Muromsky Switch Factory (Muromsky strelochny zavod; a Transmash affiliate, the management company Transcor, became its sole executive department). In 2003, Transmash established control over the Novocherkassk Electric Locomotive Plant (Novocherkassky elektrovozostroitelny zavod) and Kuvshinsky Transport Equipment Factory (Kuvshinsky zavod transportnogo oborudovaniya). Total sales volumes of Transmash companies in 2003 were nearly $500 million.
The East Line Group (manages Domodedovo Airport) got into engineering in 2002 after buying 98.19% of the shares of the Demikhov Engineering Works (DMZ; manufactures 72% of Russia's electric trains). In December 2002, the group registered ZAO Transport Engineering Scientific and Production Association (NPO TM) at Domodedovo Airport. Specialists from the Magistral Design Office (KB Magistral) formed the core of the new company's staff and management. The company is involved in railway engineering development. In spring 2003, the group added OAO Tsentrosvar, where car trolley production had already been transferred from DMZ. East Line simultaneously began buying up shares of the Oktyabrsky Electric Railway Car Repair Works (Oktyabrsky elektrovagonoremontny zavod) in St. Petersburg, the largest electric train, passenger car, wheel pair, and electric engine repair company in the Northwestern region, and by last fall had acquired a controlling interest in the plant. At the same time the company began experiencing a whole range of problems with its engineering assets; and reports that East Line was planning to get rid of them appeared as early as last year. The most valuable asset was DMZ, for which, according to unofficial information, East Line wanted nearly $100 million. Transmash Holding, the Ukrainian company OAO Dneprovagonremstroi, and OAO Russian Railways, which inherited a number of engineering enterprises from the Ministry of Railways, are considered the main contenders for the plant
Cars
For the auto industry, Vladimir Putin's first term as president was marked by two main events: consolidation of companies under large owners and continually increasing import duties on foreign cars.
Two metallurgical holdings – Aleksey Mordahsov's Severstal and Siberian Aluminum [Sibal, now Base Element (Bazovy element)] owned by Oleg Deripaska and Roman Abramovich – simultaneously became interested in auto plants after the presidential elections. As a result, by early 2001, Severstal had gained control over the Ulyanov Automobile Plant (UAZ) and the Zavolzhsk Motor Works (ZMZ)]. Siberian Aluminum responded by acquiring the Gorki Automobile Plant (GAZ) and Volga Motors (Volzhskie motory) of Ulyanovsk.
Although the steelmakers ended their expansion into the auto industry at this point (management of UAZ and ZMZ was later united in the Severstal-Avto holding), the aluminum producers took a serious interest in the industry. In 2001, the Ruspromavto holding set up by Siberian Aluminum bought up literally everything left lying around like bus, truck, diesel, and special machinery plants. Within three years, four of its main subdivisions – Ruspromavto Road Building Machinery (stroitelno-dorozhnye mashiny), Ruspromavto Engines (dvigateli), Rusavtobusprom, and Ruspromavto Nizhny Novgorod Automobiles (nizhegorodskie avtomobili) – had gained control over nearly 20 large bus plants, the Tver Excavator Plant (Tverskoi ekskavatorny zavod), Bryansk Arsenal (Bryansky arsenal), and Chelyabinsk Road Building Machinery (Chelyabinskie stroitelno-dorozhnye mashiny) with a combined sales volume of more than $2 billion. In February of this year, Ruspromavto was reorganized into an open joint-stock company (OAO) and its management announced plans for a public share placement.
Along with the oligarchs, the Russian auto industry also won better opportunities for lobbying for their interests in state structures. Through the active participation of the management of Base Element and Severstal, and with the support of Western car manufacturers, especially those who had set up their own production in Russia, there were a number of increases in customs duties on both new and used foreign cars, as well as on used buses, in 2002 and 2003. Interestingly enough, Ilya Klebanov, who was Minister of Industry and Science at the time, said openly that his department was not trying to support the domestic auto industry as a legacy of the USSR; it was simply that cars had to be produced in Russia: “The best solution may be to tear down AvtoVAZ and build a General Motors plant in its place”. However, things have not gone that far. AvtoVAZ is still standing and is controlled by its own managers. It still retains extensive assets, including the Izhevsk Automobile Plant (Izhevsky avtozavod) and the closely connected SOK group. The future of Moskvich also remains undecided.
Meanwhile, last year Russians spent almost as much ($4.08 billion) on buying new foreign cars as on domestic models ($4.2). Russian auto industry output decreased 2.4% to 956 700 cars in 2003 (978 500 counting the Chevrolet Niva). And in the period from January to March, twice as many foreign cars were sold in Russia as a year ago. But Klebanov, who set up protective duties on cars in the previous government, is now the president's authorized representative in the Northwestern Federal District. The new head of the Ministry of Industry and Energy, Viktor Khristenko, has still not said anything about protecting the Russian auto industry.
Airplanes
Formally, the domestic aircraft industry can take pride in its successes in the last four years – for the first time since the early 1990s, it managed to sell several new civilian aircraft per year and actual functioning leasing companies and contracts have appeared. However, these transactions have cost bureaucrats, aircraft manufacturers, and lessors a lot, and they are demanding that the state invest billions in the charter capital of the official leasing companies Financial Leasing Company and Ilyushin Finance Co. Meanwhile, civilian aircraft and engine manufacturing continue to suffer.
The catchword for the aircraft industry during Putin's entire first term in office was the formation of large, diversified aircraft manufacturing corporations that would unite plants and design offices. In May 2001, the head of Rosaviakosmos, Yury Koptev, presented a plan to set up two airplane and helicopter manufacturing complexes (SVSK) by 2004. SVSK-1 was supposed to include the Tupolev Aviation Scientific and Engineering Complex (ANTK imeni Tupoleva), MiG Russian Aircraft Corporation (RSK MiG), OAO Kamov, Aviastar Joint Venture (Aviastar-SP), Kazan Aircraft Manufacturing Association (Kazanskoe APO), Aviakor, Sokol Aircraft Factory of Nizhny Novgorod (NAZ Sokol), Progress, Kumertausskoe Aircraft Manufacturing Corporation (Kumertausskoe APP), and Krasny Oktyabr. SVSK-2 was to include the Ilyushin Aircraft Corporation (AK imeni Ilyushina), Sukhoi Independent Design Office (OKB Sukhogo), Myasishchev Helicopter Plant (MVZ imeni Myasishcheva), Beriev Aviation Scientific and Engineering Complex of Taganrog (TANTK imeni Berieva), Mil Helicopter Plant (MVZ Milya), the Komsolmolsk-on-Amur, Irkutsk, Novosibirsk, and Voronezh aircraft manufacturing associations, Rosvertol, Kazan Helicopter Plant (KVZ) Yakovlev Independent Design Office (OKB imeni Yakovleva), and the Saratov, Smolensk, and Ulan-Ude aircraft plants. Finally, the Aircraft Engines and Components (Aviadvigateli i agregaty) holding was supposed to include MMPP Salyut, Ufa Engine Building Association (Ufimskoe motostroitelnoe obedinenie), Motor State Scientific Production Company (GNPP Motor), OAO Lyulka-Saturn, MKB Granit, Rumyantsev MPP (MPP imeni Rumyantseva), EGA Scientific Production Company (NPP EGA), Perm Motors, OAO Aviadvigatel, Dvigateli NK Financial and Industrial Corporation (FPG Dvogateli NK), OAO Rybinsk Motors, and a number of other companies.
The government did not have enough pull to implement these programs. The only actual merger had been the union of OAO Lyulka-Saturn and Rybinsk Motors into the Saturn Scientific and Production Association (NPO Saturn) in 2001. OAO Tupolev, formed from Tupolev Aviation Scientific and Engineering Complex and Aviastar (Ulyanovsk) in 1999, never became a full-fledged company, mainly because of ongoing disputes and conflicts among Aviastar's owners. All attempts to join the Kazan Aircraft Manufacturing Association to Tupolev also failed. Interros Holding, which has owned substantial assets in Perm Motors since the mid-1990s, tried to use the “in” topic of aircraft industry integration to lobby for a single engine-building center. But after failing to come to a mutual understanding with government officials, Interros put its Perm assets up for sale in spring 2002. In February 2003, it was officially announced that the buyer was Gosinkor Holding. After the holding broke up, the Perm assets went to the Guta Group, which revived the idea of using them as the basis for the Perm Engine-Building Center (Permsky tsentr dvigatelestroeniya) with state participation.
Meanwhile, Russian airlines show no enthusiasm for buying domestic airplanes and conclude contracts for them mainly for the sake of image and to make it easier to import new and used Western airplanes. Thus, government policy in the aviation industry can be considered a failure. In fact, the new government will have to start working in this branch of engineering from square one.
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People Who Have Left the Scene
Kakha Bendukidze
Kakha Bendukidze, founder, largest co-owner, and until recently the unchanging head of OAO United Machinery (OMZ), was for many years the weightiest (in every sense) figure in the domestic engineering industry. However, this spring, Bendukidze resigned as OMZ's general manager; and on June 1, he left Russia after being appointed Georgia's Minister of Economics. Now his funds will go to work on the insurance market – at the end of May, he acquired a nearly 80% share in the capital of the reinsurance company Moskva-Re for $20 million. His management talents will work for the benefit of this native Georgian entrepreneur (Bendukidze was born in Tbilisi). However, he has kept a blocking parcel of OMZ shares.
Sergey Bidash
When he finally lost Tagmet in 2002 after a lengthy brawl, Sergey Bidash retreated to a long-prepared safe haven – the largest Russian boiler factory, Krasny Kotelshchik. But the luckless businessman managed to hang on to this company for only about a year. The Sigma investment group weakened Bidash's position by buying a blocking share package in Krasny Kotelshchik. As a result, at the end of last year, Evgeny Tugolukov, general manager of Rinako Investment Company (IK Rinako), acquired the shares controlled by Sigma and Bidash. Arbitration disputes are still going on around the company, but it is clear that Sergey Bidash has left both metallurgy and engineering for good.
Dmitry Strezhnev
Oleg Deripaska made Dmitry Strezhnev, the head and major owner of the Likinsky Bus Plant (LiAZ), a well-known figure – in 2001, the senior manager of the regional company became general manager of OOO Ruspromavto, a company controlled by Siberian Aluminum, and then of GAZ. At the same time Strezhnev exchanged his LiAZ shares for close to a 10% stake in Ruspromavto. His automotive career began to decline a year later, in August 2002, when Aleksey Barantsev, the former director of the Bratsk Aluminum Smelter (BrAZ) replaced him as head of GAZ. Then in March 2003, Strezhnev lost his job at Ruspromavto. However, his subsequent business career has been successful – six months later Strezhnev, along with a team of Ruspromavto managers loyal to him, became head of MKhK Evrokhim controlled by MDM Group.
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People Who Have Arrived on the Scene
Mikhail Bolotin
Structures belonging to Mikhail Bolotin, the head of Moscow-based ZAO Most and OAO Universal Investment Company, started buying up shares of Promtraktor in Cheboksary back in 1999. However, Bolotin began actively forming his present engineering holding form several tractor and assembly plants after the presidential elections in 2000. Despite his Moscow origins, people in the industry have traditionally regarded him as a member of the “St. Petersburg” team and are convinced that Bolotin owes his success in acquiring assets to support from the presidential administration. He currently controls a whole range of agricultural engineering companies with combined sales volumes of more than 8.5 billion rubles.
Sergey Generalov
The business interests of chairman of the board of directors of the Investor Protection Association Sergey Generalov are extremely diverse. His Industrial Investors Group controls the Topaz Distillery and Far Eastern Shipping Company (Dalnevostochnoe morskoe parokhodstvo) and acquired VgTZ from MDM Group in February 2003. However, Sergey Generalov decided not to go it alone in engineering and chose head of Sibmash Holding Yury Koropachinsky as his partner. The Industrial Investors Group and Sibmash Holding began their collaboration in 2002 when they became partners in the Orel Combine Factory (Orlovsky kombainovy zavod). Last summer, the partners combined their assets in the Agromash Holding, where Generalov received 50% of the shares when he added VgTZ in it.
Oleg Deripaska
In contrast to his metallurgist colleague Aleksey Mordashov, Oleg Deripaska, the head of Base Element, concentrated his efforts on the auto industry and ignored metallurgical engineering. Deripaska began by acquiring GAZ and went on to form the large-scale Ruspromavto holding, which manufactures cars, engines, buses, and road-building machinery. His partner in the metallurgical business, Roman Abramovich, once a former co-owner of Ruspromavto, became disillusioned with the auto industry and sold his 37.5% stake in the company to Deripaska, who now controls 75% of its capital.
Dmitry Kamenshchik
Although a large number of official documents confirm that East Line Group gained control over Demikhov Engineering Works, Tsentrosvar (Tver), and the Oktyabrsky Electric Railway Car Repair Works, the group's head, Dvmitry Kamenshchik, has flatly refused to discuss his engineering assets and never mentions them in public. There are two possible reasons. The first is connected with the lack of success of this line of business. In fact, Kamenshchik never established relations with the main consumer – the Ministry of Railways and its successor OAO Russian Railways. The second, more likely reason is that the real owner of the assets is not Dmitry Kamenshchik but one of his unofficial partners. In any case, he will soon be leaving the scene of Russian railway engineering – negotiations to sell the companies have already been going on for more than six months.
Dmitry Komissarov
Dmitry Komissarov, head of the Transmash Holding, appeared quite unexpectedly in the engineering industry as general manager of this company. Prior to 2002, he worked as an advisor to the general manager of OAO Tyumenenergo and headed a scientific production company, Soyuz Integratsiya, but was not noticed in any major projects. The result has been a false impression about him. However, Komissarov actually conducts all crucial negotiations on behalf of Transmash Holding (today he is chairman of the company's board of directors). The names of Transmash Holding's owners have not been officially disclosed (it is known that Transgroup owns about 50% of the shares), but judging from indirect information, Komissarov is one of them. He could well become a new, serious player in Russian business.
Artem Kuznetsov
The Guta Group headed by Artem Kuznetsov inherited engine building assets from the breakup of Gosinkor Holding at the beginning of 2003. Gosinkor, in turn, had bought the assets from Interros. Kuznetsov and his colleagues tried for more than a year to get full control over the companies of the Perm Motors complex, in which the group owns share blocks of various sizes. However, Guta was unable to devise any effective way to manage the multitude of companies, which were generally in a difficult financial and economic state. As a result, the group revived the already twice-discarded idea of uniting them into the Perm Engine-Building Center with a transfer of some assets to the state.
Aleksey Mordashov
The head of Severstal, of one of Russia's largest steel producers, chose the auto industry as a way into engineering, buying controlling blocks of shares in the Ulyanov Automobile Plant and Zavolzhsk Motor Works. Severstalmash, a company specializing in design, construction, and equipment maintenance for metallurgy (annual sales volumes of more than $150 million), appeared simultaneously with the reorganization of Severstal on the base of its repair and engineering complex. Last year, it started buying new assets, e.g., OOO OMZ – Metallurgical Equipment and Technologies (OMZ – metallurgicheskoe oborudovanie i tekhnologii) and the Kolpinsky Metallurgical Engineering Research Institute.
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by
Renata Yambaeva
All the Article in Russian as of June 28, 2004
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