Gateway2russia starts publishing excerpts from rating The Expert 400: the Russia`s largest companies and most dynamic industries

Dmitri Grishankov and Dmitri Kabalinsky

The fuel and energy industry and metals are “exporting” growth in machine building, consumer goods, IT, and telecom. Yet Russia’s main infrastructural industries have been left by the wayside.

Big business has been more successful than anyone else at addressing the issue of how to double the GDP. In 2003, the income of Russia’s 400 biggest companies grew by 25.8%. With correction for inflation, their real growth reached 10%, while the GDP only grew by 7%. Though the companies’ earnings do not have a direct impact on the GDP, it’s easy to believe that if these growth rates continue for the next 10 years, the GDP will double, or at the very least the part created by big business will. The main factor behind this growth is obvious: the exclusively favorable conditions on world commodities markets. Oil and metal companies’ export income is growing rapidly. Oil and natural gas holdings increased their earnings by 28.9%. Non-ferrous metal producers have recovered from their previous decline and have managed to increase sales by 28.7%. Ferrous metal producers are absolutely prospering. The amount of products sold by the industry’s largest companies grew by more than 40%. Only IT companies, retailers, and telecom companies demonstrated stronger growth. However, their influence on the economy as a whole cannot be compared to that of the natural resource industries.

The fact that growth is based on these raw commodities naturally presents one of the biggest threats to the economy’s stability. Oil and metal producers are the main “exporters” of growth to other industries. Two years ago, we witnessed for the first time the clear dependency of investment on the earnings at natural resource companies. Now, their investment demand is supporting the development of machine building, telecom, and IT. They are also in many ways responsible for putting money in consumers’ pockets, which has spurred the growth of the entire consumer sector.

However, this is not the only risk factor. The low growth rates in Russia’s main infrastructural industries are a serious cause for concern. Earnings at Russia’s leading transportation companies in 2003 grew by 20.1%, yet after correction for inflation, they grew by around 5% (see chart 1). At a variety of companies, this figure was even lower. For instance, income at Transneft, the main operator of export oil pipelines, increased by 16.6%. Yet earnings at the Novorossiisk Commercial Port fell by 1.2%.

Growth rates at construction companies are also far from inspiring. The Expert 400 demonstrates that on average the income at the construction industry’s biggest companies grew by 17.3%. While the housing construction sector grew by leaps and bounds (as housing prices increased rapidly in 2003), industrial construction is practically stagnating. Transportation construction has fared particularly badly. The key companies in this industry—Stroitransgaz and Transstroi—saw sales decrease.

In essence this is result of the government’s industrial policy. Though it has never been properly articulated or set down in a formal document, it has already been implemented in practice for several years. The authorities are either setting or limiting prices for the overwhelming majority of transportation services. After the 1998 crisis, transportation prices became a way to soften the economic blows of a changing economy. Now, however, they are guaranteeing economic failure. The low income growth rates at transportation companies are slowing investment in re-equipping the industry (as proven by the decline in construction). This investment is sorely needed. Export-oriented sectors are already experiencing a shortage in transportation capacity (pipelines, railways, ports). In the future, the situation will only get worse, and even if world market conditions remain highly favorable, export will be limited to the existing transportation infrastructure.

Despite rapid growth in petroleum and metals, only a few companies from these industries appear among the top 20 fastest growing companies in Russia: Intera, the recently formed NovaTEK Holding, and non-ferrous metal producer Yuzhuralnickel. Machine building is represented by seven companies. The absolute leader in growth was once again Almaz, thanks to export orders of its missile systems. Other defense and aviation companies also made the list: Baltic Factory, Sevmash, Rubin, and the Ulan-Ude Aviation Factory. It is important to note that bigger defense orders from the federal government provided for much of these companies’ growth. Two more companies on the list—the Ruzaevsky Chemical Machinery Factory and Altaivagon—saw rapid growth due to investment demand from oil and metal companies. Ruzaevsky specializes in oil production and refining equipment. Altaivagon took advantage of an increased demand for new train cars, in part from transportation companies.

Sistema also made the list of fastest growing companies by more than tripling its earnings and came in third in this category (and 15th in the Expert 400). However, this rapid growth was mainly due to the company’s consolidation of its controlling stake in the cellular provider MTS in 2003.

Read also: The Expert 400: Industry or services?
To be continued...