Western-Style Capitalism, but With a Russian Accent

Russian Orthodox priests prepare to bless an assembly line at a Niva sport-utility plant near Moscow that is part of a joint venture between General Motors and AvtoVaz. The Niva is the best-selling SUV in Russia, making a profit for GM.
Russian Orthodox priests prepare to bless an assembly line at a Niva sport-utility plant near Moscow that is part of a joint venture between General Motors and AvtoVaz. The Niva is the best-selling SUV in Russia, making a profit for GM. (By Maxim Marmur -- Associated Press)

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By Steven Pearlstein
Friday, July 13, 2007

MOSCOW

There is a deep contradiction developing in the Russian economy. On the one hand, Russians are embracing capitalism of the sort you'd find in Western Europe or Asia. But at the same time, the country is slipping back into a new kind of state-guided capitalism built around expansionist state-owned enterprises, national industry champions and a new breed of oligarchs who take their cues from the Kremlin.

The march toward free-market capitalism is led by multinational corporations that are bringing Western management techniques, governance, reporting and accounting standards to what had been something of a free-market free-for-all during the first decade after communism's collapse. But these days they are joined by home-grown Russian companies eager to gain access to Western investors and lenders and achieve the respectability and wealth that comes with listing shares in Frankfurt, London or New York.

It is these developments that have given companies such as Alcoa the confidence to invest more than $550 million to buy and modernize two formerly state-owned aluminum plants that are hundreds of miles from the capital.

Alcoa's Russian manager, Bill O'Rourke, doesn't gloss over the challenges involved in shedding 3,000 employees, focusing those who remain on safety and productivity or even just getting new equipment through the maddening Russian customs system without paying a bribe. And although the two plants are not making money, Alcoa is sufficiently encouraged by the quality of the workforce and the potential of the growing auto and aerospace markets here that it is thinking about expanding its presence.

Equally enthusiastic is General Motors, despite a somewhat rocky start with a joint venture that, at one point, was shut down over a dispute involving the cost of engines and parts supplied by its partner, AvtoVaz, a state-owned company.

Although not known for its quality or styling, the Niva is the best-selling SUV in the booming Russian car market, turning a profit for GM. Now, GM has decided to go it alone by building a $115 million plant to produce its own cars, just as Volkswagen, Ford, Nissan and Toyota have done. The plants are clustered just outside of St. Petersburg, which is quickly becoming the Detroit of Russia.

Even oligarchs who may have got their start obtaining state-owned assets through unsavory means have now adopted the trappings and strategies of the multinationals, hiring Big Four auditors and Wall Street law firms, making strategic acquisitions in the West and traveling to industry conferences to tell analysts that their shares are undervalued.

One such oligarch is Vladimir Yevtushenkov, a PhD in economics and chemical engineering who parlayed his longtime association with Moscow's powerful mayor to rank No. 14 on the list of Russian billionaires. Yevtushenkov got his start by buying the Moscow telephone monopoly after three other parties mysteriously dropped out of bidding.

But his $11 billion-a-year AFK Sistema empire, which is run out of an elegantly restored 19th-century mansion that once housed the city department he headed, has long since branched out from its Moscow base. It now has significant holdings in banking, retail, aerospace, tourism, cable television, health care, oil and real-estate development. One of his companies produced the 2005 Woody Allen movie "Match Point."

But just when you think Russia has caught the free-market bug, you are confronted with another industry that has been naturalized or consolidated around a politically chosen national champion, or a state energy company that has decided to buy a bank or a newspaper, or a minority shareholder who has just been robbed of his investment.


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© 2007 The Washington Post Company

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