Russian Multinationals

From Regional Supremacy to Global Lead

Andrei Panibratov

• Publisher: Routledge
• Year: 2013
• Print ISBN:
  9780415615884
• eBook ISBN:
  9781136474514
• Topic: Business
• Subtopic: International Business
• Index: Business

Russian multinationals are playing an increasingly important role in the world economy, particularly in some key sectors such as oil, gas and metallurgy. At the same time, Russian multinationals differ in many respects from multinationals from other countries in that they often receive special treatment from the Russian government, and, because of past experiences, international investors are often reluctant to invest in them. This book presents a comprehensive overview of Russian multinationals.  It discusses the rise of Russian multinationals, examines Russian multinationals' activities in key sectors, analyses the relationship between Russian multinationals and the Russian government and between Russian multinationals and international investors, and concludes by assessing how Russian multinationals are likely to develop in future.

1 The internationalisation of the Russian economy

Russia transforms – economy and enterprise

In Russia the transition from a planned economy to one based on free enterprise began in the mid-1980s but progressed notably slower than in some other parts of the Soviet bloc. The reasons for this have been widely studied at the macro level. At the micro level economists found it harder to move ahead.

Why? The short answer is that a tradition of secrecy shrouded the working parts of the economy. Statistics were ‘doped’ to accommodate a system of command. Companies were obliged to withhold financial information from system outsiders. The ‘near abroad’ of the economy’s dirigiste heartland – barter trade, cash transactions, government subsidy of inefficient enterprises, as well as other sweetheart practices, carried over from Communism. In sum, that made for a fuzzy terrain, difficult and even perilous to investigate. Researchers often needed to dare to expose data rather than just find it.

It had been easier before the advent of Communism. The progress of Russian enterprise was then well documented. Before World War I there was a brisk development of the country’s economy, despite the presence in it of some statism. The country developed a strong industrial base. Then, during the period of the Revolution of 1917, a regime of so-called War Communism was imposed. Large enterprises were nationalised and thus bereft of their profit motivation. This was replaced by the motivation of political correctness. What transpired can only be described as a demoralised economy.

The New economic policy of the 1920s aimed to fix this by dismantling the War Communism system. As the 1920s waned, a centrally planned economy was launched. It created monster industries and monstrous agriculture, but sufficed to win the mother of all wars. In this titanic effort it became stiff in joint and short of breath, failing altogether in 1991. Shortly before that happened, however, a transition process from the spirit of communism began to materialise. It varied in different industries and different regions in Russia, but, as it developed, it brought considerable change in the country’s industrial structure, its product and its entrepreneurial way. This entire process is shown in Table 1.1.

Table 1.1 ifferent phases of Russian enterprise development in the twentieth and the twenty-first centuries

The stages of transition are highlighted in more detail below.

Stage 1: onset of industrialisation

In 1913, foreign investment accounted for about a quarter of the capital of industrial enterprise in Russia. It is estimated that national income (GDP) in that same year was about level with that of the United Kingdom. It was slightly below that of Germany and 21 per cent of that of the United States. On a per-capita basis, however, Russian income was only about one-third of Germany’s.¹

Small manufacturing enterprises played a major role in the progress made in the first two decades of the 1900s. In 1915, such firms employed about 67 per cent of those engaged in manufacturing, or 5.2 million persons. They logged 33 per cent of the total industrial output. But productivity was low: the output per individual was only a quarter of that of workers in large-scale manufacturing.²

Stage 2: shaping the planned economy

Immediately after the Revolution of 1917, strong administrative oversight was applied to the running of the national economy. Workers’ control over factories was imposed; land and banks were nationalised. In mid-1918, all large factories were nationalised. War Communism, in addition to nationalising large enterprises, also banned private trade. It restricted the movement of industrial workers, appropriated by force peasants’ surplus production and set about creating a moneyless society.³

One result of this was runaway inflation. In the years between 1917 and 1921 prices rose yearly, on average, by 1,000 per cent. Combined with the famine of 1921, this led to a collapse of industrial output. Attempting to countervail this, the government thought up the New economic policy (NEP).

The NEP did not lack élan. It attempted to combine planning and market forces by returning agriculture to the hand of the peasant and largely decentralising the management of industry. Private trade was legalised again, pricing partly freed from planning, leeway granted to the regulation of employment. Using these as its principal tools, it eventually managed to stabilise the rouble.

Yet heavy industry, transport, foreign trade and banks remained nationalised and the ones rated as strategic continued to be shackled to the centralised planning system. To be sure, the bulk of nationalised firms were freed from government control and, instead, instructed to operate commercially. They formed themselves into large trusts, growing later into syndicates, which soon became the dominant form of industrial organisation. They were, one could say, the Soviet counterparts to the capitalist cartel.

According to the official statistics, the NEP seemed to be leading to a recovery of the economy. The figures for 1928 showed national income as well as industrial and agricultural output as rising more than 10 per cent above their 1913 levels. It seems curious, therefore, that it was in that same year that the New economic policy was abandoned. National security and policy were cited as grounds, but the main reason given – and never mind the story told by the official statistics – was that industrial capacity had developed unsatisfactorily.⁴

The fact was that, after eight years of Soviet management, investment and military commodities accounted for the same proportion of industrial output as they had before the Revolution. In 1924, steel output had dropped almost a quarter (23 per cent) over 1913.

Stage 3: the life cycle of the planned economy

When the failure of the NEP finally had to be officially conceded, a debate at several levels within command and control decided on a programme which strongly favoured crash development of the manufacturing industry. It did so at dire cost to agriculture as well as to the private sector. The result was famine in Russia’s breadbasket, but also a glut of muscular new manufacturing.

During the 1930s there was a shift from general manufacturing to manufacturing of the heaviest kind. The economy’s excellent growth rates recorded for 1934–36 were in large part due to the completion of big plants begun during the early 1930s. A particularly large success was claimed for the construction industry, but productivity elsewhere was also impressive, doubling from 1932 to 1937.⁵

Toward the end of the 1930s economic growth slowed, especially in metallurgy and construction. One reason for this was a national policy-dictated shift into the military sector owing to the increasing likelihood of war with Germany. It was the most important thing the planners got right, for Germany did indeed attack, in June 1941.

As the foe advanced, the Soviet government spared no effort to dismantle and relocate enterprises. It shipped workers eastwards. By November 1941, some 1,500 industrial enterprises were thus evacuated. Heavy industry, built in the 1930s in western Russia, now produced armaments in the Urals. It was in good part due to this emergency relocation that the share of national income devoted to the war effort increased from about 10 per cent in 1940 to just below 50 per cent in 1943. And, by 1945, over half of the country’s metallurgical output came from the Urals.⁶

Upon cessation of hostilities, a reconversion of war factories to civilian production was begun. The number of ministries, the main function of which consisted of planning and controlling the development of various sectors of the country’s economy, expanded quickly, totalling 33 in 1947.⁷

In the 1950s the Soviet government turned its attention to agriculture. Foreign trade and the economic cooperation between the Soviet bloc countries expanded sharply, and between 1950 and 1958 the volume of Soviet foreign trade almost tripled.⁸

In 1965, a new development programme was adopted which sought to shift operative decision-making from the syndicates and trusts to newly created industrial ministries. These, in turn, were expected to find ways to implement the government’s industrial policies. But while the reform was intended to help industry managers act on their own initiative, the way in which it was handled helped the bureaucrats instead. To cut a long story short, the bureaucrats won.

During the 1970s there was a move to merge enterprises into larger corporations, or associations, within the ministries. Deprived of the power to change matters, these bodies were ineffectual. Many of the products selected by the corporations or associations had components supplied from within different ministries. The bureaucratic jungle thickened.

From the late 1960s, industrial growth in the Soviet Union plummeted. The period beginning in 1970 and extending through the first half of the 1980s became known as ‘Zastoy’, meaning stagnation with no hope of surcease. In 1980 only the oil and the passenger car industries attained their production targets. From 1981 to 1985 the rate of growth of machinery and equipment production, as well as the rate of investment, substantially declined. Technological progress slowed and imbalances flourished throughout the economy.

Stage 4: transition to a market economy

Yet another comprehensive reform in the economic system, the so-called ‘perestroika’, is generally considered to have started in 1985, though some piecemeal changes had preceded it in 1983. A programme concerning industrial enterprises came into force in 1987. Legislation followed, obliging enterprises to finance all their activities from internally generated funds. Failure to do so meant the state could declare the enterprise bankrupt and liquidate its assets. In practice, though, the government continued to subsidise unprofitable enterprises. But perestroika did unclog the economy by permitting limited private ownership of assets and land.

A large-scale transfer of assets into non-state hands began in 1989. Joint ventures with foreign firms were allowed from January 1987. The purpose of the Joint Venture Decree was to encourage closer cooperation between Western and Soviet enterprises. In 1991, there were 1,145 joint ventures.⁹ In May 1991 the Law on Foreign Investments enabled foreign firms to set up wholly owned companies. But joint ventures in manufacturing lagged behind those in other sectors and their volume of output remained low.¹⁰

In 1990, the legislative framework for small enterprises (private or state enterprises with fewer than 200 employees) was established, allowing SMEs to develop faster. This new legal status granted tax advantages. Systematic privatisation, which can be broadly understood as all measures contributing to the de-statisation of economic activity, began in 1991. Its legislative framework was laid down in 1992.

The core ‘technology’ of privatisation in Russia was the ‘corporatisation’ of large and medium-sized enterprises by converting them into joint stock companies prior to their restructuring.¹¹ The aims were to make enterprise independent of state administration, delimit the size of its ownership and separate shareholders from management.¹² In the privatisation programme large and medium-sized enterprises (those with workforces of between 1,000 and 10,000, and 200 and 1,000, respectively) have played the main roles.¹³

The 1992 privatisation programme divided lines of business into several groups. Natural resources, television and radio were barred from privatisation. Mining and energy, transport companies and very large enterprises, city transport networks and pharmacies, among others, required special permission to privatise. The last group consisted of enterprises whose privatisation was made obligatory, including retail and wholesale trade, construction and light industry, unprofitable enterprises and unfinished construction.

Privatisation accelerated quickly. By the end of 1992, only 18 large and medium-sized enterprises had been privatised and 3,485 industrial enterprises were leased.¹⁴ By the end of 1993, 8,509 large and medium-sized enterprises had been privatised, and one year later the figure stood at 16,462. The pace slowed down during 1995, but by the end of that year 17,937 large and medium-sized enterprises stood privatised. They accounted for 88.3 per cent of Russia’s total industrial output.¹⁵

In late 1996 there followed a clean-up. It lasted a few years, mainly targeting large enterprises. In that year the World Bank published a survey of 439 industrial enterprises in Russia.¹⁶ Of this sample (which was ranked by both industrial sector and region), over 60 per cent had been privatised, 25 per cent were still state-owned and 10 per cent were start-ups.

By 1995 most industrial enterprise had been privatised, but it all still needed restructuring. Access to capital for the development of existing companies and for new investments remained tight. This steered restructuring into crisis.

Interruption: national economic crisis (NEC)

The Russian financial crisis, also called ‘Rouble Crisis’, hit Russia in August 1998. It was caused mainly by the Asian financial crisis, which started in July 1997. Given the ensuing decline in world commodity prices, countries heavily dependent on the export of raw materials, such as oil, were affected. Oil, natural gas, metals and timber accounted for more than 80 per cent of Russian exports, leaving the country vulnerable to swings in world prices. Oil posed a special problem. The sharp decline in its price meant a shortfall of taxes paid by energy and manufacturing industries to the state. This helped to bring about Russia’s default on its debt obligations in August 1998. A loss of investor confidence followed, leading to the devaluation of the rouble.¹⁷

The weakening of global demand and the unprecedented fall in prices caused a sharp fall in export earnings (by some 11 per cent year-on-year in the first half of 1998). This had a major impact on Russia’s external and fiscal balances. The tightening of fiscal policy squeezed the economy further and in the second quarter of 1998 recession set in.

We now find ourselves in the first half of 1998. At this point, according to Rosstat, the consolidated budget deficit stood at 4.8 per cent of GDP, but the overall position was made considerably worse by extra-budgetary problems. The strain was palpable, though hard to analyse; however, it sapped confidence in the ability of the government to correct the situation and led to inc...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• List of Tables
• Foreword
• Preface
• Acknowledgements
• Introduction: Russian multinationals – where are they from?
• 1. The internationalisation of the Russian economy
• 2. Multinational genesis
• 3. Exporting from Russia: The oil and gas industry
• 4. Establishing partnerships: The high-tech sector
• 5. Opening subsidiaries: The banking industry
• 6. FDI from Russia: The metallurgy sector
• 7. Acquiring the customer: The telecom industry
• 8. Born to global business
• 9. Strategy emphasis: Government stake or brand power?
• 10. Boundaries of Russian MNEs
• Conclusion: Whither multinationals?
• Notes
• Bibliography
• Index