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Enemy at the Gates
// Siemens not let in at Power Machines
Kommersant has learned that Boris Aleshin, head of the Federal Agency for Industry (FAI, part of the Russian Ministry of Energy), has sent Prime Minster Mikhail Fradkov a letter recommending that Siemens be refused permission to purchase of OAO Power Machines. Fradkov, on the personal instruction of Russian President Vladimir Putin, asked the Ministry of Energy to elucidate the situation. At the ministry, they stated that there is no law regulating the participation of foreign capital in Russian strategic enterprises, but such deals cannot be approved and the Federal Antimonopoly Service (FAS) shares that position. The FAS has the authority to decide whether Siemens will be allowed to buy Power Machines.
Power Machines – Turbine Blade Plant, Leningrad Metallurgy Plant, Electrosila, Energomachexport was formed in 2003 when AO Energomachexport – Power Machines merged with Turbine Blade Plant, Leningrad Metallurgy Plant and AO Electrosila. It controls over 60 percent of the Russian market for steam turbines and turbo- and hydrogenerators, and 80 percent of the market for hydroturbines. The company's receipts for January – June 2004 amounted to $282.8 million, operating profit $18.33 million and net profit $8.216 million. In December 2003, Vladimir Potanin's Interros, which controlled more than 70 percent of the stock in Power Machines, announced the merger of Power Machines with the United Machine-Building Plants (OMZ). On August 3, 2004, the deal was cancelled. The German concern Siemens became the new contender for Power Machines. It sent the FAS an enquiry in July about the purchase of 74.464 percent of the stock in the company. It was assumed that the FAS would make its decision in August, but it was delayed. The service requested additional information, which it received on November 5. Then Oleg Deripaska's Basic Element holding appeared a second contender for Power machines.
Maintaining Defenses
At the beginning of December, deputy head of the FAS Andrey Tsyganov stated that the service would complete the procedure to approve the purchase of Power Machines by Siemens before the end of the year. “We will specify the conditions under which we can give our approval,” he said at the time. “Although strengthening of dominant positions in several fields will result from the deal, the law allows us to approve it.” Nonetheless, the FAS has not made a decision to this day and, last week, Basic Element officially submitted an application to obtain Power Machines shares.
Kommersant has learned that the almost-given approval was reconsidered after a letter was sent on December 14 to President Putin by his representative in the Northwest Federal District Ilya Klebanov. (Kommersant has obtained a copy of the letter.) In it, the former minister of industry, science and technology writes that Power Machines fulfills a large volume of Ministry of Defense orders, including for equipment for atomic submarines. “Trying to avoid the limitations related to the presence at Power Machines of defense orders, Interros, without the consent of the FAS removed 25.5 percent of the stock in the Kaluga Turbine Plant and declared that it was possible to segregate defense production at other enterprises, which could lead to disruption of production ties and the destruction of Power Machines as a single company,” Klebanov writes. In addition, Klebanov holds that Siemens is not interested in modernizing Power Machines plants, but that its main interest is as “entrance ticket” into the Russian market and the former socialist countries.
Klebanov suggests that the result of the deal could be massive personnel layoffs and changes in Power Machines' business structure with redistribution of the profitable segments of it in favor of Siemens, which could lead to a reduction of the scientific and technical potential of Russia. Moreover, he claims, the rest of the Russian machine building companies would be unable to compete with Siemens and would be forced off the market.
As an alternative, Klebanov suggested in his letter to the president that Power Machines be left in the ownership of “national capital” and stock in the company be sold to “a consortium of Russian investors interested in the development of domestic machine building.” After that, they were supposed to form an alliance with the Kaluga Turbine Plant and restore the merger with OMZ.
Elucidating the Disposition
A high-ranking government official involved in approving the deal to sell Power Machines to Siemens told Kommersant that Putin took Klebanov's letter into account.
A presidential resolution dated December 28 and addressed to Prime Minister Mikhail Fradkov was placed: “Examine and give your opinion.” Aleksandr Zharov, press secretary to the prime minister, told Kommersant that the prime minister officially charged the Ministry of Industry and Energy with studying the situation with Interros and Siemens. He added that the prime minister has yet to receive an answer on that issue, that it is overdue and that the prime minister would most likely receive it in the coming days. At the Ministry of Industry and Energy, they say that the letter was prepared and sent at the end of January.
Refusing the Foreigners
According to information obtained by Kommersant, FAI head Aleshin evaluated the sale of Power Machines to Siemens in the most negative terms in his letter to the prime minister. While mainly repeating the arguments of Klebanov, he added that efficiently removing defense production from Power Machines is impossible; the process would take over three years. “At the present moment, the approval of the deal seems unjustified,” Aleshin concludes.
Kommersant was told at the Ministry of Industry and Energy that there is no law at present in Russia regulating the presence of foreign investors in the capital of strategic enterprises and, until one is drafted, the ministry does not think it possible to approve such deals. They are officially saying at the ministry that its position is fully supported by other state agencies, Roskosmos and the FAS, for example. In the opinion of a high-placed Kommersant at the Ministry of Industry and Energy, the likelihood of the sale of Power Machines to the Germans is less than 10 percent. It is curious to note in this light that the leadership of the FAS told Kommersant through its press service that it does not want to discuss Siemens and it refuses to discuss its opinion of the deal.
“But all is not lost for Siemens,” they said at the Ministry of Industry and Energy, “The Ministry of Economic Development and Trade supports the deal.” The Ministry of Economic Development and Trade refused to comment on the issue.
Offering It to the Russians
According to Kommersant's information, if Siemens is refused, Basic Element will be the only contender for Power Machines. A source close to the Interros leadership told Kommersant that Potanin is refusing to conduct negotiations with Deripaska until he received an official refusal from the FAS to approve the deal with Siemens and that two more Russian contenders have announced themselves. It is not yet known who they are, but the Kommersant source said that one of the potential buyers would want to remain a strategic investor, as Deripaska would be. The other would want a merger, as with OMZ.
The circle of possible candidates is not wide. The first among them is Electromachcorporation, a former co-owner of some Power Machines enterprises. Aleksey Pleshchev, first deputy general director of Electromachcorporation, told Kommersant on Tuesday that the corporation does not plan to buy Power Machines. He suggested that Power Machines might be of interest to the owners of Krasny Kotelshchik, 75 percent of the stock in which is controlled by Rinako Investment Co. head Evgeny Tugolukov. But Krasny Kotelshchik is in the beginning stages of merging with the Podolsk Machine-Building Plant and Tugolukov noted that he does not have enough partners for Power Machines as well.
There is still the possibility of a return to the merger with OMZ, which met with the approval of presidential representative Klebanov. At OMZ, they say they do not know anything about the chance of returning to the merger with Power Machines. “The details of Mr. Klebanov's initiative are not known to us,” said Andrey Onufriev, director of public relations for OMZ. “We are open to collaboration with other machine builders, but we are not prepared to discuss merging with Power Machines now.”
Electromachcorporation's Pleshchev thinks that the refusal of Siemens will not help the bureaucrats preserve or improve Power Machine's position on the market. “The company is burdened with credits and not very successful contracts,” he said. “Now, with the dollar falling, the growth of prices for metals and electricity, long-term contracts are unprofitable in general. About 40 percent of the workers in the Moscow office of Power Machines have been laid off. The authorized capital of the company has not been increased in recent years either. Sale to the German in this situation would be its best choice. If Power Machines is turned over to Russians, Siemens will still crowd them out of the domestic market, at least in the thermal power market. It's already happening.”
Kommersant's source at the Ministry of Industry and Energy says that the American General Electric has also expressed interest in Power Machines, but that it would most likely act not directly, as Siemens has, but through some Russian structure. General Electric refused to comment on Tuesday. At Siemens, they told Kommersant that they remain interested in the deal and will wait for the answer from the FAS as long as it takes. They refused to discuss the position of the Ministry of Industry and Energy.
Kommersant will continue to follow the development of events.
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Siemens Renews Cooperation Contract with Gazprom
On Tuesday, Aleksey Miller, chairman of the board of Gazprom met with Klaus Kleinfeld, new chairman of the board of Siemens, in Moscow. They discuss cooperation on new Gazprom projects, including the building of a Northern European gas pipeline, tapping southern Russian gas fields, the development of a gas transport system beyond Russia and electricity. They agreed to make corrections in the September 2003 memorandum on cooperation in light of new their new areas of cooperation. A Gazprom source told Kommersant that the purchase by Siemens of Power Machines has not been discussed as a joint project.
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How the Foreigners Got into the Defenses
Russian Aluminum Co. has sold American Alcoa almost 90 percent of stock in the Belokalitvensky Metallurgical Productions Amalgamation and the Samara Metallurgy Plant, which produce items for the defense industry, details for military planes in particular. Before the deal was concluded, the general director of VSMPO-Avisma, Vladislav Tetyukhin, wrote a letter to the government about the impermissibility of the sale of the defense-industry suppliers. FAS officials, the Ministry of Economic Development and Trade, the FAI and the law firm of Egorov, Puginsky, Afanasyev and Partners spent more than six months searching for a mechanism for the sale to Alcoa of the defense enterprises. It was decided that the FAS would approve the deal if the American company would sign an additional agreement with the Russian government not to disrupt the enterprises fulfillment of defense orders. The FAS approved the deal on December 31, 2004.
Vladimir Potanin, president of the Interros holding, may be powerless before the letters of officials who consider his assets property of the whole country.
Renata Yambaeva, Elena Kiseleva
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