Kingmakers Dethroned Global Downturn Brings Russia's Oligarchs to Their Knees

By in Moscow

Part 2: Waiting for the Upswing

Back then, the oligarchy supported the Yeltsin government with billions of rubles and, in return, received choice segments of the country's industry -- and ministerial appointments. Now the Kremlin has thrown this process into reverse. Most of the oil and gas industry had already reverted back to government control before the crisis. Last summer, Putin transformed a government defense export agency into a holding with a total of 423 companies. This new entity -- which receives subsidies and essentially acts as a huge state corporation -- is headed by Sergei Chemezov, a close ally of Putin and a former colleague from the days when they both worked as KGB intelligence agents in the former East Germany.

Yevtushenkov still believes, however, that the Kremlin will later re-privatize the companies that it is now taking over. "Our poor Prime Minister Putin has to constantly repeat this," says the magnate. "Everyone knows that bureaucrats make poor corporate managers."

Nevertheless, a fundamental policy dispute is raging between proponents of a liberal market economy, spearheaded by Finance Minister Alexei Kudrin, and supporters of greater state control, led by Deputy Prime Minister Igor Sechin. The outcome of this debate is just as open as the question of when gas and oil prices -- which are crucial to Russia's economy -- will rise again.

One thing is for certain, however: The expansion of Russian companies abroad has come to a standstill. Deripaska has already had to sell at a loss his stake in German construction company Hochtief and Canadian automotive supplier Magna. Steel tycoon Alexei Mordashov did admittedly purchase US coal mining firm PBS Coals last November for €1 billion, but he also announced that he was slashing an investment program worth billions.

Mordashov had become the fourth largest steel producer in the US. But now he's ordered his workers in the northern Russian city of Cherepovets and in Dearborn, Michigan to work reduced hours.

Mordashov's greatest competitor, steel magnate Vladimir Lisin, aborted at the last minute the $3.5 billion takeover of US steelmaker John Maneely. His company's share price had nose-dived by nearly 90 percent within just four months, meaning that the cost of the takeover would have suddenly exceeded his own company's current market capitalization.

Shutting Down the Furnaces

The heart of the Lisin conglomerate beats in Lipetsk, 400 km (250 miles) south of Moscow. The city was founded by Peter the Great, who had cast-iron cannons for his navy made there.

Lipetsk is well known in Russia because of a certain story which is told about the city. It's said that Hitler's air force, the Luftwaffe, spared the city because German airmen had their girlfriends there. During the Weimar Republic, when the German army cooperated with the Red Army, officers were trained in the city.

Vladimir Lisin's NLMK huge steel mill, where a total of 34,000 people work, is located close to the river that divides the city. During the summer, the furnaces are concealed behind pristine birch tree forests. The streets still bear the same Soviet names like "Avenue of the Energy Worker" and "Boulevard of the Rolling Mill Worker," except the air is better, now that modern filters have been installed.

Right now the pollution level is particularly low. The financial crisis has turned out to have an environmentally-friendly side effect: Three out of five furnaces have been shut down until further notice.

At the rolling mill, with its 1,000-meter-long production hall, shift manager Sergei Mazur, 43, monitors the processing of glowing pieces of steel, each weighing several tons. Before the crisis struck, the unit used to spit out a roll every 20 seconds. Now it produces one every two minutes.

Within two months, the NLMK steelworks saw demand plunge, with a 40 percent fall in pig iron sales and a 60 percent drop in steel sales. Deripaska and his car company GAZ, for instance, can no longer pay the bills for steel orders, so Lisin has canceled the deliveries. It's a similar story with thousands of companies across the country.

This has prompted most independent experts to lower their growth forecasts for Russia for 2009 from 7 to 3 percent -- and this is a "best-case scenario," many of them add with concern. In order to support domestic industries, the Russian government has raised import duties for cars, sparking protests in a number of cities.

People like Mazur, who have up till now belonged to the rapidly growing middle class, are afraid that they may soon no longer be able to afford their annual vacation trips to Turkey and Egypt. They can only hope for the next upswing.

Volkswagen buys some of its steel from NLMK. The steel mill's equipment comes from Japan, Italy, America, but primarily from Germany, where it is made by companies such as SMS-Demag and Sundwig. Over the past few years, Lisin has purchased over €200 million worth of equipment in Germany.

When business slows for the steelworkers in Lipetsk, and the Russians purchase fewer cars, this also has consequences for Germany. Over 70,000 German jobs depend on the export business with Russia.

Betting on Potatoes

The close trade relations between the two countries can also be observed in the small village of Popovka, located midway between Lipetsk and Moscow. Russian tycoon Alexander Lebedev has ordered €4 million worth of agricultural equipment from the Grimme company in Lower Saxony. "We are building the largest potato packaging plant in Europe," he says. He has already invested €40 million, and plans to spend an additional €40 million.

Lebedev's operation is a symbol of the risks as well as the opportunities that come with the crisis. On the one hand, he has to pay back foreign exchange loans, which are becoming increasingly expensive due to the creeping devaluation of the ruble. The modest prosperity in the village -- reflected in Western cars, satellite dishes and new houses -- is at stake. On the other hand, Lebedev is venturing into a huge growth market.

"During the crisis, we need ideas that will generate the profits of tomorrow more than ever," he says. And didn't the agricultural minister say that Russia was not only a raw materials superpower, but also a future farming world power? Back under the czars, the country was the world's largest producer of wheat. After agriculture was collectivized, harvests dropped and the Soviet Union eventually had to purchase grain from the West.

In the village of Popovka, population 1,600, Lebedev has purchased the old "Maxim Gorki" collective farm -- and already increased potato production to a level which is 10 times what it was during the final years of the Soviet period.

After all, if so many trendy industrial sectors are no longer making a profit, why not give an old-fashioned business model a try?

Translated from the German by Paul Cohen.


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