Russia 2010. Part 2. The Macroeconomic Situation in 2010

(the part of book "Russia 2010. Report of Transformation")

Part 2. THE MACROECONOMIC SITUATION IN 2010

In 2010, politics remained controversial and conflict-generating. The development and intensification of major conflicts in strategic sectors was accompanied by new groups of interest appearing. The redistribution of the areas of influence affected the information and office campaigns of federal agencies. Government agencies presented individual projects as well as new development strategies of the key sectors of the Russian economy.

Fuel and power sector

The situation in the fuel and power sector was determined by two parallel trends, namely, the strengthening of ‘the Sechin group’ and the entry of ‘the Timchenko group’ on the market. The first group controls Rosneft and Inter RAO through the Deputy Prime Minister who supervises the sector, and the second one develops NOVATEK, Gunvor, and refineries at Surgutneftegaz. The strengthening of Sechin and Timchenko was balanced by a weaker Gazprom, which had to make serious concessions to its competitors.

The gas monopoly had to give serious export preferences to Gennady Timchenko’s NOVATEK.

The struggle of the two gas companies intensified after the abovementioned businessman had bought a second gas producing company. Timchenko has been lobbying for strategic projects in the Russian fuel and power sector successfully for a long time but did not start mass purchase of strategic assets until last year. NOVATEK was one of the expansion items. Supported by the owner of Gunvor, the independent gas producers got control over the Yuzhno-Tambeyskoye gas field via Yamal SPG, which Gazprom had also been interested in.

This did not end NOVATEK’s projects that were hostile to the monopoly. Recently, Total has completed the establishment of a joint venture with a Russian company. According to the agreements, the President got 49%, and the Russian business structure, 51%. The joint venture started developing the Termokarstovoye field in the Yamalo-Nenets autonomous district (YNAD). Earlier, Gazprom’s business entities had put serious obstacles to the cooperation of the two companies. In particular, five years ago Total made an attempt to work with NOVATEK on its own. The French company even applied to the Federal Antimonopoly Service (FAS) for a purchase of a Russian business entity. However, under Gazprom’s pressure FAS basically said no to the non-resident.

In 2010, the gas monopoly continued losing to NOVATEK. The actual appointment of Dmitry Kobylkin, the head of the Purovsky district of Yamal, a NOVATEK person, to the position of the governor of the Yamalo-Nenets autonomous district (YNAD) was a serious strike on Gazprom. At the same time, the gas monopoly failed to put Igor Fyodorov, the Director General of OOO Gazpromkomplektatsiya, in charge of its main raw materials base. The gas monopoly has managed to compensate for some of the Yamal losses in the Khanty-Mansi autonomous district (KMAD), but Natalia Komarova who has been lobbied for to this position has failed to find understanding with regional elites so far.

In addition to NOVATEK, Rosneft got serious preferences on the account of the gas monopoly. With Igor Sechin’s support, the oil company has been blocking Gazprom’s strategic projects on the domestic market very deliberately for a long time. Since Gennadiy Timchenko has long been working with Rosneft as a trader, the tactical union of Timchenko and Sechin against Gazprom may be quite effective in the mid-term perspective.

Independent gas exports will enable the oil company to implement its serious energy potential. In particular, Rosneft is one of the biggest independent gas producers in Russia. The share of gas in the total hydrocarbon production is currently about 10%, and there are significant undeveloped gas reserves. According to the company, Rosneft’s gas production potential is more than 55 billion cubic meters per year. At the end of 2009, the proven gas reserves of the company amounted to 816 billion cubic meters (according to the PRMS classification), and less than a quarter of these reserves were being developed. About 70% of the company’s production gas reserves are in YNAD, which Timchenko controls. Rosneft’s other big gas project is Sakhalin-1 where gas has been produced since 2005. Sakhalin-3 and Sakhalin-5 are promising shelf gas projects. To increase the gas production by controlled business entities, Sechin and Timchenko are lobbying for access of independent producers to Gazprom’s united gas pipeline system (UGPS).

In addition to the oil and gas market, the Deputy Prime Minister and the businessman are interested in related sectors of the economy. Igor Sechin is pushing an expansion to the electric power sector and metallurgy while Gennadiy Timchenko is developing transport companies and infrastructure projects.

Metallurgy

In 2010, metallurgy remained the second most important sector of the Russian economy. Unlike the pre-crisis period, the biggest struggle was for the non-ferrous metallurgy rather than the ferrous part. This is where Nornickel became the clash point for the leading groups of influence.

At first, it was expected that GMK would become the core for consolidation of the sector’s key assets. Various merger strategies were considered with an opportunity of asset exchange between sectors. However, by the summer of 2010 the merger projects had to be abandoned. After the consolidation of the metallurgic assets around Nornickel had been blocked, the dividend issue was raised. The main initiator of the dividend raise was Oleg Deripaska. The businessman needs extra sources of income to refinance his debts to VEB. During all the year 2010, Rusal was negotiating on a loan extension with the state corporation and on opening a line of credit with the Savings Bank. However, even on condition of the VEB loan term extension, Deripaska’s debt exceeds 12 billion dollars. In particular, according to the schedule, by December 31, 2010, Rusal must pay at least 1.4 billion dollars to its creditors (not including VEB), by September 30, 2011, 3 billion dollars, by September 30, 2010, 4 billion dollars, and by December 31, 2013, 5 billion dollars. Since Oleg Deripaska’s company cannot raise the necessary money on its own, Nornickel’s dividends would improve Rusal’s position significantly. However, Interros and Nornickel’s top management objected to the initiative of the aluminum company’s main shareholder. Already in May, Strzhalkovsky criticized Rusal’s proposal to pay 115% of Nornickel’s profits as dividends. The final decision was paying just 50%.

In response, Rusal made an attempt to gain control over Nornickel’s Board of Directors.

In the summer of 2010 before the shareholders’ assembly, Oleg Deripaska’s company bought 0.13% of GMK shares on the market. Having got more shares than Interros, Rusal tried to bring four of its representatives to the Board of Directors of Nornickel. Despite all Rusal’s efforts, Deripaska got just three seats on the main management body of GMK out of the planned four. Moreover, the businessman failed to make Alexandr Voloshin an independent Director and the Chairman of the Board of Directors. Out of 13 seats, four were taken by Interros people (Andrey Klishas, Marianna Zakharova, Boris Bakal, Andrey Bugrov), three by Nornickel managers (Vladimir Strzhalkovsky, Oleg Pivovarchuk, Dmitry Kostoyev), three by Rusal (Oleg Deripaska, Maxim Sokov, Vladislav Solovyov), and three by independent Directors (Vasiliy Titov, Brad Mills, and Robert Holden). Dmitry Razumov, the President of the Unexim group that is owned by the former co-owner of Nornickel and the current owner of UC Rusal, failed to get a seat on the Board. A VTB representative, Vasiliy Titov, became the Chairman of the Board of Directors. Therefore, Rusal lost two seats, one of its own and one independent seat. They were taken by Oleg Pivovarchuk and Dmitry Kostoyev, both of whom are Strzhalkovsky’s people. Nornickel managers have used GMK treasury shares with which the company’s subsidiaries voted to secure victory.

Having lost parity on the Board of Directors, Oleg Deripaska intensified the attack on Potanin’s and Strzhalkovsky’s positions. The businessman sent a letter to Dmitry Medvedev, based on which the President ordered to investigate the lawfulness of the GMK shareholders assembly. However, the investigations of the Federal Service for Financial Markets (FSFR) and the Prosecutor General’s Office had no serious effect. In 2010, the latter declared that no violations in the assembly of Nornickel shareholders had been found.

At the same time, the Rusal-friendly Alexandr Voloshin left for Uralkaliy after having signed the minutes of the annual shareholders assembly of the company. Until then, the ex Chairman of the Board of Directors, who had failed to get on the GMK management body by the results of the vote, had refused to sign this document. At the same time, it became known that consultations had been started on selling Deripaska’s block of shares to private investors in Russia. The transaction price may be much less than the market value of the company.

Understanding that keeping the strategic assets is going to be a big problem, Oleg Deripaska decided to get as much as he could for his block. According to some data, the businessman offered to sell his shares in Nornickel for 14 billion dollars. This amount would cover all of Rusal’s debts and the businessman’s expenses on the corporate war for GMK. By the end of the year, Potanin and Strzhalkovsky were ready to offer 12 billion dollars, which Deripaska did not accept.

Mineral fertilizers

In 2010, there were serious changes on the mineral fertilizer market. The new participant in this sector managed to gain control over the two biggest companies and to promote their merger. At the same time as this businessman went to the strategic segment, Dmitry Rybolovlev, a market aborigine, started losing positions in the strategic segment.

The consolidation of the mineral fertilizer market began when Suleiman Kerimov bought Uralkaliy. In 2010, the situation around the company was developing rather negatively for Dmitry Rybolovlev who was the owner of the business entity. During all of 2009, there were rumors on the market that control over the strategic Uralkaliy would pass to the state because of the Berezniki accident. It is worth reminding that in October 2006, an emergency had occurred on the Berezniki mine of the Verkhnekamskoye field of potassium and magnesium salts when ground water got into the mine and the earth was destroyed. Immediately after the accident, it was decided to stop the mine’s work and flood it. After that, in July 2007, there was an earth collapse over a karst hollow, and some

residential areas in the town of Berezniki and railways got in the area of possible collapse. At present, the damaged Mine No.1 is completely flooded. In addition, as a result of an accident at OAO Uralkaliy, passenger train traffic at the railway section that got into the possible collapse zone was terminated and the cargo train speed was limited to 25 kilometers per hour. At the same time, Russian Railways started implementing a project of ‘deep’ 53-kilometer roundabout route, which will go outside the area of possible earth collapses.

The first investigation did not reveal any fault of Uralkaliy. However, the second investigation that was initiated by Igor Sechin could have led to nationalization of the company. According to some data, the reason was a conflict between the Deputy Prime Minister and Dmitry Rybolovlev, which continued in the first quarter of 2010. The business entity then managed to withstand with the support of the Minister of Natural Resources, Yury Trutnev, which according to some data had business interests in Dmitry Rybolovlev’s company. However, the businessman could not resist the opponents’ pressure for a long time and started working on the sale of the strategic asset. The company finally went to a consortium of investors that was headed by Suleiman Kerimov.

At the same time, it became known that Kerimov had bought 20% of Silvinit shares from Rybolovlev for 500 million dollars. The main competitors, namely, Rostekhnologii and Andrey Guryev’s PhosAgro objected to consolidation of Uralkaliy and Silvinit by this businessman. Both companies presented various consolidation projects of the mineral fertilizer sector. In early July, the state corporation proposed including the assets of SIBUR Holding, Silvinit, and Togliattiazot in the united company. Rostekhnologii would then get control over the business entity. Andrey Guryev’s people proposed a similar plan with PhosAgro’s assets (20% in Apatit). Both initiatives were submitted to Igor Sechin, and the Deputy Prime Minister selected Sergey Chemezov’s proposal. With the pressure of Rostekhnologii and PhosAgro, Kerimov pushed the acquisition of Silvinit with Filaret Galchev’s support. Already in August it became known that some entities that are close to these businessman bought a 44% share in the company. The nominal owners became Kerimov’s friend Zelimkhan Mutsoyev (24%) and Galshev’s partner Anatoly Skurov (20%).

After purchase of Uralkaliy and Silvinit shares, Kerimov got Igor Sechin’s support. The Deputy Prime Minister allowed the merger of the biggest producers of mineral fertilizers in exchange for stronger positions of government representatives in business entities.

However, Kerimov will not manage the united company himself and will sell the asset already in 2011.

Telecom

2010 became an important year for telecom. The main lobbyist of Svyazinvest privatization, Leonid Reyman, quit the struggle for strategic assets in this sector. The place of the ex Minister of Communications was taken by the people from Marshall Capital who were delegated to the company by Igor Shchyogolev. After the resistance had been overcome, the team of the Minister of Communications began consolidating the state assets in telecom consistently. The decisive period in fighting for strategic state companies occurred in the fall of 2010 when violent confrontation around the base asset of the sector, Svyazinvest, ended in a compromise in Marshall Capital’s best interest.

The active phase of the company’s expansion to the Russian telecom sector began in the summer of 2010 with the appointment of Alexandr Provotorov to the position of the Director General of Rostelecom. The top manager represented Igor Shchegolev’s group. Over the last two years, the head of the Ministry of Communications was increasing his presence in the government through Marshall Capital, a company related to the Minister. In 2005-2009, Provotorov worked for this company as Management Director of Funds. In addition to the top manager, other representatives of Marshall Capital Group were also delegated to the strategic sector. For example, the Managing Partner of the company, Konstantin Malofeyev, became a member of the Board of Directors of Svyazinvest and Rostelecom in early 2009, and the former Managing Director of Marshall Capital Group, Mikhail Leshchenko, became first an Advisor to the Minister of Communications, Igor Shchegolev, and then a Deputy Director General at Syvazinvest. Marshall Capital representatives have designed and are implementing a project of state asset development in telecom. Svyazinvest was of particular interest for members of Igor Shchegolev’s group.

In addition to Shchegolev’s people, the abovementioned Leonid Reyman was looking at the strategic company. When he ran the Ministry of Communications, he lobbied for the privatization of the state asset, hoping to give control over the biggest Russian telecom to affiliates. The latter had already controlled key positions at Svyazinvest but never managed to get the state block of shares in the company due to deliberate resistance of the Ministry of Economic Development. Despite Reyman’s move from the government to the Presidential Administration in 2008, the official had kept the position on the Board of Directors of the company till August 20, 2010, and continued lobbying for the sale of the assets.

This time, the new Minister of Communications, Igor Shchegolev, objected to the sale together with the Ministry of Economic Development. Earlier, the official presented a plan of establishment of the biggest telecommunication holding by consolidation of Svyazinvest on the base of Rostelecom.

It was Shchegolev’s representatives who wanted to keep control over the united company. It was Provotorov’s appointment to the top position of Rostelecom that gave rise to the second stage of state asset consolidation in telecom. In 2009, the Minister of Communications already delegated the top manager to the position of the First Deputy Director General of Svyazinvest to design a program of telecommunication asset consolidation on the base of Rostelecom. After the preparation stage was completed, and all the Svyazinvest-controlled interregional companies approved the merger with the state company, Provotorov was appointed to the top position at Rostelecom. At that position, the top manager was expected to complete the consolidation ‘manually’ and build the organization structure of the united company.

However, the Director General of Svyazinvest, Yevgeny Yurchenko, wanted to run the consolidated business entity just like Reyman and Shchegolev’s people. In February 2009, the top manager replaced Alexandr Kiselev, a Reyman man, at this position and hoped to run the consolidated company later. At first, Shchegolev endorsed Yurchenko’s initiatives; while the Minister established his own team from Marshall Capital, he did not have a person for the Director General. It was Shchegolev’s protection that helped Yurchenko withstand Reyman’s information attack in 2009. At that time, the President’s Assistant accused the top manager of using insider information for buying Svyazinvest’s regional subsidiaries, which were intended to merge with Rostelecom.

The situation began to change in the spring of 2010. Shchegolev gathered a team of his own, which started grasping control over the key telecommunication assets. Reyman started putting more pressure on Yurchenko expecting that this manager would leave soon. Ultimately, under the pressure of Shchegolev and Reyman, he had to agree to leave Svyazinvest. Before leaving, the top manager accused Reyman of putting pressure on the company management and criticized the people from Marshall Capital. On the next day, Yurchenko’s main career opponent, Leonid Reyman, lost his position of the Presidential Advisor, and the ex Director General of Svyazinvest decided to take his leave notice back. On the background of violent confrontation between Reyman, Shchegolev, and the come-back Yurchenko, the government and the Presidential Administration made a compromise decision. They nominated Vadim Semyonov to the top position a Svyazinvest. The government representatives voted for him at the shareholders assembly. Having studied at university with Dmitry Medvedev, the top manager is a President’s man.

Under Semyonov’s nominal management, Shchegolev’s people completed the consolidation of telecommunication assets on the base of Rostelecom without any problem. They also control key positions in two companies, namely, the President’s position at Rostelecom (Alexandr Provotorov) and the main Deputy Director General’s position at Svyazinvest (Mikhail Leshchenko). The only intrigue of 2011 will be the development direction of the consolidated company. Earlier, the business entity was planning to enter the highly liquid cell communication market by buying Megafon or developing Skylink. But at the end of the year, the Ministry of Communications did not discuss this matter in detail.

Agriculture

2010 became a breaking year for the Russian agro-industry sector. The draught and the fires have brought its potential down seriously and hit the positions of Yelena Skrynnik and Viktor Zubkov. The last 12 months were marked by confrontation for control over the state companies between the Minister of Agriculture and the Deputy Prime Minister.

The confrontation for the agro-industry began to grow with an information attack on the Minister of Agriculture. According to mass media, Skrynnik founded three business entities, namely, Rusmedinvest-M, Medleasing, and the Russian Medical Company, which later became beneficiaries of companies whose business was related to Rosagroleasing. In particular, the beneficiary of Voronezhskaya Zemlya, a company that sells grain which agricultural producers use as a payment tender with Rosagroleasing, is Leonid Novitsky, Skrynnik’s brother and a former Deputy Director General of Rosagroleasing. The information attack was a continuation of the campaign against the Minister of Agriculture that had started in the second half of 2009 when the Prosecutor General’s Office had initiated an investigation on Rosagroleasing, which Yelena Skrynnik had headed from December 2001 till April 2009. By the beginning of 2010, the prosecutors completed the investigation and found some violations; in actual fact, Rosagroleasing was lending money to suppliers as it bought agricultural equipment with delivery deferral of up to one year.

Rosagroleasing is the reason why Skrynnik’s positions in the agro-industry became stronger. The business entity was the key and most efficient asset of the Ministry of Agriculture after Rosselkhozbank. Rosagroleasing is the contractor in the Agro-Industry Development national project and the FTP for agriculture development and regulation of agriculture, raw materials, and food markets in 2008 - 2012. Before he left, the ex Minister of Agriculture, Alexey Gordeyev, lobbied intensively for an increase of the authorized capital of OAO Rosagroleasing. In the past, the new Minister was also a member of the Russian Union of Industrialists and Entrepreneurs and headed the Rosleasing association, which gave her the necessary support in the business community. Skrynnik had been getting ready for a political career since November 2008 when she joined the Supreme Council of the United Russia party with Alexey Gordeyev’s support. Since her appointment as Minister, Yelena Skrynnik has got in the way of many influence groups in the government. The cruelest conflict was about the funding of grain interventions, which was where she faced confrontation from the side of the Ministry of Finance.

Earlier, the main opponent of the Ministry of Agriculture in mass intervention issues was the Ministry of Economic Development that is controlled by Shuvalov. The two agencies first confronted each other three years ago when the demand for grain became less than the supply, which caused a growth of the agricultural product prices. To bring the prices down, the main consumers of agricultural products asked the government to ban wheat exports and start selling grain from state reserves. The Ministry of Economic Development also supported the big sale of the state reserves. This agency has always lobbied for retail networks, which it still controlled at that time. In addition, the Ministry of Economic Development had some responsibility for the inflation, which was pushed by the agricultural product prices. The intensive pressure made the Ministry of Agriculture agree to grain sales from the state reserves, but the agency suggested postponing the interventions until late November, which neutralized their effect.

In the crisis year of 2009, the conditions inside the country changed dramatically. There was an excess of supply on the market, and the grain prices began going down. At the same time, the gross costs of agricultural companies continued growing. The average self-cost of one ton of wheat in the Southern Federal District amounted to about 3,150 rubles, which was almost the same as in 2008. The reduction of fuel and lubricant prices (31%) and mineral fertilizer prices (18%) had their effect, but the salary costs rose by nearly a third, and electric power costs, by 20%. In order to support the grain producers, Yelena Skrynnik started lobbying for procurement to the state reserves. The intervention was expected to take place on August 1, but then it was delayed till October 1, and the real entry of the government on the grain market did not happen until November.

The delays with the procurement start were caused by the resistance of Alexey Kudrin’s group. The Deputy Prime Minister’s agency insisted on delaying the interventions until 2010 due to the budget deficit. The Ministry of Finance gave scary forecasts that the food prices would grow after having stabilized as recently as in October 2009. The Ministry of Agriculture, in its turn, insisted that canceling the interventions would bring the investments in the agricultural sector down and put a number of companies on the edge of survival. Ultimately, Yelena Skrynnik’s agency did get funding for state procurement, but the amount was half the declared size.

At the same time, the Ministry of Agriculture started lobbying for extra funds for agriculture support through Rosagroleasing and Rosselkhozbank. Rosselkhozbank was established for implementation of the national credit and finance policy in the agricultural sector and establishment of an effective system of credit services to the agricultural sector. Rosselkhozbank is 100% state-owned. As of January 1, 2010, the bank was number three in capital (157.7 billion rubles) and number four in net assets (951.4 billion rubles). According to IAS statements for 2009, last year the total credit portfolio increased by 31% up to 614.26 billion rubles. Overdue receivables increased up to 6.85%, as compared to 4% in early 2009. In early 2010, the President signed the National Agricultural Security Doctrine, which stipulates significant preferences for Russian agricultural producers.

In 2010, along with the information attack, the pressure on the Minister of Agriculture intensified in the issue of grain reserve sales. In June, Vladimir Putin ordered Skrynnik to find a way of getting rid of the grain which had been procured by grain interventions in 2008 and 2009 and which the state did not need. These measures were intended to reduce the monthly costs of its storage. In 2008 and 2009, about 50 billion rubles were spent on interventions. The procured grain was not sold due to the crisis price fall in the spring of 2009. At present, 1 billion rubles per month is spent on storage of these reserves.

The upcoming deficit on the market was intended to back the sale of the grain reserves. The long period of head together with difficulties in winter crop growing provoked a grain price growth in Russia. In addition to Russia, the cash or other property yield went down in some other countries of the post-Soviet space. According to the US Department of Agriculture, the Russian grain exports in 2010 will amount to 3 million tons. The other 12 million tons, which the US Department of Agriculture had earlier included in its forecasts, will not be exported due to the embargo that the Russian government imposed since August 15, 2010. US producers want to compensate for the reduction of the grain supplies from Russia as well as Kazakhstan and Ukraine as they intend to supply 5.4 million tons of wheat to the world market. The exports from China, Australian and the European Union are also expected to increase. 

However, the Ministry of Agriculture did not hurry to open the Intervention Fund. At the end of 2010, the reserves contained 9.5 million tons of grain. Most of it is food wheat, whereas the Central and Volga regions lack forage grain because of the draught. As a result, the prices of forage grain in Russia were growing even though, according to the government data, over 12 million tons of grain that would otherwise be exported had remained in Russia due to the export ban. In December, Yelena Skrynnik said that sale of forage grain from the state funds would not begin until March 2011.

While Skrynnik’s position became weaker, the influence of Andrey Krainiy went up. The head of Rusrybolovstvo managed to expand his functionality quite significantly and resist the attacks of state companies, namely, Russian Railways and OSK. However, the office victory of the agency was diminished by the cuts of state funding and problems with funding Natsrybflot. For the last few years, the agency has been fighting violently to retain its independence. For the first year of its existence, the Ministry of Agriculture had been trying to regain control over Andrey Krainiy’s agency, and then Rospotrebnadzor tried to take the agency’s functions away. By August 2010, the exhausting office fights left Rosrybolovstvo quite weak with no serious links in the government. Andrey Krainiy’s access to the Prime Minister through Ludmila Putina was closed for the last two years.

Nevertheless, in August the agency gained the lost positions back. At a special meeting, Rosrybolovstvo was given extra functionality and more staff. The order on that matter was signed by the Prime Minister, Vladimir Putin. The document expanded Rosrybolovstvo’s capacities in legal regulation of aquaculture and mariculture as well as navigation safety. Rosrybolovstvo was also ordered to design methodical recommendations for businessmen who are engaged in aquaculture and mariculture including commercial fishing. Moreover, the agency was given an opportunity to draft a law on aquaculture, which will establish a legal background for artificial growing of bioresources; this draft law was submitted to the government in the fall of 2010. In addition, according to the government order, Rosrybolovstvo designed methodical recommendations on training the crews of the fishing ships for navigation safety.

As he expanded the functionality, Andrey Krainiy confronted state companies quite successfully. The main opponents of his agency are Russian Railways and OSK. Every season, the transport monopoly raised the prices of seafood shipping from the Far East. Rosrybolovstvo tried to restrict the price growth legally for the fishing season, but the state company blocked all of Krainiy’s lawmaking initiatives effectively through its President, Vladimir Yakunin. To overcome the resistance, the agency gained the support of nearly all the related organizations and regional governments of the Far East. Powerful allies and good circumstances, i.e. the growth of the food prices, helped Rosrybolovstvo get preferences from the Prime Minister. The latter ordered the Federal Antimonopoly Service to control the growth of the Russian Railways’ prices.

In addition to the transport monopoly, the United Shipbuilding Corporation (OSK) took hostile action against Rosrybolovstvo. At one of the meetings, its President, Roman Trotsenko, began insisting once again that the newly built ships must have quotas for bioresource production assigned to them. Representatives of the industry opposed the top manager’s initiative. Instead of the ship quotes, residents suggested three fleet modernization options, which included establishment of a National Sea Lease Company controlled by Rosrybolovstvo, introduction of secondary circulation of production quotas for water bioresources that could be used as collateral, and abolition of restrictions on the number of employees for companies to pay the United Agricultural Tax. Andrey Krainiy supported the industry people when he said in August 2010 that introduction of ship quotas to keep Russian wharves occupied would break the foundations of the fishing law and might cause an excessive burden on the main fishing population and imbalance of the fleet and the resource base. By joint efforts of residents and Rosrybolovstvo, OSK’s initiatives were excluded from the Prime Minister’s orders.

Having efficiently stopped the hostile actions of the state companies, Krainiy failed to achieve the extension of its main state funding channel, the FTP. Its reduction has put the implementation of Rosrybolovstvo’s key projects at threat. The correction of the effective FTP was stipulated by the government order No. 505 of July 5, 2010. According to the new program parameters, the total amount of funding reduced by 481.6 million rubles and amounted to 61,349.5 million rubles. The greatest cuts were made to the federal budget’s contribution, which will amount to 32,001.9 million rubles (-437.4 million rubles). Funding from Russian regions went down to 255.8 million rubles (-84.2 million rubles). On the contrary, the share of non-budget sources (funds of the fishing sector companies, bank loans, etc.) increased by 40 million rubles up to 29,091.8 million rubles.

The Ministry of Finance was the main initiator of cutting the federal and regional budget expenses. Alexey Kudrin’s agency is cutting non-social FTP intensively due to the treasury deficit. At the same time, the Ministry is withholding current funding for the program, which makes its implementation very difficult. The issue of the FTP extension was discussed intensively at the meeting on Krainiy’s initiative, but the head of Rosrybolovstvo did not get any funding raise guarantees.

In addition to the funding problem, in 2010 Rosrybolovstvo got one more sensitive career strike. Since May 2009, Andrey Krainiy’s agency lobbied for transfer of 27 Far East ships (12 Kamchatka and 15 Sakhalin ones) under the control of affiliates. The ships were registered in the Cyprus, controlled by Russian owners, and their debts belonged to the Russian VEB. Rosrybolovstvo expected that they would become part of the capital of the private OAO Natsrybflot, formerly Rosrybflot, which had been established at Natsrybresursy, a Federal State Unitary Enterprise. The agency hoped to buy both Cyprus-based companies which own the ships for 2,500 dollars each because the fleet had no opportunity to fish. In addition to the ships, Rosrybolovstvo hoped to get 100% shares in the freight companies as collateral in payment of the debt. However, despite all the efforts of Rosrybolovstvo, the 27 ships have never got on the balance of Natsrybflot, which the agency controlled. Moreover, 12 of them were sold to Kamchatka fishing companies already legally. Their full-scale operation started in late 2010. The loss of strategic assets was quite painful for Rosrybolovstvo. As state funding went down, without the abovementioned 27 ships the project of Natsrybflot establishment was at threat.

Automobile construction

For automobile construction, 2010 was a year of non-residents’ activation in the sector. Foreign manufacturers not just opened their own production facilities but also increased investments in the Russian companies. The strengthening of non-residents caused a proportional weakening of the Russian participants including the Rostekhnologii state company. Sergey Chemezov’s state corporation had to give away control over a strategic asset, namely, AvtoVAZ, where the controlling stake will go to a foreign investor.

In the 2nd half of 2010, Renault-Nissan was made an offer to buy the controlling stake in AvtoVAZ. The transaction gave rise to the third and last stage of the Russian car giant reform, which will end the transformation process that has been launched two years ago. The company’s preparations for sale were intensified after the leave of ‘Aleshin’s team’ who belonged to the close circle of the head of the state corporation, Sergey Chemezov. Aleshin designed the establishment of Rostekhnologii and lobbied for a merger of the company’s automobile construction assets intensively. Before he came to AvtoVAZ, he remained the main lobbyist for Rosoboronexport, Rostekhnologii’s predecessor, as the Deputy Ministry of Industry of Russia and the head of Rosprom that was dissolved after the reorganization of the Ministry of Industry and Trade, formerly the Ministry of Energy. It was him that lobbied for a transfer of blocking stakes in AvtoVAZ and KAMAZ to the state corporation some time ago.

As the problems of the Samara car company became worse, Aleshin became the head of the car giant. His main objective was updating AvtoVAZ’ model line and finding foreign partners. With his participation, 25% of the Togliatti plant shares were sold to Renault-Nissan. The non-resident was involved as a junior partner and not a controlling shareholder. Later, a platform for making a new car was bought from Renault-Nissan for 220 million euro. For this purpose, AvtoVAZ even had to take a 171.5 million euro loan from Societe Generale. However, even though there was some progress, Aleshin failed to solve production and financial problems of implementation of new brands. Moreover, the economic crisis showed how inefficient the company’s operations were. As the buying capacity went down, AvtoVAZ could not longer make the necessary profits and needed state funding.

The top management of Rostekhnologii had been showing discontent about Boris Aleshin’s work for a long time. However, it took some time to find a replacement for the top manager of the car giant. At that time, Igor Komarov, Advisor to Sergey Chemezov, was delegated to the plant as Vice President. There also came Oleg Komarov, Vice President for Finance, and Grigory Khvorostyanov, Vice President for Strategy, who had been appointed to these positions two years ago and had worked with Komarov at Norilsk Nickel prior to that. In August 2009, after the affairs had been passed over, Komarov replaced Aleshin at the top position at AvtoVAZ and began optimizing the company’s production processes. After the management rotation, production optimization, and the launch of a utilization program, the car giant’s rates of return began growing.

The improvement of the financial parameters has added a lot of strength to the positions of Rostekhnologii, which is controlled by Sergey Chemezov’s group. The group’s interests are concentrated on state assets in military and transport engineering, raw materials, metallurgy, high-tech sectors, and construction. The group has its own ways to the Ministry of Industry and Trade. Earlier, Rosprom controlled engineering itself, but after its liquidation, these functions went to the Ministry of Industry and Trade; Viktor Khristenko’s agency lobbied for support programs for this sector. All the initiatives went along the line of Denis Manturov, Deputy Minister and a ‘representative’ of Sergey Chemezov. The top management of Rostekhnologii is also in close contact with Igor Sechin. In addition to the Ministry of Industry and Trade, the group controls the Union of Machine Builders of Russia and a number of related entities.

Chemezov managed to make very powerful agencies his enemies including the Ministry of Finance, the Ministry of Economic Development, the Ministry of Defense, and the President’s Expert Administration. The last year was bad for Rostekhnologii, as the campaign that was started against state corporations from the top has weakened the positions of its top manager quite significantly. At the same time, some projects of its expansion to related sectors were blocked by Chemezov’s career opponents. In addition, the Ministry of Finance made successful efforts to reduce the state funding of the car giant, which had exceeded 2 million dollars before 2010. The total amount of state funding for AvtoVAZ amounted to 65 billion rubles, of which the car giant got about 55 billion. The funds were granted to the company in several stages. It was the weakening of Rostekhnologii that created conditions for the sale of the car giant’s controlling stake to a non-resident. Initially it was planned that investors would only get the car giant’s non-core assets. Within the framework of restructuring, the Russian company was planning to transform six production facilities into separate 100% subsidiaries. AvtoVAZ decided to part with the instrumental, molding, and metallurgic plants and the production of molds, plastic molding, and processing of industrial waste. It was planned that the fate of these non-core assets might be decided in 2010.

However, the economic situation changed in the fall. The budget deficit and the slowdown of the utilization program effect made the government to work for the sale of all of the AvtoVAZ. The Renault-Nissan alliance was selected as the strategic investor. The non-resident must bring a new model line of cars on the market for the car giant, which has not updated its model line for five years. Renault-Nissan has quite extensive capacities to develop AvtoVAZ. In the third quarter of 2010, the non-resident’s car sales worldwide increased by 5.7% up to 592 thousand, and the revenue increased by 7.6% up t 8.7 billion euro as compared to the same period in the previous year. Renault sold all of its shares in Volvo AB, a truck and bus manufacturer, and paid one billion out of a three billion anti-crisis loan, which the French government had granted to it in early 2009, before maturity. The company also has unused lines of credit for 4.1 billion euro.

Despite the financial resources, the process of increase of the non-resident’s share in AvtoVAZ up to a controlling stake will take two or three years. The shares will have to be bought from Troika Dialog, which may leave the car giant’s shareholder capital. Rostekhnologii will keep the blocking stake and continue lobbying for the biggest car manufacturer in the government and in the regions.

An important factor of the domestic sectors’ development was the implementation of domestic projects. Abroad, Russia continued lobbying for strategic pipeline projects. At the same time, the residents intensified their expansion to Latin America and Southeast Asia. The American and European vectors of development were less successful. In the European direction, the opposition of Russian power companies and the European Commission has become strained.

In 2010, the European Commission demanded an amendment of the agreement be Russia and Bulgaria for the construction of the Southern Stream. The decision of the European official agency was a response to the November agreements of Moscow and Sofia about the strategic gas pipeline. The Southern Stream project is a system of new gas pipelines that will link Russia to the European Union via the Black Sea bottom. The capacity of the gas pipeline will be 47 to 63 billion cubic meters of gas per year. The memorandum of understanding about the implementation of the Southern Stream project between the Italian ENI and Gazprom was signed on June 23, 2007, in the presence of the Minister of Economic Development of Italy, Pierluigi Bersani, and the Ministry of Industry and Energy of Russia, Viktor Khristenko. The sea section of the gas pipeline is intended to go via the Black Sea bottom from the Beregovaya compressor station on the Russian coast to the Bulgarian coast. The total length of the Black Sea section will be about 900 km, and the maximum depth will be over 2 km. The total investments in Southern Stream are expected to exceed 10 billion dollars. For the land part from Bulgaria, two route options are considered, one to the northwest and one to the southwest. So far, the start and end points have been determined, which are Russia and Italy or optionally Austria.

The long-expected Russian-Bulgarian cooperation became a result of efficient use of ‘the Romanian card’ by the gas monopoly. One should remember that Gazprom had had problems in the strategic Hungarian and Bulgarian directions. The national governments of these countries put efforts to block the negotiations about the Southern Stream construction. To push its partners, the Russian company made a number of steps to neutralize the hostile actions. The gas monopoly intensified its negotiations with Croatia to weaken Budapest’s positions. Gazprom positioned Croatia as an alternative to Hungary for laying the strategic gas pipeline from Serbia.

Ultimately, the macroeconomic situation in the Russian industries was very controversial. On the one hand, the economy has found a way to long-term growth with the fuel and power sector as the main driver. The recovery of the oil and gas prices gave these sectors the liquidity that they needed. On the other hand, the growth still is not systemic and depends on the current circumstances. While the raw materials market is fine, the redistribution in the Russian economy is insignificant, and the transfer of technologies is slow and sporadic.