Russian companies of various sizes are actively buying up assets around the world. Europe has proven particularly attractive for Russian money. By acquiring European companies from the heirs of the old bourgeoisie, Russians are gaining access to new markets, modern technology, and cheap financial resources.

Yana Galukhina and Maxim Rubchenko

Last week, the Financial Times reported that American steel giant US Steel planned to acquire assets in Eastern Europe. Over the last three years, the entire world has picked up on the fact that Russian companies are buying up manufacturing assets abroad with increasing energy.

An unexpected arrival

Russian companies began buying foreign assets around four years ago. Oil companies were the first to move in this direction by actively acquiring refineries in the NIS and Eastern Europe in 2001-2. As the Russian economy grew, the oil barons were joined by other large Russian companies, only to be followed by mid-sized and small business.
Corporate giants naturally buy major foreign assets. For instance, Severstal acquired the fifth largest metal producer in the US, Rouge Industries. The Novolipetsk Metal Works became the new owner of a factory in Denmark, while Norilsk Nickel bought Stillwater, the only significant producer of platinoids in the US. LUKoil, meanwhile, acquired production and refining assets in Serbia.
Despite the burdens of the new tax system, in 2004 Russian oil companies distinguished themselves by acquiring new foreign assets. LUKoil bought the second largest chain of gas stations in the eastern US, Mobil. In May, YUKOS in an elegant gesture acquired a terminal in the Rotterdam port. For Russian oil companies, this was very much like what opening a branch in Switzerland means for banks.
Companies from other sectors followed in the footsteps of the natural resource producers. The first stage of this process was concentrated in the NIS. Leaders in Russian mobile communications made fairly serious purchases in Central Asia. Vympelkom won a tender for a 100% stake in Kazakhstan’s second largest cellular provider KaR-Tel, while MTS spent $121 million on a 74% stake in the largest Uzbek mobile company, Uzdonorbit.
Russian developers also acquired foreign assets and are currently storming the Ukrainian real estate market. In February, the Moscow Investment Construction Company signed an agreement to build the 35,000-m2 Moscow City residential complex in Lugansk. Inteko bought a 10-hectare plot in Kiev where the company plans to build a 100,000-m2 housing development. Yet another large Moscow construction company, Sotsial’naya Initsiativa (Social Initiative), got a 140-hectare plot to build two developments in Donetsk.

First the NIS, then the world…

One can confidently predict that after gaining a firm foothold on NIS markets, second-tier Russian companies will continue their expansion, first in Eastern Europe, then in the EU, US, and Asia.
This expansion is expected to continue for the next several years due to the recession currently underway in Europe. European mid-sized companies have good brands, design, distribution, management, and production, but have not yet been able to cope with the problems of European deindustrialization. Many company owners are passing away or retiring. The business goes to their children who often have no idea what to do with it. For this reason, on one hand, mid-sized European companies are great assets, while on the other hand, they are selling cheap. The acquisition of stagnating European companies by Russians has proven mutually beneficial.

The mid-sized world

Big companies are not the only ones involved in the current Russian expansion. Mid-sized and even small Russian companies are also looking abroad. Their acquisitions usually go unreported in the media as a rule because the purchases are made by companies that lead in narrow market segments but are virtually unknown to the public at large. Nonetheless, many such deals have occurred.
For example, recently Evan, a fast growing producer of electric furnaces controlling more than 30% of the Russian market today, acquired a company in France that according to company representatives will allow Evan to improve its market position. It is extremely difficult to estimate the total expansion of small Russian companies throughout the world, as their owners have no desire for publicity. For instance, this spring a mid-sized Russian company purchased a shipyard in Greece, but absolutely refused to acknowledge this purchase publicly. Despite their silence, analysts have praised international expansion as a highly positive trend.

The simple logic of development

The goals Russian companies are pursuing by buying companies abroad are wide-ranging and varied. One of the most common is to gain the last link in a production chain. For example, LUKoil’s acquisitions are closely tied to its plans to develop refineries and sales outlets. “If you build a production chain from Russia to the final consumers abroad, you begin to have better control over foreign demand,” explains Mikhail Moshiashvili, Chair of the Board of Directors at OFG, “because you are already supplying oil to your own refinery and selling gas via your own chain of gas stations.”
The desire to expand global market share is another convincing motive for acquiring foreign companies. This is precisely why Russian mobile companies are buying up their NIS colleagues and Norilsk Nickel purchased gold and platinum businesses in various parts of the world.
Moreover, buying a company in a developed country can help Russian entrepreneurs solve specific problems related to their business. For example, they can get unimpeded access to markets: Severstal got around the headache of US steel quotas by purchasing Rouge Industries.
In summary, one can conclude that foreign acquisitions allow Russian companies to increase their competitive potential. According to specialists, Russian manufacturers of clothing, shoes, and appliances are currently the most active purchasers of foreign assets. These industries have long lagged behind their Western counterparts. We should welcome this expansion. However, there is one problem: not all foreign countries are willing to accept Russians as the new owners of manufacturing enterprises. Almost all the foreign companies Russians have purchased are either in the throes of bankruptcy or are experiencing serious financial difficulties. As a rule, Russians are not permitted to buy successful and promising enterprises.

Domestic brakes

There is one more problem of Russian expansion worthy of discussion. The governments of developed countries are supportive when domestic companies acquire foreign assets, both economically and politically. In Russia, such purchases are seen as “capital outflow,” which the government is fighting by any means necessary. The excessive zeal in this battle on the part of officials is the main barrier to Russian business’ world expansion. For this reason, experts are unanimously calling for a legal separation of criminal capital transfers from legitimate purchases of assets abroad. They have even suggested special terms such as “capital export” and even “business import.”
“Capital export plays a limited but extremely positive role in Russia’s economic climate,” believes Yakov Pappe. “It is limited because the amount spent on purchasing foreign assets cannot be compared to the amount spent in Russia. It is positive because it builds confidence at home. The government must not limit this process because it will send a signal that first of all, the government does not trust Russian business, and secondly that it wants to teach Russian business how to conduct its affairs, and thirdly that nothing will stop it from doing so. Prohibiting Russian companies from purchasing foreign assets will have negative consequences comparable to those of the YUKOS Affair.”
If we assume that officials will not try to limit purchases of foreign assets, these deals are certain to increase in the near future. In August, Severstal announced plans to participate in the auction of a Czech foundry, Vitkovice. LUKoil, the recent winner of a contract to prospect for and produce natural gas in Saudi Arabia, is very likely to purchase assets in that country. The directors of Evrazholding announced that they would soon enter the markets of Southeast Asia, and most likely the company will do so by buying manufacturing enterprises in the region. Thus the expansion continues.

More in Russian>> www.expert.ru