The most wide-scale example was the process of formation of a vertically integrated holding, which observers link to activities of a number of formally unrelated structures such as Urals Mining and Metallurgy Company, “Russki Alumini,” “Sibirski Alumini,” “EAM Group,” “Eurazholding,” “MDM Group,” and others, including foreign firms11. The holding’s form is vague, probably due to its continuing expansion and accepted management principles. Subholdings, run by partners, managers on trust, or old managers who retained their shares in the authorized capital and became “junior partners, control considerable segments of copper industry, ferrous metallurgy, coal mining, aluminum industry (70 per cent), automobile industry. In the latter case, “GAZ,” “PAZ,” Zavolzhsky Motor Works, bearing-manufacturing plants are already within the holding’s sphere of interest. Some observers view intensification of stock exchange operations with regard to “AvtoVAZ” shares in the autumn of 2000 as a sign of preparation to a takeover. The conflicts between “Interross” group and the Urals Mining and Metallurgy Company appear to be linked to the holding’s interest in “Norilsk Nickel.”
Taking into account the overall role these structures play in the Russian economy, a most important issue is the level of and the economic and political factors behind the support the holding’s expansion finds with authorities. Apparently, the completed mergers and takeovers, as well as necessary for these purposes financial resources (probably including some reinvestments from abroad) are of a scope requiring some approval from the very top. Even the formally passive stand taken by the authorities is a certain indicator permitting to evaluate the real concept the authorities are going to pursue in the course of further structural transformation of the economy.
There are also other numerous examples, although of a lesser scale. For instance, Gazprom took control over expanding SIBUR group in petro-chemistry. Gazprom also controls “FarmTEK” group, which in year 2000 took over considerable pharmaceutical production capacities. “Svyazinvest” is carrying out a program aimed to enlarge its regional subsidiearies (in the Ural and North West regions in year 2000), at the same time it consolidates its shares in regional cellular operators under auspices of specially created “MobiTel” company. In year 2000, JSC “Rostelekom” announced plans for reorganization (affiliation of JSC “MMT). In the course of 2000 it is planned to transform JSC “AvtoVAZ” into a holding company. “Aeroflot” subsidiaries may be transformed into a group of vertically integrated companies. “Severo-Zapadnoye Parokhodstvo” (North West Steamship Company) announced its plans to integrate 15 subsidiaries into a holding. In 2000, a most widely publicized conflict broke out as it was attempted to affiliate shipyard “Krasnoye Sormovo” (Samara) to “Obyedinennye Mashinostroitelnye Zavody” (United Engineering Works) group. The OMZ share in the shipyard was about 30 per cent12.
The criteria according to which such structures are formed have also changed (as compared to earlier FIGs (financial and industrial groups):
technological, financial and economic desirability to affiliate new assets (enterprises);
substantially higher level of corporate control over subsidiaries (75 per cent and higher);
organizational and legal transformation (including mergers, consolidation within and between holdings, transition to single share within holdings, etc.).
Metallurgical industry is a most interesting example allowing to understand the most important institutional trends observed in the corporate sector in year 2000.
First, the process of property concentration reached a new level. In the 1990s (after privatization), the process of concentration of share capital took place chiefly in the framework of one (base) enterprise. The activities of so called FIGs (formal and informal) are not exemplary in this respect, since their acquisition strategies was usually of chaotic nature and did not base on technologies. In years 1999 and 2000 “base” enterprises started to actively pursue external expansion, concentration of property occurred in the framework of vertically integrated groups. In a certain sense it was the mending of intra- and inter-industrial technological links disrupted by privatization. In fact, the former Soviet concerns and amalgamations were being “re-assembled” on the basis of private ownership and without redundant structures.
Second, largest groups are completing the stage of open confrontation and start to implement policies aimed to form alliances. This concerns both the raw material base and agreements on “taking over” “yet free” enterprises in metallurgy and related industries. The former case may be illustrated by the intention of “SUAL-holding” and “Russki Alumini” to carry out a joint project (construction of an aluminum dioxide plant in the Republic of Komi to process bauxite extracted at Sredne-Timanskoye deposit. The second case concerns an a priori sharing of remaining property in order to avoid cost-intensive conflicts (while fixing the existing property interests). It is important that owners (managers) of remaining relatively small enterprises have in fact surrendered and are ready to sell their shares, although earlier the level of resistance was rather high (including claims lodged with MAMP).
Although there are different points of view on the effectiveness of vertical integration13, its apparent advantage for Russia is related to the process of redistribution of property. Those seizing control over the supplier or consumer may disrupt the operation of the whole vertically integrated chain (in case they whish to put some pressure). Instances of “raw materials” pressure on competitors or shareholders who do not want to yield control are numerous and well known.
For instance, the perceptibly growing interest in coal mining companies (first of all, on the part of ferrous and non-ferrous metallurgic enterprises) in year 2000 was directly linked to the striving to regulate volumes of output and deliveries, prices, and to ensure effective pressure on power engineering companies. In year 2000, there were sold Mezhdurechenskaya and Krasnoyarskaya coal mining companies, 38.7 per cent of shares in “Khakasugol” company (the auction for 43 per cent of shares in the company failed, so this block of shares shall be put up for a next auction). “MDM Group” purchased a 38 per cent share in highly profitable JSC “Vostsibugol” (although it remains unclear if it was on behalf of “Russki Alumini” or SUAL-holding) out of a 43 per cent block of shares in the enterprise offered at an auction announced in December of 2000. The control over this company permits to impose dictate on “Irkutskenergo.” In 2001 it is planned to sell federally owned blocks of shares in coal mining companies “Yakutugol,” “Kuzbassugol” (80 per cent), and “Kuznetskugol” (81 per cent). According to available information, Novolipetski Integrated Iron and Steel Works plan to purchase the federally owned block of shares in “Kuzbassugol,” while “EvrAzHolding” will purchase shares in “Kuznetskugol” (to supply Zapadno-Sibirski and Kuznetsk integrated iron and steel works). In 1999, regional authorities sold their shares (16 and 15 per cent respectively) to structures affiliated to potential purchasers. Structures pertaining to “Sibirski Alumini” purchased 15.75 per cent of shares in “Chtinskaya Ugolnaya Kompaniya” in the autumn of year 2000. In the course of several above mentioned transactions “Alpha-Eko” company (which owned blocks of shares in metallurgical enterprises and planned to form its own vertically integrated holding) competed with the actual purchasers. Structures affiliated to JSC “UES Russia” also show interest in a number of coal companies.
Purchase of energy producing capacity is the next logical step for new vertically integrated groups (with metallurgic “core”). The sale of power generating companies in the framework of potential restructuring of “UES Russia” will apparently result in metallurgic groups buying them up thus obtaining unlimited influence on the national economy. It is also of importance that a single center exercising ownership control over the whole complex “power engineering – coal – metallurgy” permits to effectively direct financial flows from all links to exports and “optimize” tax policy.
On the whole, in the aspect of formation of real control poles, narrow groups of partners – real owners – continued to consolidate power and management levers (not necessarily based on ownership of shares). It shall not be excluded that the processes of consolidation of shares underway may become only a stage on the way to transformation into closed joint stock and limited companies. Some largest (private) companies already review such reorganization in practical terms. Overt or concealed process of concentration of property (control) in Russia’s corporations is a key medium-term trend to be considered in the course of elaboration of state regulation measures.
Strengthening State Control at Corporations
In year 2000 the trend towards enlargement of state-controlled structures and consolidation of state-owned blocks of shares in the framework of holdings became very perceptible (consolidation of “Rosneft” subsidiaries, MIC enterprises – “Antei” and “Almaz” concerns, alcohol holding “Rosspirtprom” – 89 enterprises, consolidation of all structures involved in production and sales of nuclear fuel in the framework of a single corporation, creation of an energy generating company embracing all nuclear power stations (on “Rosenergoatom” base), etc.). It may be assumed that the strategic goal is to retain (create) at least one state “power center” constructed of fragments remaining in the state ownership (state-owned unitary enterprises and blocks of shares) in each staple industry.
Shareholders’ meetings held by “Gazprom,” “UES Russia,” and “Aeroflot” in year 2000 also demonstrated that the federal authority strive to toughen control via corporate procedures. For instance, 10 out of 15 directors of “UES Russia” represent the state, while six state representatives on the board of directors of “Aeroflot” control over 50 per cent of shareholders’ votes. State-owned company “Rosneft” may become the monopolistic representative of state interests in matters related to production sharing agreements.
The toughening of state control via formation of large holdings and expansion of state representation in existing companies is related to a number of objective factors: the requirements of technological integration, the need to create larger structures to meet the challenges of international competition, to put stronger fiscal pressure on enterprises. At the same time these measures are implemented only in isolated cases at the background of the general crisis of the system of management of state-owned property. Probably, in this crisis situation enlargement and merger of state-owned assets seem a most simple decision.
In a certain sense, the apparent trend towards toughening of state control via enlargement of economic agents is extended to private companies at the level of ideology. As it was noted above, the creation of the largest aluminum holding “Russki Alumini” on the basis of two formerly competing private-owned groups in year 2000 was hardly possible without an approval from the very top. Such an approval from the very beginning presumes the absolute transparency of the deal, including names of real owners and beneficiaries of financial flows.
In more general terms, it may be assumed that there exists an alternative strategic approach basing on the entrustment of certain private companies (groups) to function as managers representing the federal center in a concrete region (for instance, Tumen), or an industry (for instance, ferrous and non-ferrous metallurgy). The benefits obtained by private groups under such arrangements are also apparent and related not to just carrying out banal “gray” schemes with impunity, but to a carte blanche for expansion with political support of the federal center. The demonstratively “equidistant” stand taken by the RF President to the contacts with largest financiers and industrialists does not negate this approach but just stresses that any “trusted” manager may be dismissed in case not complying with the rules.
Despite these rater perceptible trends, the state still remains a serious factor of uncertainty for Russia’s corporations. Although after the Presidential elections held in year 2000 the political stability, an important general factor to lower corporate governance risks, is definitely at work in Russia, the old problems of the negative effect the state has on the corporate sector still exist, and there emerge new ones.
First, the practice to use the state (state and local authorities) as a tool in the struggle for control over a company and/or against competitors persists. Uncertainties related to this practice remains a serious factor behind existence of high corporate governance risks in Russia.
Second, commercial interests of various departments and agencies may come into conflict with interests of private companies with high probability to be settled in the administrative way.
Third, the process of formation and strengthening of the new leadership means that there will arise new destabilizing factors related to the modification of real control centers in the economy. The tough political struggle for and against plans of reorganization of largest natural monopolies (“Gazprom,” “UES Russia,” MPS (Ministry for Transport Routes)) to a considerable degree reflects these processes.