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. Last Updated: 07/27/2016

Food for Thought: When Pasta Goes Private

NIZHNY NOVGOROD, Russia -- The Vermani noodle company joined Russia's expanding ranks of privatized firms eight months ago, and on the surface nothing much seems to have changed.


Inside the drooping 1938 factory in this large Volga River city 400 kilometers east of Moscow, sparrows still flit above the automatic spaghetti maker. But for Vermani's 300 workers, privatization has brought dizzying change. Their Soviet-era boss was ousted at a bare-knuckled shareholders' meeting. The Moscow-based mutual fund Alfa Capital, run by 20-something financiers, is gobbling up stock and seeking control.


In the land of the drab and the nameless, bright new packaging is appearing, with brand names and marketing strategies to match. And there has been enough high-level back-stabbing and intrigue to last most companies a decade.


How Vermani, and thousands of companies like it, adapt to the "post-privatized" world has emerged as a key to the success or failure of Russia's reforms. Thanks to the largest national yard sale in history, more than half of Russia's workforce now toils in the private sector, according to a spokeswoman for the quasi-official Russia Privatization Center.


The turmoil at Vermani (the name comes from the first letters of the words vermicelli, macaroni and Nizhny Novgorod) in some ways is what reformers in Moscow hoped for when they launched the fastest and most ambitious sell-off of state property ever attempted.


But the Vermani story also shows tremendous roadblocks in the system that keep privatized firms from operating as an Econ 101 textbook might predict. A monopoly flour supplier, entrenched state and local bureaucracies and an overall economic slump have conspired against an early rebound for the noodle plant.If the ultimate goal of privatization was to provide jobs, increase production and build a constituency for change, Vermani cannot yet be judged a success. Its payroll has declined from 320 to 300, and it is operating at less than half its capacity, according to new general director Vladimir Kuzmin, 38.


Still, Kuzmin, until recently Vermani's chief engineer, allowed himself a half-smile one recent morning as he explained the biggest difference in life now. "It's certainly not boring," he said.


From Kuzmin's spaghetti line, it is a world away to the gleaming wood-top desk of Igor Smolkin, 24, the finance director of Alfa Capital. Large men guard the front door. DHL envelopes and Filofax notebooks bespeak an international connection.


When President Boris Yeltsin issued privatization vouchers to every Russian man, woman and child as their stake in the Soviet economy being dismantled, Alfa swung into action, offering to buy vouchers in exchange for shares in an investment fund. Aided by a Western-designed television advertising campaign, Alfa wound up with 2.3 million vouchers, making it one of the largest of the nation's new stock funds.


Alfa's young researchers and fund managers then began roaming the country, poking into assembly lines and attending auctions of state-owned firms.


It was the factories that attracted Alfa, in particular those manufacturing consumer goods and food products. "They don't feel the production decline as much," Smolkin said. "No matter what, people have to eat -- and these sectors will recover first."


Using rubles and vouchers, Alfa bought sizable stakes in about 50 companies, taking positions on the boards of directors of 10, Smolkin said. Eventually, it hopes to establish a brand name linking the factories and signifying quality.


"It will take several years for consumers to get used to the idea that domestic products can be high-quality too," Smolkin said. "They're used to buying no-brand products that all look the same, which might come from a decent factory one time and somewhere else the next."


Alfa liked Vermani because it was one of the country's five biggest pasta makers; because it was outside Moscow, where prices are inflated; and because it already owned modern Italian pasta-making equipment.


Fearing social unrest during the last Soviet years, the government spent generously to make sure the country did not run out of basic foods -- especially bread, potatoes and noodles -- and Vermani had been one of the beneficiaries.


At the auction last June, the factory workers and managers held onto more than half the stock, thanks to preferential prices built into the privatization program. The local government kept 20 percent, and Alfa emerged with about 25 percent for an investment of about $250,000. That was enough to shake things up.


By December, Alfa's managers had decided that incumbent general director Alexander Knutov was not the man to lead Vermani into the future. And on Dec. 19, chief engineer Kuzmin forged a coalition of young workers and the Alfa fund to squeak into office with 51 percent of voting shares behind him.


But Kuzmin is not entirely happy. First, he said, the Saratov flour mill -- still state-owned and the only supplier within hundreds of kilometers -- stopped selling flour after Knutov was ousted.


Then the local Anti-Monopoly Committee, still worried about social unrest, clamped a 15 percent profit limit on Vermani to keep prices down, arguing that as the only noodle maker in Nizhny, the factory constitutes a monopoly. Meanwhile, the local bread bureaucracy, having turned itself into a "private association," offered to intercede with the Anti-Monopoly Committee to raise the profit limit to 30 percent -- if Vermani kicked back 7 percent to the association, Kuzmin said. "To us, naturally, this is robbery," he said, explaining his refusal to pay.


But Kuzmin's biggest worry now is his backer of three months ago, Alfa Capital. In a Russian version of Main Street versus Wall Street, Kuzmin accused Alfa of unwarranted interference.


Back in Moscow, Alfa's financiers shrugged off the criticism. They said they hoped they would not have to install yet another new director at Vermani, but they did not rule out the possibility.


Meanwhile, Kuzmin has hired Tetrapak to design a bright yellow box for his spaghetti, complete with a new company logo. He is advertising in under-served markets in Siberia and northern Russia. And he is seeking to attract Western investors, offering a controlling stake in his company for an investment of $3.5 million.


"But that's just a starting offer," Kuzmin added quickly. "We're prepared to negotiate."