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. Last Updated: 07/27/2016

THE ANALYST: Russian Enterprises End '97 With Gestures of Openness

Russia's capital markets have been pleasantly surprised over the last couple of weeks by a series of announcements connected by a very encouraging theme. Taken together, it would appear Russian managers have gathered and declared unanimously, "We need to start improving the way we run our business."

Ever more aware of the vagaries of an integrated global market with limited capital resources, managers are learning fast that, in order to survive, core businesses must be streamlined, excess assets dumped and greater transparency provided. The bottom line: It's time to improve shareholder value.

Unified Energy System, Russia's third-largest company in terms of market capitalization, led the pack by announcing that it is prepared to sell off more than 100 minuscule businesses that managed to accumulate on its balance sheet over the years. Credit for the move goes to Boris Brevnov, the Boris Nemtsov appointee who has a completely different mentality on how a company should be run from that of his stodgy predecessor, Anatoly Dyakov. (It is nearly impossible to imagine Dyakov making a similar decision.)

According to Brevnov's plan, all of UES's stakes in non-profile companies will be auctioned off for at least the book value. UES, he said, needs to focus on its core business of producing and distributing power. As the young CEO quipped, the company can use one bank, but not 54.

The decision was long overdue. As a general rule, jettisoning garbage is a task all Russian companies could stand to learn.

Let Brevnov's move serve as an example. The mammoth Soviet industrials had a natural proclivity to take non-profile business onto their balance sheets; they wanted to own all the services rendered unto them, as if each company was meant to be its own kingdom. The result of this indiscriminate acquisition binge is that now major companies own financial institutions, dachas, sanatoriums, construction brigades, farms and milk factories.

Now managers are knuckling down to spin off these assets, regardless of size. They have little choice. Last week Mikhail Khodorkovsky, head of the Rosprom-Yukos group, told the press the group has sold its controlling stake in Avisma, one of the world's largest titanium producers. Khodorkovsky explained that Rosprom needs to concentrate its resources on a narrower range of activities, in particular oil. Avisma, he said, is only the beginning of the fire sale, and Menatep-backed Rosprom is in the process of selling "a lot of stuff" it acquired during the discount days of 1993-94.

The trend is that young Russian conglomerates such as Rosprom are realizing that managing a wide scope of business activities -- and managing them profitably -- is a drain on resources, both capital and human. You won't be able to run an empire if you can't manage a city first -- they are finally admitting this to themselves. Core businesses urgently need to be developed. In Rosprom's case, the strategy is to boost oil production by first divesting of other non-crude related businesses. Once the ballast is heaved off, the balloon can begin its flight.

It is a do-or-die situation for all companies. Competition with more experienced, better-equipped multinationals is dictating the rules of survival. In order to be considered world-class competitors, Russian directors are going to have to become better managers. Although giants like Gazprom and LUKoil may produce more than their rivals, on a production-per-employee basis Russian companies usually are at the bottom of the list. This is a disadvantage inherited from Soviet times, when over-employment and the creation of industrial fiefdoms were the accepted way of running a company. But in a rapidly coalescing world economy -- one which is indifferent to borders or social ideals -- businesses must be a bit more frugal.

UES and Rosprom-Yukos aren't the only companies that have caught on. Gazprom earlier this year announced its intentions to streamline its empire, which includes just about one of everything under the sun. Izhorsky Zavody, a leading producer of heavy industry equipment, said it would cut 3,000 workers next year in a measure to cut costs.

Norilsk Nickel, which carries the problems of an entire city on its shoulders, will do the same. This week the company, admitting that it needs to be more open, announced a partnership with a Finnish mining company to help boost its financial situation. Ingosstrakh, the second-largest insurance company in Russia, has appointed a Western auditor and plans to seek a credit rating in 1998.

Year by year, the Russian market is shedding, and will continue to shed, its peculiarities and often ornery idiosyncrasies. It is part of the process of globalization. In order to compete internationally, companies will be compelled to slash expenditures, spin off superfluous businesses and perfect their core activities.

Basically, they must increase shareholder value. Russian managers should know this well: More often than not they are some of the biggest shareholders in their companies.

Gary Peach is the editor of the weekly newsletter Capital Markets Russia.