Kremlin Inc. Widening Control Over Industry

Workers at VSMPO-Avisma in Verkhnyaya Salda, Russia, examine a molten titanium ingot from a press. The company was just taken over by the state.
Workers at VSMPO-Avisma in Verkhnyaya Salda, Russia, examine a molten titanium ingot from a press. The company was just taken over by the state. (Photos By Peter Finn -- The Washington Post)
By Peter Finn
Washington Post Foreign Service
Sunday, November 19, 2006

VERKHNYAYA SALDA, Russia -- The orange glow of molten titanium ingots illuminates the cavernous factory, one of several Soviet-era facilities that sprawl across 5,000 acres in this small city east of the Ural Mountains. The hot metal will soon be fashioned into dozens of parts destined for Boeing's new aircraft, the 787 Dreamliner.

This throbbing, isolated complex was moved here as the Soviets evacuated their industrial complex to the east in the face of the German advance in 1941. Now it is the headquarters of VSMPO-Avisma, the world's largest manufacturer of titanium, the strong, lightweight metal that is a basic element in the aviation industry. Near collapse in the early 1990s, the company was resurrected into a world-beating enterprise, a key supplier for Boeing Co., Airbus and Rolls-Royce that now controls 27 percent of the global titanium market.

What happened next has become a common occurrence for companies that are too successful in Vladimir Putin's Russia: VSMPO-Avisma was taken over by the state.

In industries such as energy, aviation, engineering, mining and car manufacturing, private companies that emerged after the collapse of the Soviet Union are being brought back under state control or consolidated in the hands of businessmen loyal to the authorities. Government ministers and Kremlin insiders now sit on the boards of the country's largest companies.

And Kremlin Inc.'s appetite for control shows no sign of abating. According to Tatyana Stanovaya, a senior analyst at the Center for Political Technologies in Moscow, the Kremlin is also eyeing new stakes in energy as well as diamond extraction, metallurgy and machine building.

The Kremlin defends the swelling economic role of the state as an essential element in the creation of powerful companies that can compete in the global economy. The takeovers are also officially called a necessary reversal of dubious privatizations in the 1990s that deprived the state of income and strategic assets crucial to Russia's security.

But the emergence of the government as a preeminent business player has also led to charges that the Kremlin is using its vast powers to force itself on unwilling partners, and is wielding its new economic clout as a foreign policy weapon while enriching political insiders.

This effective renationalization of key industries is also a retreat from the goals of privatization, a pillar of Russia's efforts to become a market economy after the collapse of the Soviet Union. The drive to put property in private hands stemmed from a belief that such companies would be more efficient, and more attractive to investors, than the industrial dinosaurs of Soviet times.

"The state has decided it's time to gather all the stones that were cast away; it's all according to the Bible," said Vladislav Tetyukhin, 73, an entrepreneur who, along with his partner, Vyacheslav Bresht, was behind the titanium company's ascent. He bowed, reluctantly, to the takeover. "They told me that for the state it will make sense to have everything in one fist."

Rosoboronexport, the state-owned Russian arms-trading company, this month took the majority of seats on the board of VSMPO-Avisma after acquiring 66 percent of the company's shares, including the stakes of Bresht and of Tetyukhin, who will stay on as general director. The new chairman of the board is Sergei Chemezov, the head of Rosoboronexport and a former KGB officer who served in Dresden, East Germany, with Putin. Chemezov declined to be interviewed.

"Within the global economy, the principal requirement is to be strong and competitive; otherwise, you'll be devoured," Sergei Markov, a political analyst and Kremlin consultant, wrote in a recent article. "Vladimir Putin's policy is becoming increasingly clear -- to promote the creation of a pool of major Russian companies that could become global players. That would enable Russia to preserve the independence of its economy and, amid free competition, to save the choicest morsels of the Russian economy from being acquired by foreign multinational corporations."

Others are deeply skeptical. "We should differentiate between state capitalism and bureaucratic capitalism; here we have bureaucratic capitalism, groups of state bureaucrats taking control of companies," said Nikita Belykh, leader of the small Union of Right Forces party. "The attempts of the state to get control of various companies can be explained by the desire of officials to redistribute property. And the lack of transparency in these deals is scary and dangerous."

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