Kremlin Inc. Widening Control Over Industry

The growing state role in the economy began with oil, when the state-owned energy company Rosneft took control in late 2004 of the prime assets of Yukos, the company founded by Mikhail Khodorkovsky. The oligarch was imprisoned for tax evasion and fraud, and his company was dismantled. The state-controlled energy giant Gazprom, in which the government took a majority stake in 2005, purchased Sibneft, the oil company owned by tycoon Roman Abramovich. Soliciting rival bids was never considered, according to Putin's former economic adviser, Andrei Illarionov.

Several Western oil majors are currently being investigated for licensing and environmental violations, which some analysts describe as a thinly disguised effort to rewrite deals cut in the 1990s and increase the state's stake in energy projects. A $22 billion project led by Shell on Sakhalin Island, north of Japan, is now threatened with the loss of its license. Other billion-dollar projects, involving British Petroleum, are facing a similar fate. State control of oil production rose from 10 percent to 30 percent from 2004 to 2006, and could reach 50 percent next year, according to a recent report by the British company Control Risks Group.

"We welcome foreign investment, but the state has to have a controlling stake in the pillars of the economy," said Vladimir Tarachev, a member of parliament for the ruling United Russia party. "This is not nationalization."

The government is considering a law that would prevent foreign investors from obtaining control of companies working in some industrial sectors, such as energy and mineral resources, defense, aviation, space and nuclear power. And according to Tarachev, there is a strong lobby within the government to subject all foreign investors seeking minority stakes in certain industries to an approval process controlled by the FSB, the domestic successor of the KGB.

Presidential staffers and state officials, including ministers, now sit on the boards of state-controlled businesses such as Gazprom and Rosneft as well as mining, shipping, railway and airline companies. Deputy Prime Minister Dmitry Medvedev, a potential presidential candidate in 2008, is the chairman of Gazprom. Defense Minister and Deputy Prime Minister Sergei Ivanov, another possible presidential candidate, has just been proposed as the head of a new unified aviation corporation that will bring all the country's airline manufacturers under the umbrella of a state-controlled company.

The marriage of politics and business has led to charges that companies such as Gazprom have wielded their power to punish countries such as Ukraine and Georgia, which had drifted from Russia's orbit. Gazprom recently announced it wants to more than double the price of natural gas for Georgia. "State companies are used to solve political tasks both inside the country and internationally," said Vladimir Ryzhkov, a member of parliament and leader of the small opposition Republican Party. "So economic logic becomes a victim of political interests."

Mikhail Pak, an analyst at the investment group Capital in Moscow, said in an interview that titanium could become a tool to realize, for example, Russia's desire to form a strategic partnership with EADS, the parent company of Airbus. Executives at the Netherlands-based company shot down suggestions that Russia might take a management role in the company.

"The state wants reliable people to head these corporations, loyal, patriotic people who will be very different from owners of the 1990s and act for the national interest as the Kremlin defines it," said Stanovaya, the analyst. "And that coincides with the concrete interests of individuals around Putin who strengthen their own economic position as property is redistributed."

Last year, Tetyukhin was invited to tea at the Moscow headquarters of Rosoboronexport, and the conversation, he said, quickly took an unpleasant but not unexpected turn. Executives from Rosoboronexport told him that they wanted to buy a controlling stake in the titanium concern. The tea, he said, suddenly did not taste so sweet.

At first, Tetyukhin and Bresht publicly protested any sale of their shares, but their company quickly found itself under investigation by the tax police, and the prosecutor's office launched an inquiry into VSMPO-Avisma's share structure. Before it was acquired by VSMPO, Avisma, a raw materials supplier, was owned by Khodorkovsky, a potentially dangerous connection.

Rosoboronexport said it planned to move into the metals industry to "prevent the enterprises of the metallurgy sector from being usurped by various organizations, including those acting in the interests of foreign capital and using illegal methods."

Resistance at VSMPO quickly wilted. Tetyukhin, who kept a 3.8 percent stake in the company, said he reconciled himself to the sale based on assurances that Rosoboronexport will maintain the titanium concern as a reliable supplier for its international partners, which now account for 75 percent of the company's $1 billion in annual sales.

In August, Boeing and VSMPO signed a contract for supplies of titanium and semi-finished products worth $18 billion over 30 years. Michael Tull, a spokesman for Boeing, said: "We meet with VSMPO on a regular basis, as we do with all our strategic suppliers. We don't discuss publicly the subjects of those meetings, but without a doubt we have a very close relationship with VSMPO that enables ongoing, regular communication regarding all issues."

The United States imposed sanctions on Rosoboronexport in August for selling equipment to Iran that allegedly could assist in the development of weapons of mass destruction, a charge the company has strenuously denied. The Boeing deal, however, is not affected by U.S. sanctions, which apply only to purchases by the U.S. government, not private companies.