Financial Times (UK) 6 August 2002 Russia's rising tycoons By Robert Cottrell
Boris Berezovsky, the most outspoken Russian "oligarch" of the mid- 1990s, once claimed that he and a few other well connected tycoons controlled half the Russian economy. It was not true but it was good publicity.
Now, however, Mr Berezovsky's dream is being realised - albeit in his absence, since he quarrelled with President Vladimir Putin and fled Russia two years ago.
According to Peter Boone and Denis Rodionov of UBS Brunswick Warburg, the Moscow investment bank, an analysis of Russia's biggest non-government companies shows that "85 per cent of the value is controlled by just eight shareholder groups".
Such is the concentration of ownership in Russia now, some analysts are beginning to speak of a "chaebolisation" of the economy - comparing the rise of conglomerates in Russia to the rise of the chaebol business groups in South Korea from the 1960s on.
If so, that is ambiguous news for Russia. The chaebol system in South Korea has proved good for industrial growth but bad for corporate governance and prone to crashes when over-extended.
Today's Russian tycoons include survivors from Mr Berezovsky's generation such as Mikhail Khodorkovsky, head of the oil company Yukos, Vladimir Pot-anin, boss of the Interros metals and industrial group, and Mikhail Fridman, head of the Alfa banking and industrial group.
Then there are relative newcomers such as Oleg Deripaska and his ally Roman Abramovich, joint owners of the Russian Aluminium group. Mr Abramovich also owns most of the Sibneft oil company and a quarter of Aeroflot. Mr Deripaska controls Gaz, Russia's second biggest carmaker, and several bus plants.
Russia's oil, steel, aluminium, nickel, car and heavy engineering industries are already dominated by the new tycoons. The last basic industries, such as coal and timber, are being bought up now.
The new king of coal looks set to be Andrei Melnichenko, a young Moscow banker who is close to sealing a deal for control of big coalmines in the Siberian province of Krasnoyarsk. These, added to the mines he owns around Lake Baikal in eastern Siberia, will make his MDM Group much the biggest coal producer in Russia.
A struggle for dominance of the timber industry is well under way. The main challenger here is Mr Deripaska, who is reported to be pooling his resources with Vladimir Kogan, a St Petersburg banker, to create a powerful new holding company.
Agriculture is also attracting the tycoons, especially since Mr Putin signed a law this year allowing private ownership of farmland across Russia for the first time since the 1917 revolution. Mr Potanin's Interros group, whose main asset is Norilsk Nickel, the huge metals company, is already one of Russia's biggest livestock producers.
The last great prizes for the tycoons will be the gas and power industries, still largely in the hands of state-controlled monopolies. UES, the electricity monopoly, is due to be broken up in two years' time. If that goes well, pressure for a break-up of Gazprom, the gas monopoly, is bound to grow.
Mr Boone and Mr Rodionov have analysed ownership of 64 of Russia's biggest companies, with total sales in 2000 of $109bn (э69bn). They found that $47bn in sales was attributable to government-controlled companies, mainly Gazprom and UES. The privately controlled companies had sales of $62bn, equivalent to 25 per cent of gross domestic product. Eight groups of investors and managers controlled the companies, accounting for 85 per cent of those sales.
This marks a big change from the initial pattern of Russian privatisation in 1992-94. Factories were sold off individually and on average employees received about 50 per cent of the shares, management about 9 per cent and the government or other outside shareholders 41 per cent.
Three main factors have encouraged the consolidation of industry and the concentration of ownership. The first was an early trend among managers to buy shares cheaply from employees, often using the company's funds.
Next came the notorious "loans for shares" deals of 1995-96, when the Russian government allowed a small number of financiers to buy the state's biggest oil and mining companies for very little. The aim was to create a business elite loyal to President Boris Yeltsin, who was seeking re-election. The favoured financiers were commonly called the "oligarchs".
The third big shift in ownership came after Russia's default and devaluation in August 1998. Foreign investors and bankrupt Russian banks sold their stakes in Russian industrial companies. The tycoons who controlled exports of oil and other natural resources had the cash to buy those assets at fire-sale prices.
Now the dominance of the tycoons is being reinforced by the underdevelopment of the Russian banking system. The shortage of credit makes it difficult for newcomers to mobilise cash for acquisition and investment. "There is no channel for transferring money from cash-rich companies to other sectors of the economy," says Andrei Kostin, head of Vneshtorgbank, a state-owned Russian bank.
A second factor deterring new competition is the weight of red tape and corruption that suffocates small business in Russia. The big tycoons, by contrast, have the money and influence to combat or collude with the government. Roland Nash, head of research Renaissance Capital, a Moscow investment bank, sees the scope for "price-setting at best and political manipulation at worst", as one of the main potential dangers to Russia from excessive concentration of ownership.
It is not quite fair to compare Russia's conglomerates to South Korea's chaebol, says Christopher Granville, strategist with United Financial Group, a Moscow brokerage, because the Russian government plays a much smaller role in industrial policy. It does not steer investment and credit in the private sector as the South Korean government did.
The comparison does, however, reflect well the degree of concentration of ownership in Russia, which resembles that of South Korea in the mid-1990s. Then, according to International Monetary Fund data, the 30 largest chaebol owned two-thirds of the 100 biggest manufacturing firms and produced 16 per cent of GDP.
South Korea's chaebol system produced rapid growth from the early 1960s to the late 1990s by mobilising investment and importing management skills. In Russia, too, the growth of conglomerates since 1998 has contributed to a rise in industrial investment and output.
For those reasons, concentration of ownership does not yet rank high on the Russian government's list of worries. One Kremlin official says if Russia can emulate South Korea's growth rate, it can worry about the problems later.
It may be, as Mr Boone believes, that the concentration of ownership will be diluted as new manufacturing and service industries grow in Russia and as foreign investment increases. Some tycoons may turn into sellers of assets as prices rise.
Others are less sanguine. Evgeny Gavrilenko, chief economist at Troika Dialog, another Moscow investment bank, suggests looking back at the record of Russia in the last 30 years of the Soviet Union, from 1961 to 1991, when investment doubled as a share of GDP but growth collapsed. The main problem was a misallocation of investment resources.
Now, says Mr Gavrilenko, the growth rate and the ratio of investment to GDP in Russia are similar to those prevailing in the early 1960s. Russia is at "a fork in the road", he says. If it can put a strong banking system in place to allocate investment resources efficiently, and lower the barriers to new business to stimulate the maximum of competition, it may yet achieve high and sustainable economic growth. If not, he says, another economic crisis will be "inevitable".