Arms Chief in Race to Grab Assets

Itar-TassRussian Technologies chief Sergei Chemezov, left, and RusSpetsStal chief Sergei Nosov visiting the Krasny Oktyabr metals plant in Volgograd on Nov. 28.
With his balding head and benign air, Sergei Chemezov seems more like a small-town shopkeeper than the man in charge of one of the world's largest arms exporters.

Since the turn of the year, the usually publicity-shy Chemezov, a close ally of President Vladimir Putin's who heads the newly formed state corporation Russian Technologies, has been at the center of the media spotlight.

The reason for all the attention is Chemezov's seemingly insatiable ambition to grab state assets in up to 250 companies -- from passenger airlines to Mongolian copper mines -- as Russian Technologies, dubbed a new "industrial Gazprom," looks to carve out its startup capital.

Set up late last year on the foundations of state arms exporter Rosoboronexport, which Chemezov also headed, Russian Technologies was given a broad remit to boost the country's ailing technology sector by attracting much-needed investment. But the corporation's mandate has now become so vague that Interfax has simply started referring to it as "consolidating various assets in various economic sectors."

In December, Chemezov submitted a list of nearly 250 state assets that Russian Technologies was seeking to control, Kommersant reported. Analysts see the current wrangles, and the publicity they have attracted, as part of a wider tussle for control going on among the country's ruling elite ahead of the inauguration of President-elect Dmitry Medvedev in May.

Chemezov has previously said he hopes to see the state corporation fully formed by the end of this month.

Although Russian Technologies' acquisition efforts have been one of the most talked-about business stories this year, the corporation itself, the companies on its hit list and the government bodies involved have been reluctant to talk about the specifics on the record.

Chief among the state corporation's goals appears to be an ambitious plan to create a competitor to the country's leading airline, Aeroflot, by claiming the government's stakes in a range of passenger carriers, including consortium AirUnion, S7 (formerly Sibir), Rossia and Vladivostok Avia.

Last week, Prime Minister Viktor Zubkov hosted a meeting with Economic Development and Trade Minister Elvira Nabiullina, Transportation Minister Igor Levitin and Industry and Energy Minister Viktor Khristenko to discuss handing over the assets, Interfax reported, citing unnamed sources from the meeting. A government spokesman said later, however, that the meeting did not appear on Zubkov's schedule, while spokespeople for the ministries declined to comment.

Although Nabiullina raised objections over damaging competition in the sector and the fact that Russian Technologies "has not yet presented an intelligible consolidation program," the government is inclined to give the green light to the project, Interfax reported.

Russian Technologies will present a proposal to the government on incorporating the assets this week, Interfax said.

Officials at Russian Technologies have refused repeated requests over the past month to reveal the full list of assets that the company is eyeing up, and interview requests for this article with senior managers at Russian Technologies and Rosoboronexport have been similarly declined.

A steady series of leaks to the media from people close to both companies have given some indication, however, of the possible takeover targets.

Chemezov's Empire
RosoboronexportArms producer and exporter
OboronpromHelicopter maker
VSMPO-AvismaTitanium producer
RusSpetsStalSpecialist steel manufacturer

Curiously, Atlas, the company that created the EGAIS system for monitoring the country's alcohol sales, figures on Russian Technologies' purported hit list. A spokeswoman for Atlas said the company's management backed Russian Technologies' efforts to take control of the firm.

Russian media have also said stakes in truck maker KamAZ, power station builder Technopromexport and UralVagonZavod, which makes tanks and train wagons, are all on Chemezov's hit list.

Currently valued at about $25 billion, the Rosoboronexport empire already includes car giant AvtoVAZ, the world's largest titanium producer, VSMPO-Avisma, specialist steelmaker RusSpetsStal and helicopter maker Oboronprom. Now all these assets will be transferred to Russian Technologies.

Once it is fully established, the state corporation will essentially act as a giant holding company with the right to float its subsidiaries. Government control will be reduced dramatically and financial oversight will be slashed, analysts said.

"The essence of a state corporation is that they give considerable room for maneuver and increase the influence of the group that controls them," said Dmitry Abzalov, an analyst at the Center for Contemporary Russian Politics.

"Russian Technologies is one of the [biggest] and strongest of these state corporations," Abzalov said. Last year, the center ranked Chemezov's Rosoboronexport empire as one of the seven most powerful business and political groupings in the country.

As part of a metals joint venture with billionaire Viktor Vekselberg, to be called Rusinvestpartner, Russian Technologies is looking to scoop up the state's stakes in a hydropower project near Lake Baikal and in a Mongolian copper mining concern, Erdenet, Kommersant reported. The joint venture is also looking to work with East-Siberian Metals Corp. to mine precious metals in Buryatia, the newspaper said.

"The objective seems to be acquisitions for size rather than integration," said Chris Weafer, chief strategist at UralSib. "Size does matter in Russia today."

But Chemezov's empire-building seems to fly in the face of the liberal-leaning economic policies of President-elect Dmitry Medvedev, who has said he sees limits on state control over the economy.

Speaking to an audience of ministers, state officials and business leaders at the Krasnoyarsk Economic Forum last month, Medvedev called for state companies to bring in executives from the private sector, rather than fill boards with state officials.

"[A] significant share of the functions carried out by state organs should be given over to the private sector," said Medvedev, who heads the board at Gazprom, the only company other than Rosoboronexport to hold an export monopoly.

Russian Technologies' efforts to gain control of the airline stakes also seem to some analysts to make little commercial sense and could seriously disrupt the plans by AirUnion's major stakeholders, twin brothers Boris and Alexander Abramovich.

"I don't see any logic in it. For AirUnion there was a very clear strategy and that is [in doubt] now," said Eduard Faritov, an aviation and automotive analyst at Renaissance Capital.

"What is happening is that you have a very competitive market, and now everything at AirUnion is being put on hold," Faritov said.

The attempts to claim assets in airlines such as S7 might be intended to help artificially bolster demand for domestically manufactured aircraft, Faritov said.

"The only way it makes sense is if Russian Technologies wants to make sufficient demand for aircraft such as the Sukhoi [Superjet-100], but that depends on market forces."

Beyond the government's economic liberals, it seems that Chemezov's industrial ambitions might be upsetting some of the country's other powerful groups.

"The problem now is that Chemezov wants to get so many assets and other influential groups want some of them too," said Abzalov, of the Center for Contemporary Russian Politics.

The Federal Tax Service is thought to be interested in taking control of Atlas, while the government of Tatarstan has been linked to KamAZ, Gazprombank has reportedly moved for Mongolian miner Erednet and any attempts to take over UralVagonZavod could adversely affect Russian Railways.

Yet Dmitry Pertsev, a spokesman for Russian Railways, said by telephone that the company would have no problem if Russian Technologies took over the factory.


Sergei Viktorovich Chemezov

Born: Aug. 20, 1952

Place of Birth: Cheremkhovo, Irkutsk region

Education: Irkutsk Institute for National Economy, specializing in engineering and economics
1975-1980 -- Worked in the Irkutsk Science Research Institute for Rare and Nonferrous Metals
1980-1983 -- Deputy head of the Luch industrial research venture
1983-1988 -- Luch representative in Dresden, East Germany
1988-1996 -- Deputy managing director, Sovintersport, Moscow
1996-1999 -- Head of foreign economic relations at Presidential Property Department
1999-2000 -- General director, Promexport
2000-2004 -- First deputy general director, Rosoboronexport
2004-2007 -- General director, Rosoboronexport
December 2007 -- General director, Russian Technologies
Member of the Academy of Military Science

Notable Quotes: "We lived in the same building and got to know each other through serving together and by being neighbors. ... When you are posted abroad you are always drawn to your compatriots." Interview with Itogi, October 2005, about life with Putin in Dresden.
"I don't understand how you can't get excited by the technical perfection, the harmony and the design of an automatic rifle or handgun." -- Itogi, 2005
"We don't need to compete between ourselves, but to compete with the international giants abroad." -- Interview with Nezavisimaya Gazeta, February 2008, on establishing state corporations.
"The Da Vinci Code by Dan Brown is a very useful book! After reading a few pages, I turn off the lights and sleep." -- Itogi, 2005

Marital status: Divorced, with three sons and a dog.

Hobbies: Hunting and reading Dan Brown novels.

Favorite weapon: Makarov pistol.

Earlier this month, it also emerged that the country's military has become worried by Russian Technologies' potential consolidation of the country's defense industry, with the government's Military-Industrial Committee, headed by First Deputy Prime Minister Sergei Ivanov, drawing up alternative plans to lessen the military's dependence on the state corporation, Kommersant reported.

Chemezov has been actively lobbying for the creation of a state corporation since 2005. Currently, there are five other state corporations, including Rosatom, the state nuclear industry giant run by former Prime Minister Sergei Kiriyenko, the Nanotechnology Corporation and Olympstroi, the company charged with preparing Sochi for the 2014 Olympics.

These steps have encouraged other state-run organizations to push for state corporation status. One of these is Russian Post, the country's ailing postal service, whose new chief, Andrei Kazmin, was sent from his post as chief executive at Sberbank in last fall's reshuffle of senior state officials.

Already in 2005, Chemezov publicly said he hoped to see Ivanov appointed as head of Russian Technologies' supervisory board.

But jockeying between various powerful factions has seen Prime Minister Viktor Zubkov put his man, Defense Minister Anatoly Serdyukov, in that post instead.

"One of Chemezov's major opponents has been Viktor Zubkov, and he managed to make his protege and son-in-law head of the supervisory board," Abzalov said.

Other members of Russian Technologies' supervisory board include Federal Service for Military and Technical Cooperation chief Mikhail Dmitriyev, Regional Development Minister Dmitry Kozak, Economic Development and Trade Minister Elvira Nabiullina and Industry and Energy Minister Viktor Khristenko.

Although he may be little known in the West, Chemezov's career profile certainly gives him all the grandeur, contacts and shady history of the other so-called state oligarchs, such as Russian Railways head Vladimir Yakunin and Transneft boss Nikolai Tokarev.

In the mid-1980s, Chemezov met Putin while both were working in the East German town of Dresden -- Putin for the KGB and Chemezov for an obscure Soviet experimental trade organization, Luch, which some analysts have said was a KGB cover. Living in the same apartment block, the two men became firm friends.

After returning from East Germany in 1988, Chemezov was appointed deputy head at Sovintersport, a state firm with the import monopoly for bringing sporting goods into the Soviet Union, where he worked for the next seven years.

While Putin worked as deputy to St. Petersburg Mayor Anatoly Sobchak, he and Chemezov kept in regular contact, and when Putin later landed a job in Boris Yeltsin's presidential administration, Chemezov was one of the first wave of the future president's acquaintances to join him in the Kremlin. On Putin's recommendation, Chemezov was appointed head of the foreign economic relations at the presidential property department.

In 1999, Chemezov was made head of Promexport, one of several state-run arms export agencies at the time. Soon after his appointment, Chemezov set about uniting the arms export industry and bringing it under his control.

In early 2000, Promexport gobbled up an earlier company called Russian Technologies, and later that year Promexport and Rosvooruzheniye were merged to form Rosoboronexport.

Chemezov became deputy director in the new organization. In 2004 he replaced his boss, Andrei Belyaninov, who according to some reports also served as a KGB agent in East Germany, as head of Rosoboronexport. Belyaninov now heads the Federal Customs Service.

Chemezov's ability to bundle everything together soon earned him the nickname "the Grand Integrator" among industry insiders, Kommersant-Vlast reported.

Thus the current expansionist ethos of Russian Technologies is typical of the way that Rosoboronexport and its predecessors worked under Chemezov. In the seven years since its formation, Rosoboronexport has come to directly or indirectly own businesses in myriad and unconnected sectors of the economy from house construction to warehouse insurance and computer retail.

"We give total freedom to our subsidiary companies and that includes their subsidiaries as well," Chemezov said in an interview with Forbes Russia magazine last year. "No business is forbidden and our companies can work in any sector."

The sprawling nature of Chemezov's empire is characteristic of the way state firms work under Putin, analysts said.

Under this model, a close ally is given a key role to play -- in Chemezov's case boosting the flagging arms industry and rescuing ailing car giant AvtoVAZ -- and then allowed, in turn, to bring his allies onboard to run subsidiary firms and expand their business interests under the central company's protective banner.

Chemezov's record at Rosoboronexport has, on paper at least, been impressive. The agency reported a post-Soviet record of over $6 billion in arms exports last year and $25 billion of orders on its books, and has struck major deals with foreign industrial giants.

French carmaker Renault last month signed off on a deal to pay at least $1 billion for a 25 percent stake in AvtoVAZ, bringing to an end the Tolyatti giant's long-running search for a foreign partner. In aircraft construction, U.S. giant Boeing and its European rival Airbus both buy titanium from VSMPO-Avisma.

Chief among Chemezov's group of loyal lieutenants are Anatoly Isaikin, who replaced him as head of Rosoboronexport when Chemezov moved to lead Russian Technologies, former Federal Industry Agency chief Boris Alyoshin, who was appointed AvtoVAZ chief executive last year, and Mikhail Shelkov, head of Oboronimpex, which runs VSMPO-Avisma.

But when asked to justify their most impressive acquisitions, Rosoboronexport officials have sometimes floundered for an answer.

Pushed at a recent news conference to explain why Rosoboronexport had taken over AvtoVAZ, Isaikin seemed slightly at a loss.

"What made us become the major shareholders in AvtoVAZ was, I think, our overall concern for the, shall we say, automotive production and leadership in Russia," Isaikin said hesitantly.

Despite widespread skepticism about the wisdom of some Rosoboronexport acquisitions, buying titanium producer VSMPO-Avisma appears to have turned out well. A talked-about public offering of the company has been put on the back burner, however.

"All the development plans from the time when it was an independent company are still continuing," said Alexander Yakubov, a metals analyst at Trust investment bank. "The Rosoboronexport purchase changed only the ownership structure -- the management is the same."

"Rosoboronexport's expansion into heavy industry is not so good from the strategic point of view, but if we talk about specific companies then nothing bad has happened," Yakubov said. "They are quite reasonable."

While being absorbed into Russian Technologies could be good for some companies, others should be wary, said Yevgeny Shago, an analyst at Ingosstrakh.

For a company riddled with internal conflicts among the major stakeholders, such as AirUnion, a takeover could help iron out problems, Shago said. "But when Russian Technologies takes over a company that is working well it can be a negative event for the shareholders."