Having finished ‘collecting together’ various industrial assets from the Soviet legacy of past years, Rostec transfers to a new state of development. Its aim is to turn the state corporation into an institution for the high-tech development of Russia.
The state corporation Rostekhnologii was set up by presidential decree in November 2007. A year later, as a property contribution by the state, 437 organizations were handed over to it, including 148 in subcritical or critical condition; 28 at the stage of bankruptcy; 17 that were dormant; and 27 that had had lost some of their assets or were at serious risk of doing so. According to Rostec, aggregate losses totaled over 60 billion rubles.
By 2010, however, the corporation received its first consolidated net profit – 15 billion rubles. In 2016, this figure reached 88 billion. Consolidated revenues rose from 500 billion rubles in 2009 to 1.5 trillion in 2017. To achieve this result, Rostec had to undergo a serious restructuring over an entire decade. During this process, the assets received initially were merged into clusters by type of activity and the companies themselves underwent financial sanation and additional capitalization.
Asset structuring followed the strategy for development of the state corporation (‘Strategy 2020’), adopted in 2011. During the first stage, from 2011 through 2014, it was proposed to prepare for growing the corporation’s business. During the second (2015–2017), to provide for revenue growth of 14%. At the same time, the main events planned in the Strategy 2020 were fulfilled substantially ahead of time – by 2014, when the corporation received its new name, Rostec. This included completion of the corporation’s asset consolidation, sale of some of the non-core assets, establishment of a fund for innovative and investment development, completion of corporatization of over 92% of the FGUPs, and introduction of a strategy and action plan for the majority of the corporation’s holding companies.
“When Rostec was set up, we were saying that the state corporation would be a factory for creating high-tech production units and assets of interest to investors,” Rostec CEO Sergey Chemezov said in an interview for Kommersant. “To tell the truth, at the stage of incorporation, there were virtually no such assets. When, though, an asset reaches a certain stage of development, then investors take an interest and it can be sold.”
One of the first assets that Rostec undertook to put in order was AVTOVAZ. The car manufacturer was in a difficult economic position. The shares in the plant belonged to its own subsidiaries. Given such a structure, the company’s owners were, in essence, its top managers.
Rostec undertook to clean up the capital together with the investment company Troika Dialogue. In parallel, the question of the non-core assets, with schools, stadiums, hospitals and sanatoria, a bus fleet, and a water supply system all ‘hanging’ on the balance sheet, was resolved. The ‘cleansed’ enterprise became of interest to serious investors. Renault became a shareholder in AVTOVAZ by initially acquiring 23% of the car-makers and subsequently increasing its block of shares in AVTOVAZ to a controlling stake.
In 2008, another major transaction took place. Daimler AG, the Troika Dialogue Group, KAMAZ, and Rostec signed an agreement to sell 10% of the shares in KAMAZ to the German corporation Daimler. In 2009, KAMAZ and Daimler AG set up a JV on a parity basis to produce and sell Mercedes-Benz heavy trucks. In 2016, the 10,000th Mercedes-Benz truck came off the company’s conveyor belt. The Daimler KAMAZ RUS JV is now preparing to launch a new cabin body assembling plant in Naberezhniye Chelny.
With the help of Rostec, stable operations were restored at the world’s biggest producer of titanium and semi-finished items out of titanium alloy, VSMPO-AVISMA. As Sergey Chemezov said in a TASS interview, it all began with a conversation he had at an international motor salon with then-executive vice president of Boeing, Alan Malalli. “We got talking and he complained that the works in Russia producing titanium goods on orders from the Americans was constantly missing delivery deadlines and sending over substandard output, causing the company serious problems,” the Rostec CEO recounted.
Later, Chemezov got to know the co-owner of the enterprise Vladislav Tetyukhin, who admitted that the quality of the output was sometimes lacking but there were no funds for development. “I visited the workshops and the situation was deplorable: terrible dilapidation, dirt, rivers of machine oil beneath the feet,” Chemezov noted.
The main block of shares at that time belonged not to Tetyukhin but his partner Vyacheslav Bresht. The first round of talks on a sale of the shares came to nothing. It was decided to involve Renaissance Capital in the deal, and this company subsequently bought up the controlling block of shares in the enterprise for Rostec. The state corporation began investing in updating the productive capacity to ensure output of high enough quality to fulfil the demand of world markets. The Ural Boeing Manufacturing JV was registered, new workshops built and fitted out with the latest processing equipment. The renewal process lasted about five years, with all the company’s proceeds being ploughed back into the technical refitting and creating a modern model for managing production and the business. As a result, VSMPO-AVISMA became a modern, high-tech enterprise and the biggest supplier of titanium semi-finished goods on the world market.
In 2013, Rostec sold 45.42% of the shares in OAO Corporation VSMPO-AVISMA. The shares passed to ZAO Business Alliance Company (BAC), where 75% plus one share belonged to the management of VSMPO and the remainder to Gazprombank. The deal was worth about $970 million. As a result, BAC received 50% plus one share in VSMPO (the managers transferred to the ZAO the 4.6% that already belonged to them, leaving Rostec with 25% plus one share and allowing the company to control this strategic asset.
Support for and maintenance of core enterprises were performed all this time at the expense of state subsidies and the financial rehabilitation fund. The latter is replenished with money earned by Rostec: Year-end profits are partly distributed to the fund.
According to Deputy General Director of Rostec Alexander Nazarov, since 2008, 38 problem assets have received budget subsidies to prevent them from going bankrupt, to a total of over 10 billion rubles. At the beginning of 2018, only 18 of the subsidized enterprises were still on the register of problem assets.
It is important that allocation of subsidies and loans and provision of guarantees are performed on the condition of utilizing the production capacity. This principle allows the majority of enterprises receiving financial support to stabilize their operations.
“We are prepared to sell assets when we are the minority shareholders, so do not impact fully on the governance processes. In such cases, we consider our participation from the perspective that, with our resources, we help the enterprise to develop, capitalize and buy out stake and then develop independently,” Alexander Nazarov explained to TASS.
In particular, precisely such a scheme was applied in relation to the companies Skartel and Yota Devices, which Rostec supported in the initial stages and then released to float successfully on their own.
In October 2008, the state corporation exercised the option to acquire a 25.1% stake in Skartel (Yota brand). In an interview with the newspaper Vedomosti in the spring of 2009, Sergey Chemezov recounted that, three years before, he had been approached by the head of Skartel, Denis Sverdlov, with an idea “right out of science fiction” to set up a WiMax operator. Even so, Chemezov agreed to support them – Rostec helped Skartel obtain frequencies, and, at the end of 2008, the state corporation obtained a blocking stake in the company. In 2010, Yota announced plans to transfer from WiMax technology to a new data transfer technology – LTE and, already by August of that year, Russia’s first new communications standard network went into pilot mode. In 2012, the shareholders in MegaFon and Skartel announced a merger of their assets.
Before that, the smartphone subdivision was split off from Skartel and, in June 2011, it was transformed into Yota Devices. In 2013, the YotaPhone mobile device developed by this company was recognized as the best and most innovative telephone at the prestigious international exhibition of consumer electronics CES 2013 in Las Vegas. At the end of 2017, the state corporation exercised the option of selling its 25.1% stake in Yota Devices to Chinese investors.
At the end of 2017, Rostec CEO Sergey Chemezov announced that there were virtually no more critical production units within the state corporation’s structure. At the same time, as some enterprises were rehabilitated, the assets of the corporation were replenished with new problem organizations.
In particular, in 2017, Rostec took control of Uralvagonzavod (UVZ). The company was in a very difficult situation: It was burdened by huge debts not secured by obligations of the former management and was suffering difficulties in selling its civilian output.
By government decision, over the course of the year, 100% of the shares in UVZ were handed over as a property contribution to Rostec. By December 2017, the RAEX rating agency confirmed the credit rating of UVZ as ruВВВ (“high level of creditability”). At the same time, the rating forecast was improved from ‘stable’ to ‘positive’. In the opinion of RAEX representatives, a positive effect on the enterprise’s credit stability was caused by the change of management team, strengthening of corporate governance and the trend toward reducing debt and increasing profitability. At Rostec itself, they note that the strategic plans for developing UVZ were geared toward intensive debt reduction through sale of non-core assets, building of transparent business models, and measures to increase profitability in the civilian output production segments. In February 2018, Rostec virtually completed the process of rehabilitating the Kalashnikov Concern. The company, called NPO Izhmash at the time, was included in the state corporation in 2013 when it was in a pre-bankruptcy condition. In 2016, 26% minus one share in Kalashnikov was sold to the head of the corporation, Alexey Krivoruchko, and his company Transkomplektholding. Later, a private investor bought up an additional block and brought his stake up to 75%. Following the transaction, which was worth 1.5 billion rubles, Rostec retained its blocking stake (25% plus one share) in the enterprise.
As a result of the restructuring and modernization, the company’s financial indicators improved substantially. Over 2017, the Kalashnikov Group’s revenues amounted to about 26 billion rubles, the company owing this success largely to the efforts made to grow competences in the new spheres of ship-building and production of caterpillar-tracked vehicles. In particular, to this end, in 2016 and 2017, Kalashnikov acquired AO Rybinskaya Verf and took over management of the Vympel ship-building works. The wharfs design and build speedboats, small and medium-draft vessels. This fleet is produced for the needs of the Ministry of Defence and for civilian purposes. The company focuses particularly on technical modernization of its production. Implementation of the 2014–2017 investment program of 15 billion rubles made it possible to renew the equipment of the Kalashnikov Concern production site in Izhevsk, reduce production space and cut costs, while substantially increasing labor productivity.
In 2015, a new strategy for development of the corporation was approved, its main aims being to increase the share of high-tech civilian output to 50% and bring Rostec into the world’s top 10 industrial companies by revenue, putting it on a level with the global leaders – GE and Samsung.
Attainment of these goals will depend on the corporation’s ability to ensure an annual ruble revenue growth of 17% by increasing the share of Rostec output on current markets and entry into fast-growing new segments. It is expected that the key market for the corporation in 2025 will be telecoms equipment, aircraft components, helicopters, medium and heavy trucks, radioelectronics, security systems, medical equipment and pharmaceuticals, materials and chemicals, IT, automation, and robotic equipment.
The corporation intends to finance the investment program itself, one source being privatization of part of the assets and involvement of investors and partners.
In February 2017, Rostec agreed to sell 12% of the shares in the Russian Helicopters holding company for $300 million. The buyer was a consortium comprised of the Russian Direct Investment Fund and Middle Eastern funds. A potential subsequent increase in investment to $600 million was agreed. The funds raised were allocated for implementing the holding company’s strategy and business plan, including development of new types of helicopter. In addition, the investors’ funds will allow Russian Helicopters to continue expanding on to new markets in the Middle East.
In November last year, Rostec plans were announced to sell to a private investor 49% of the shares in the High Precision Systems holding company, which produces missile and air defense systems. According to the Rostec terms, only 100%-Russian residents with successful experience and competences in the defense industry and civilian production may purchase the block.
In choosing an investor, the potential buyers’ assets, activities, origins, management experience, and reliability will be checked, as will the quality and scope of the proposed investment program. A shareholders’ agreement is planned to conclude with the tender winner setting forth the obligations of the new owner. These include modernization of production capacity, unconditional fulfilment of state defense orders, and a significant increase in the share of civilian production. The controlling block of shares (at least 51%) will remain with Rostec.
Rostec is also considering options for cooperation with other major holding companies. In 2017, the state corporation signed an agreement of intent with AFK Sistema, envisaging creation of an amalgamated microelectronics company. It is proposed that AFK Sistema and Ruselectronics, which belongs to Rostec, will contribute to the amalgamated company their assets specializing in development, production, and certification of electronic component platforms.
The initiative of merging the assets is being implemented in accordance with the Rostec strategy designed to draw investment partners into the company to ensure the country’s technological sovereignty. “The amalgamation will allow a transition to implementing a unified scientific and technical and output strategy, centralization of program research and development, expansion of cooperation between enterprises, optimization of the loading of production capacity and their greater operating efficiency,” Rostec explained of impending integration’s goal.
Development of public-private partnerships, raising of investment in high-tech industries, modernization of production units, creation of new technologies and products – these are the main elements of the corporation’s growth strategy. By 2025, the positions and competitiveness of Rostec on world markets and the corporation’s results in general will depend on their realization.
When Rostec was set up, it consisted of a group of diverse enterprises. Today, its structure is made up of three major clusters by type of activity, accounting for 80% to 85% of its aggregate revenues, plus a few companies directly subordinate to the corporation, for instance, KAMAZ and AVTOVAZ.
The aviation cluster is comprised of enterprises in the following industries: helicopter building, production of avionics, and aircraft components. The biggest of these are United Engine Corporation, Russian Helicopters, KRET, and Technodinamika.
The second cluster is radioelectronics, including production of telecoms equipment, computer hardware, electronic component platforms, optics, security systems, and medicine. These are concentrated in the Ruselectronics and Shvabe holding companies and the Avtomatika Concern.
The third is an armaments cluster. It is made up of high-tech weaponry manufacturers, missile complexes, MLRS, ammunition, military gear, drones, and small arms. It is represented by such holding companies as Tecmash, High Precision Systems, Kalashnikov Concern, NPO Splav, and TsNIITochMash.
