COMMENT: Putin's "zaibatsu" - the Russian technology property grab

By bne IntelliNews August 1, 2008

Ariel Cohen of The Heritage Foundation -

July 2008 will mark a momentous month in the history of Russian business. This is when Sergey Chemezov, a close associate of Prime Minister Vladimir Putin, consolidated control over 426 additional enterprises that are now a part of the Russian Technologies (Rostechnologii) empire. A global, state-owned Russian weapons-and-metals holding has been born. Yet its birth has triggered the fiercest fight among the Russian elite since Dmitry Medvedev was anointed president.

In fact, Medvedev, a professed economic liberal, has opposed the strengthening of the state economic muscle. Sergey Ivanov, a former competitor to Medvedev in the post-Putin succession, also opposed the power grab. And there is more.

Putin has shaped Russian Technologies, a state-owned corporation, to accomplish three tasks. First, it is to recreate the legendary Ministry of Medium Machine Building, or Sredmash, the Soviet-era behemoth that was at the heart of the Soviet Union's military-industrial complex. Second, to enable Russian technology and semi-finished goods, from weapons to titanium and copper, to compete worldwide. And third, sources in Moscow say, to privatize the choicest morsels.

Whereas Japanese industrial conglomerates, known as zaibatsu pre-World War II, keiretsu in the post-war years, were privately held, most Russian ones are state owned, at least for now. In the energy field, these include Rosneft and Gazprom. Russian Technologies is the first one in the industrial sector. And Chemezov is the man to watch.

Man of the moment

Chemezov is a close personal friend of Putin's, and served with him in Dresden, German Democratic Republic, in 1980-1986. His expertise was in counterintelligence, while his specialty in the Putin inner circle was procurement of beer. He is also a competitive boxer, a sports shooter, and a game hunter - necessary instincts in the rough world of Russian business in general, and in weapons trading in particular.

Today, he is a three-star general, a Putin loyalist, and a statist. Moscow insiders view him as close to the siloviki factions - those with ties to the securities services - around Putin, but cannot figure out if he is closer to the Igor Sechin-Nikolay Patrushev group, or to Sergey Ivanov (unlikely).

It is clear, however, that the so-called "liberals," led by President Dmitry Medvedev, Deputy Prime Minister and Finance Minister Alexey Kudrin, and Economy Minister Elvira Nabiullina staunchly opposed Chemezov's property grab. Kudrin criticized the attempt to pump billions of dollars into Russian Technologies in the guise of "technical modernization" and weapons development credits. Kudrin bemoaned his ministry's anticipated inability to audit Russian Technologies.

Nabiullina, in an open confrontation with Chemezov, said she opposed state ownership of business "in principle," and criticized Russian Technologies' grab of Kamaz truck plant and AirUnion airlines, of which more below. Together with the Anti-Monopoly Committee, she publicly criticized Russian Technologies' venture into civilian sectors, such as passenger air transport and airport services; automotive production; and even printing.

A global weapons and technology monster

Chemezov's meteoric rise is closely connected to Putin's, and reflects the desire to use state monopolies to control financial flows. Putin brought Chemezov with him to Moscow, first to manage the international property division of the Presidential property administration under the notorious Pavel Borodin, and later transferred him to the weapons trading business.

Chemezov, like other statists in the Russian government, believe that only by massive consolidation can Russian businesses become globally competitive. These industries have, however, a long way to go, as low quality and even fraud in recent weapons deals, such as aircraft to Algeria or an aircraft carrier to India, caused recriminations and even the return of weapons sold. This is what likely prompted Chemezov to request the Accounting Chamber (Russian equivalent of the Government Accounting Office) to conduct a comprehensive audit of Russian Technologies. While several World Bank studies have found that corruption is more likely to flourish in state-owned enterprises than in the private sector, Russian decisionmakers prefer to disregard these findings.

The plan for Russian Technologies is to consolidate different forms of property, including Federal state unitary enterprises known by their Russian acronym FGUP; and closed stock corporations (ZAO). Chemezov said that he will create 30 industry-specific holding companies within Russian Technologies. While stated-owned Russian Technologies is likely to control these holdings, at least some of the companies - such as carmaker AvtoVAZ; AirUnion airlines, which includes Domodedovo, Krasnoyarsk and Samara Airlines (and are headed by the Abramovich brothers, who are no relation to Chelsea owner Roman); Mineralnye Vody Airlines; Rossiya state airline; and Sibir - are likely to become publicly traded companies (OAO) through IPOs.

Russian Technologies is also receiving control or a share in the largest titanium producer in the world VSMPO-Avisma, which supplies Boeing; Obonoronprom weapons manufacturer; Oboronitelnye Systemi (a major air defense and electronics); Vysokie Tekhologii R (data processing); Russpetsstual, a core specialty steel producer; Promushlennaya Energeticheskaya Compania, which supplies electricity and gas to industry; Amalgamated Shipbuilding Corporation; and many others.

Back to the Command Economy?

Russian economists realize that the return to the quasi-Soviet pattern of a 400 plus-strong enterprise holding runs counter to the industrial decentralization and horizontal ties that are typical of the 21st century. It defeats development of business and industrial core competencies, and undermines the global competitiveness that Russia wants to achieve in the first place. It didn't work for Japan's zaibatsu, which failed to produce military technologies competitive with the West prior to World War II, and in the long run didn't work anywhere else, including the USSR.

Chemezov's thinking is reminiscent of the East German command industrial economy of the 1980s, a Russian critic says. The Ministry of Finance and the Federal Anti-Monopoly Service are horrified by the lack of transparency the "defence" shield will provide to this business empire, and the subsequent violations of the law likely to be committed. This includes the forced nationalization of privately held high-tech businesses, which are supposed to provide Russia with the high value-added finished goods and high paying jobs of the 21st century that Prime Minister Putin likes to talk about.

Ariel Cohen, Ph.D., is Senior Research Fellow at the Heritage Foundation

Japan Holding Inc.

The zaibatsu were the heart of economic and industrial activity within the Empire of Japan, and held great influence over Japanese national and foreign policies. Japanese politics were all but an extension of the zaibatsu. One political party was regarded as an extension of the Mitsui group, which also had very strong connections with the Imperial Japanese Army. Another party had its connections to the Mitsubishi group, as was the Imperial Japanese Navy. By the start of World War II, the Big Four zaibatsu alone had direct control over more than 30% of Japan's mining, chemical, metals industries and almost 50% control of the machinery and equipment market, a significant part of the foreign commercial merchant fleet and 60% of the commercial stock exchange. The top tier Zaibatsu were Mitsubishi, Mitsui, Sumitomo and Yasuda. Source: Wikipedia .

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