Over the next several weeks, Gateway2Russia will present highlights from this year’s Expert 200, Expert RA Rating Agency’s annual rating of Russia’s 200 biggest and most dynamic companies.

The Ninth Annual Expert 200: Rating Russia’s Biggest Companies

To be completely honest, the ninth annual rating of Russia’s biggest companies seemed rather discouraging at first. The total revenue of Russia’s 200 biggest corporations still hasn’t reached pre-1998 Crisis levels. The actual growth rate for real businesses turned out practically zero percent. However, if we assume that the quality of a business, and not its growth rates, are what really matters, things don’t seem so bleak. Big business is gradually restructuring. Processing sectors are consolidating their positions and in the majority of industries a clear trend toward increasing the production of more highly processed products is emerging. Companies are paying more and more attention to new technologies, including in their administrative spheres. This is extremely obvious when we move from macro-level observations to analyzing industries and individual companies.
A few years ago, big business was the undisputed leader. It demonstrated a faster rate of growth and higher efficiency. Now the situation has changed. The big guys remain the most profitable companies and have the highest labor productivity. They set the pace for thousands of partner companies. They are the main investors. However, growth has moved gradually into smaller organizations.
For the time being, the rule that the more successful the company, the less it wants to be widely known still holds. This is easily explained. By attracting attention to themselves, companies also risk attracting the interest of government officials and facing an array of unpleasant consequences. The positive side of more publicity - the possibility of attracting money from financial markets - remains closed to the majority of companies. In the next several years, this situation will only change if the bond market, which experienced the first liquidity crisis of its short life this year, develops.

Part I: Trends in big business

Hidden growth
Fast-growing businesses prefer to keep their success to themselves. The total sales at the 200 biggest Russian companies grew by 13.6% in 2002. In last year’s rating, this figure was 14.8%, in 2001 62.4%, and in 2000 95.5%. Taking inflation into account (15.1% and 18.6% for 2001 and 2002 respectively, in addition to even greater rates of manufacturing cost increases), we can conclude that we are already in the second year of manufacturing stagnation. In real prices, sales at big companies are not increasing at all and are even falling.
The methods used by the State Statistics Committee could be called into question, but their conclusions coincide with the results of many other independent researchers and with our everyday observations. Yet personal incomes are growing, as are consumer markets and construction. Where is this growth coming from?
A few years ago, the answer to this question was obvious: from big business. At that time, the total revenue at the big 200 grew at a pace 1.6 times that of manufacturing overall (see Chart 3). A year later, the biggest companies not only saw the same growth rates as the rest of manufacturers; they even fell behind slightly (at that time, it was also possible to attribute this to temporary factors and calculation errors). Now, however, the lag is clear: 13.6% versus 16.7% (the average growth at 10,000 selected manufacturers).
This cannot be blamed on methodological errors. Of course, total sales and production growth are not the same things. For a more accurate measurement of production, it would be better to add up total value added. This, however, with today’s quality of bookkeeping and level of transparency, is fairly difficult. If we are trying to observe changes in the overall state of the economy, the absolute numbers are less important than their comparability. We can compare the figures from the last several years because the structure of major companies has not undergone any significant changes.
If this is the case, then elementary logic dictates that small and mid-size businesses are behind economic growth. This is partially true. But only partially so, as in this case changes in growth rates do not explain the changes presented by State Statistics Committee.
The problem is that increased growth has come from companies that are partly or completely operating under the table. While once this “black market” allowed companies to avoid taxes, now the majority of these companies are not only exporting resources under the table, but they are also reinvesting and expanding them.
For example, let’s take IT companies. According to the IT 50 rating, the industry is growing at a rate of at least 30% a year (or double the average rate for manufacturers overall). It is nearly impossible to find official reporting for the big IT companies. In the best-case scenario, you will get seven or eight balance sheets. The remaining companies are either divided up into dozen smaller entities (and therefore slip by almost unnoticed), or operate via off shores, or prefer to do their business in cash.
Here’s another example. According to our extensive market research, the demand for manufacturing products consistently exceeds production (naturally, taking the import-export balance into account). Producers reduce their numbers as a habit, but consumers don’t need to. Clearly, this is why the directors at big companies, when making their forecasts for future development, show growth rates half as low as those already attained. This is again the result of optimizing the flows of money and goods.
Finally, often the owners of large and successful businesses are trying to keep out of the limelight. While discussing this year’s rating we recalled at least half a dozen companies that could have potentially gotten into the rating. These companies appear in rumors and in print fairly frequently, but when asked, their directors insist that legally no such company exists (and there are numerous formally unaffiliated entities), or they lower their numbers, or they just keep quiet. A good example of this is Vimm-Bill-Dann, which entered the Expert 200 for the first time last year, where previously only the companies that made up this holding participated. Or take the entities making up the Guta Group. After this candy and confections holding formed, Krasny Oktyabr, once the model of openness, disappeared from the scene for several years.
From government officials’ point of view, the above companies set bad examples. They don’t pay their taxes and it isn’t clear what the government should do about them. However, from the point of view of Russia’s economy, they are good examples. By setting up their own kind of off-shore zone, they are creating much discussed economic growth. They won’t come out of this zone until it’s profitable, regardless of what law enforcement officials do. For example, when their capitalization will allow them to attract less expensive financing. For the time being, this is only attainable for the few.

The Next Twist in the Spiral

The fact that the growth points in the Russian economy were generally found outside of Russia’s 200 largest companies does not reduce their significance one bit. In fact, practically every rapidly expanding sector is in some way involved with the top 200.  They are either companies located above or below them on the production chain (and sometimes even directly affiliated with the companies in the rating), companies servicing investment demand, or finally companies meeting the consumer demand of the big 200’s employees.

General trends this year:
-  The rating’s stability has increased dramatically, which reflects the now established status quo in the current oligarch lineup. The top 20 remained practically unchanged (Table 1);
-  We can say with great confidence that this year’s expanded share of the natural resource companies is only the result of current market conditions. In the medium term, the processing industries will tend to expand (Table 2, Chart 4);
-  Concentration will decrease (Chart 5);
-  The concentration of financial resources in Moscow is coming to a halt. Previously, the share of Moscow money increased by 5% annually. This year, the relative density of earnings at interregional holding companies headquartered in Moscow increased by less than one percentage point, from 67.9% to 68.8%. The share of companies working in Moscow remained unchanged. At the same time, the number of regions represented in the rating also did not change (Table 3).
-  The achievements of Russian business are gradually being recognized in the West Compared to last year, the number of Russian representatives in Fortune’s Global 500 increased. Gazprom took 235th place, moving up one rank, while LUKoil was 377th, rising from 422nd. YUKOS appeared for the first time among the world’s 500 biggest companies, entering near the tail end of the ranking at 461st. Yet Fortune put YUKOS, according to a variety of indicators, among the rating’s favorites. In particular, the company took 39th place in terms of development dynamics.

The efficiency of big business

To estimate aggregate efficiency when analyzing industries, growth-profitability coordinates were plotted. Analysis of this matrix yielded amazing results. While previously oil companies were occasionally given a run for their money by some other export-oriented raw material industry (usually non-ferrous metals) in terms of efficiency (high rates of growth and profitability), now the situation has changed. For the first time, a domestic market-oriented, and not natural resource, industry has not only broken into the top 200, but has also substantially outpaced the oil companies in terms of both growth and productivity. This is the tobacco industry.

Profits and profitability

The profitability at major companies declined for the second year in a row, and at an increasingly faster pace. The decline compared to last year was 10.8% (4.7% last year). Yet while in 2001 the main factor behind a decline in profits was falling world prices for electricity and metal products, now the reasons are far from clear.
The increased tax burden resulting from new taxes on mineral resource exploitation and increased transportation costs had the greatest effect on oil company results. All in all, they lost 4.3% in profits compared to last year. This decline occurred despite generally favorable price conditions. Among producers of non-ferrous metals, profit declines of more than 63% were due primarily to falling world prices for the industry’s products. The pre-tax profits in the electricity and energy sector fell by almost two thirds, while in the coal industry profits were cut in half. The only natural resource-related industry with increased profits (by 36.8%) according to the results of Expert’s rating was the ferrous metal industry.
Last year’s rating recorded increasing profits in Russia’s processing industries, yet this trend did not continue this year. The machine builders and food producers that appeared in last year’s top 20 most profitable companies in Russia are back, though they did lose some ground this year (Table 5).
Despite declines in absolute figures, big business is still more profitable than medium-sized Russian companies. The profitability edge that big companies have over medium-sized ones can be seen in practically every industry, especially in the chemical and machine building sectors.
One of the leading industries in last year’s ratings in terms of profitability growth, machine building, did not look quite as impressive this year, losing a third of its level in the ratings (Chart 7). While military contractors with major export contracts once dominated this category, this year transportation companies and energy-related machine builders predominate (Table 6).

See the whole rating at www.raexpert.ru