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Chemical Industry 1991-2000
Russia produces about 2% of the world's chemical products, which is less than the turnover of such companies as BASF and Bayer. Nevertheless, our chemistry plays a very important part in the world economy. For example, Russian companies control 15% of the world market for carbamide and ammonia and a third of world trade in these products. The whole world buys Russian fertilizer and synthetic organic products, including the US, whose chemical industry is about ten times larger than Russia's.
Chemistry and petrochemistry account for approximately 2.7% of Russia's GNP, or about $11-12 billion. There are about 3000 companies and more than 200 large enterprises in the industry employing 800 000 people. However, no more than 20% of Russian chemical combines employ modern technologies; these are mainly enterprises built under Western projects. About 40% of the industry is unprofitable, with an average production profitability of no more than 7-8%. Foreign investment in the chemical industry is virtually nonexistent: the payback period for a large chemical project is 13-26 years. Western surveys in the mid-1990s said that Russia would nearly lose its chemical industry by 2001. However, experts have calculated that in 2001 the industry will record growth of 6.1%. After ten years of decline, the chemical industry has become one of the five most attractive industries for investments in the Russian economy.
HISTORY: 1991-2000
Many outstanding people in the Russian business and political elite have started in the Soviet chemical industry, tough few of them had actually proven themselves directly in the industry. Nowadays, hardly anyone remembers that Grigory Yavlinsky' Ph.D. thesis was on "Improving the Division of Labor in the Chemical Industry," just as no one knows that Yury Luzhkov got the nickname "Il duce" from his subordinates in the design office of a chemical facility. Abandoned by many bright intellects, the industry has been developed by totally different people who were not seeking public acclaim. These are the ones who have made its history in the last ten years.
1991
The year 1991 saw the opening of The Chemical Products Exchange in Moscow; as was usual in those days, it was set up by large enterprises of the Ministry for Atomic Energy, the Ministry of Defense, and the Ministry of the Radio Industry, as well as Central Union of Cooperative Societies (Tsentrosoyuz) the Chemical Industry Bank, and Foreign Trade Bank (Vneshtorgbank) of the RSFSR. The exchange was not very profitable for its founders and was closed in 1994 due to huge debts. Still, the exchange had an enormous influence on the chemical industry; many companies that became important intermediaries in the industry in the mid-1990s earned their capital on it.
1992
The total disruption of intraindustry production links in Russia was aggravated by the crisis in the European chemical industry. In 1997, analysts calculated that the fall in investment levels in the chemical industry had amounted to 70% in 1992, and the fall in export volumes, to 44%. There were two other significant events in that year. First, the EU, which was alarmed at deliveries of supercheap chemical products from the former USSR, imposed antidumping duties on Russian fertilizer. Second, there appeared the first plan for consolidating the Russian chemical industry: Mikhail Khodorkovsky, the head of MENATEP, beat down doors with a proposal to invest $1.8 billion rubles in the industry in exchange for property control over a number of enterprises.
MENATEP's proposal was not adopted. Instead, privatization was launched in the industry. Analysts at the Russian Fund for Federal Property (RFFI) assessed it as unsuccessful because of the reluctance to invest vouchers in the chemical industry. It only later became clear that they should indeed have been invested in the industry: the owner of one voucher who invested it in a chemical industry enterprise received seven times more assets than he did from depositing it in oil production. For some reason, only the residents of Mordovia saw the light; according to statistics, they were most willing of all to invest their "share of the national wealth" in the chemical industry.
Arkon, a Nizhny Novgorod enterprise that produced fertilizer, was privatized as well. Within a few years, under the leadership of Vyacheslav Kantor, it became one of the leading players on the European fertilizer market.
The creation of vertically integrated companies began in the oil industry in the same year. The structure of these companies included the majority of Russian oil refineries and petrochemical plants. With the exception of the Angara Petrochemical Company, the Khabarovsk Oil Refinery, and Salavatnefteorgsintez, they did not change owners.
1993
Russian government committee for the chemical industry initiated the creation of the first chemical financial and industrial group (FIG), Ruskhim. The group included 14 chemical enterprises of different Russian regions. Ruskhim was headed by Irina Ermakova, and even then it was known that MENATEP had already been surpassed in the privatization business by Russian Credit Bank and its owner Boris Ivanishvili under the Ruskhim flag. Against the background of the first attempt to reestablish the processing chain in the chemical industry on a new foundation, the creation of the Federation of Chemists of the CIS in August 1993 appeared especially comical; the Federation was called upon to "reestablish production ties in the industry" on the basis of quasi-political declarations of government bureaucrats in countries of the former Soviet Union that by then had almost completely lost control over the chemical companies.
Privatization in the industry was moving full speed ahead. So, then-unknown Il'ya Vaisman carried out privatization of PO (Production Association) Plastpolimer of St. Petersburg, which served as the basis for the creation of the ORIMI concern, whose business would be managed by Sergei Krizhan and Dmitry Varvarin. Both were shot dead in 1999. Vaisman was also murdered - after he had left Plastpolimer to take up the post of financial director of the Baltika brewery and had virtually made Baltika the leader in the industry. None of the murders have ever been solved.
1994
First National Bank Trust, which was jointly owned by MENATEP and ONEKSIM Bank, privatized 41% of the shares of AO Cherepovetsky Azot (Cherepovets Nitrogen). A scandal arose in 1996 when it was discovered that First National had not fulfilled the conditions of an investment tender and had not made the promised investments in Cherepovets. The disclosure of the story of the Cherepovetsky Azot was the beginning of Sergei Dorenko's career in the genre of noisy exposes.
In September 1994, ONEKSIM Bank and MFK Bank set up the Interros financial and industrial group, which included several chemical industry enterprises.
Meanwhile, Ruskhim achieved its first major success. By order of the RF State Committee for the Management of State Property (GKI), the state shareholdings in two companies of the "Nizhny Novgorod organic synthesis group," i.e., AO Korund and Orgsteklo, were transferred to the management of AO KhimTrustConsulting, a partner of the Ruskhim financial and industrial group. Some time later, Boris Nemtsov, the governor of Nizhny Novgorod Region, spoke out against the investors; Russian Credit had not found a common language with him.
The reorganizing South Korean concern LG offered Russia major investments in the chemical industry in exchange for a number of state share blocks in chemical combines. The offer was unexpectedly refused. A simple fact became clear: the Russian chemical industry, which it seemed no one needed, already had its lobbyists in the government.
1995
Eight chemical financial and industrial groups had already been registered in Russia.
The Siberian-Ural Petrochemical Company (SIBUR) was formed.
In May, the Moscow investment corporation Nipek got control over AO Tomsk Petrochemical Combine, one of the largest and most modern petrochemical enterprises in Russia. Nipek's general manager was Kakha Bendukidze, although he left the chemical business in 1997.
In March, the Dinamika investment and finance company, which was part of the Mikrodin group, joined the privatization and management game. Together with KhimTrustConsulting, the company promised to pay Korund and Orgsteklo's debts and invest $60 million in them after acquiring the companies' large state share blocks. Thus, for a short while, chairman of Mikrodin's governing board and ex-general director of Resource Bank Dmitry Zelenin was involved in the chemical industry.
On September 1, MENATEP registered Rosprom, a management company of the group; Mikhail Khodorovsky became chairman of its board of directors. By this time, Rosprom controlled the following chemical industry enterprises: AO Karbolit, the Sudogda Glass Fiber factory, the Plastmassy Scientific and Production Association, the Steklovolokno factory, AO Sibvolokno, AO Nitron, the Fertilizer factory (Mineralnie udobreniya), the Mosasbotermsteklo factory, a plastics factory, and AO Klinskoe Khimvolokno. By 1999, Rosprom had lost all these enterprises.
In September, the Interros Group merged with the Mikrodin group. Members of the Interros-Mikrodin alliance in the chemical industry included Cherepovetsky Azot, AO Fosforit (Kingisepp), and AO Khimvolokno (Saratov). Several months later, Interros head Dmitry Zlenin left the chemical business.
1996
Local authorities first began to suspect Ruskhim of not fulfilling its investment obligations and filed a suit in court to have Korund and Orgsteklo declared bankrupt.
The American company TAFCO bought a large block of shares in AO Tol'yatti Azot, the largest Russian ammonia producer. After this operation, the head of Tol'yatti Azot, Igor' Makhlai, became full owner of an enterprise that was one of the world's five largest chemical factories.
October witnessed the creation of Interkhimprom, the largest chemical financial and industrial group in the country's history. The group included the Cherepovets and Novomoskovsk fertilizer combines, AO Ventamon'yaks (Latvia), Strategy Bank, ZAO Port Kavkaz, and AO Interkhimprom-OKSO-sintez. Participants in the Interkhimprom group also included the Solvalub group of companies headquartered in London and the Russian investment company Analaiz. With the inclusion of Analaiz in the group, a blocking package of shares (29%) in AO Kirovo-Chepetsky Chemical Combine was transferred to Interkhimprom's control. Boris Titov was president of Interkhimprom, and Yury Titov was chairman of the board of directors.
At the same time, ONEKSIM Bank decided that Cherepovetsky Azot would not be part of its strategic plans. Interkhimprom received a block of "Azot" shares in trust, and ONEKSIM Bank began to withdraw its investment funds from "Azot's" accounts.
1997
In February, a commission of the Russian Fund for Federal Property recommended that the controlling blocks of shares in Korund and Orgsteklo belonging to Ruskhim firms be returned to the state. Former governor Boris Nemtsov, who became Vice-Premier in 1997, and the region's new governor, Ivan Sklyarov, sought dissolution of the trust contract with Ruskhim. The companies returned to state ownership and went bankrupt, this process, in essence, continues to this day.
In July, the Neftekhimprom investment group was formed on the base of the Maksim group of companies; this was another attempt to consolidate the industry, this time on the Volga. Neftekhimprom, celebrated by Viktor Pelevin in his novel Chapaev and Futility, had a decent start. It is said that the group's owner, Maksim Vasil'ev, had started collecting BMWs a few months later. However, within six months, the group was pulled to pieces by more successful "consolidators."
In August, outside management was brought into the Tomsk Petrochemical Combine on the initiative of Tomsk Gas, a structural subdivision of Gazprom and the largest supplier of raw materials to Tomsk Petrochemical. Kakha Bendukidze held talks with Gazprom but did not agree on the price. As a result, 56% of Tomsk's shares were sold to Sibkhimkombinat, a structural subdivision of the Russian Ministry for Atomic Energy.
In September, the Moscow Court of Arbitration decided in favor of the return of 41% of the shares in Cherepovetsky Azot to state ownership. A month later, Vladimir Potanin, the head of ONEKSIM Bank was summoned to a Ministry of the Interior investigative committee. This was probably the first interrogation of an oligarch in Russia.
1998
In February, the Finnish company Nokian Tyres and the Rosshina group, which united a number of large Russian tire factories, signed a protocol under which OAO Yaroslavl Tire Factory (YTF) was to start production of various kinds of Nokian tires at its facilities. The project's mission was to become the crown of Rosshina's business, but it fell through. Within six months, outside management was brought into YTF, and within a year, Rosshina had lost control over all of its tire factories when they left to join the SIBUR group. In the same year, which was a crisis year for the tire industry, Marina Antonova, the financial director of AO Voltire, one of the five largest tire factories in the country, was murdered.
In February, the Rosprom group lost control over AO Apatit, the monopoly supplier of raw phosphates for the chemical industry.
1999
First Vice-Premier Nikolai Aksenenko declared the need to create a single petrochemical holding. Gazprom subsidiary SIBUR headed by Yakov Goldovsky was assigned the role of nucleus of this structure. Mr. Goldovsky, who had been able to get $120 million in credit at his disposal at Gazprombank and place AO Sibneftegazpererabotka (nine gas-processing plants in Siberia) under SIBUR's control, began to consolidate the entire Russian gas-chemical industry. In the same year, SIBUR gained control of AO Salavatnefteorgsintez in Bashkiria. Goldovsky later told a Kommersant reporter that "My goal is simple-I want to recreate the Ministry of the Petrochemical Industry."
There appeared the first information about the activities of the NIKOS group in Volgograd. The market was sure that first letters of the group's name were taken from the Nika motion-picture prize, and the group was working for renowned film director Nikita Mikhalkov. The ambitious-looking holding was founded on the base of AO Kaustik of Volgograd. However, SIBUR quickly put a stop to the group's attempts to expand to more interesting enterprises.
Gazprom subsidiary Mezhregiongaz acquired 30% of Interkhimprom's shares. Gazprom began its expansion onto the fertilizer and nitrogen-synthesis market. Six months later, Mezhregiongaz initiated the creation of AO Agrokhimpromholding, a large holding for the manufacture of nitrogen products. The shares of five nitrogen-industry enterprises-NAK Azot (Novomoskovsk Nitrogen Combine), Mineralnie Udobreniya (Fertilizer) (Perm'), Azot (Berezniki), the Kirovo-Chepetsky Chemical Combine, and Cherepovets Nitrogen-were transferred to the new holding.
AO Nizhnekamskneftekhim (NKNKh) and the German concern BASF signed a cooperation agreement. This was the first victory in the Nizhnekamsk enterprise's struggle against a merger with AO Tatneft, which had already gained control over Nizhnekamskshina, the country's largest tire factory. NKNKh has remained independent to this day.
After control over AO Apatit was transferred from Rosprom to Apatit's managers in 1999, there was an attempt to create a "soft" holding, Fosagro, for the production of phosphate fertilizers. In 2000, the owners of AO Ammofos of Cherepovets began the sale of the company to Fosagro.
In December, SIBUR and ZAO Neftekhim, which united a number of petrochemical plants belonging to the NORSI-Oil company, signed an agreement on the creation of AO SIBUR-Neftekhim. The goal of the new company was to raise up a Nizhny Novgorod petrochemical industry to include in its processing chain.
2000
In January, a block of shares in the Tomsk Petrochemical Combine belonging to Sibkhimkombinat was committed to trust (it was actually sold for $17.5 million) to the Alliance group of Moscow. The row over Tomsk Petrochemical continued until the death of Alliance head Ziya Bazhaev. His brother Musa, who became the new head of Alliance, virtually gave up the dispute with Tomsk Gas's successor Vostokgazprom, and Tomsk Petrochemical was transferred to the control of Vostokgazprom's partner SIBUR.
In March, there began a large-scale dispute over the Kirovo-Chepetsky Chemical Combine. Vladimir Sergeenkov, the governor of Kirov Region, publicly opposed plans for the sale of the state shareholding in the combine. The RF Ministry of Property owned 25.3% of the voting shares (administered by the Ministry for Atomic Energy); the Kirov Region Property Management Committee owned 25.3%; and 29.5% belonged to the Interkhiminvest investment and finance company (part of the Interkhimprom group) and its partner, the Solvalub trading company, one of the world's three largest nitrogen fertilizer dealers. The dispute is still going on, and so far, Interkhimprom is winning.
LUKOIL announced in April that it was willing to buy a controlling block of shares in AO NORSI-Oil, but only on condition of the return to NORSI of the EP-300 ethylene production installation and an ethylene oxide and glycol plant now belonging to OAO SIBUR-Neftekhim. It was discovered in June that the head of Neftekhim, Vladimir Kiryushin, had sold 24% of SIBUR-Neftekhim's shares to two Moscow companies when he moved over to SIBUR-Neftekhim. Thus, LUKOIL lost the chance to control the Nizhny Novgorod petrochemical industry. The local authorities sided with LUKOIL. As a result of the escalating dispute, Nizhnoenergo planned to cut off electric power to SIBUR-Neftekhim on September 28 and the company began serious preparations for a manmade catastrophe. The situation was resolved simply. On the morning of September 28, Yakov Goldovsky met with LUKOIL head Vagit Alekperov and reached an agreement on an actual exchange of NORSI's share in SIBUR-Neftekhim for SIBUR's share in Perm'neftegazpererabotka and on cooperation as a whole.
At the end of the year, Gazprom acquired a controlling block of shares in SIBUR and began to buy up shares in the Hungarian petrochemical companies BorsodChem and TVK. In 2001, BorsodChem came under actual control of structures closely connected to Gazprom, and the struggle for TVK is still going on, with the Hungarian company MOL competing with SIBUR and Gazprom.
Former Alliance and YUKOS managers began the process of creating the Khimpromindustriya group in the fall. They created a row when they tried to include Khimprom of Novocheboksarsk and AO Fosfor of Tol'yatti in the group. Viktor Tarkhov, the director of Khimpromindustriya, became head of Khimprom; and Fosfor remains the domain of Irina Gendel', a co-owner of the local company A-Teks. Analysts note that the chemical industry has become a popular area among oil industry top-managers.
On December 31, the head of SIBUR informed Kommersant that the company was preparing a new share issue, which, as it later became clear, would complete SIBUR's consolidation of the country's petrochemical complex.
However, this will take place in a new century.
by Dmitry Butrin
PRESENT
The chemical industry is ill-suited to a transfer to capitalism by Russian methods. In five years, the 900 chemical industry enterprises in the RSFSR were transformed into 6500 chemical industry companies in the Russian Federation, which is probably one of the few achievements. Today, the Russian chemical industry lags at least ten years behind the world industry. The enterprises that are even the slightest bit successful can be separated into three clearly defined groups: those that process raw materials, those that build production chains, and those that stay afloat by a miracle. Each group has its own way of surviving.
Collateral Business
Pavel Teplukhin, head of the Troika Dialog management company once remarked at a conference devoted to the petrochemical business in Russia that "I understand all this. It's proof that all these seven or eight rearrangements are terribly important for the economy. There's only one thing left to find out: where in these chains do they earn money? Isn't it more profitable to simply export raw materials, because you know, investments in the industry have a long payback period?"
In principle, during a breakdown of economic relations, companies that are closest to raw materials, primarily oil and gas, find themselves in relatively simple conditions. This is generally what has happened: there are hardly any unsuccessful producers of simple chemical compounds.
Nearly every oil refinery has a relatively large chemical plant in its structure, sometimes as part of the refinery and sometimes, as in the case of Yaroslavnefteorgsintez (YaNOS), a plant that was separated from it during privatization. Thus, there can be no more proprietors of petrochemical enterprises in the country than there are vertically integrated oil companies that own oil refineries; there are no independent oil refiners in Russia. In practice, oil companies are interested in chemistry as such in different ways.
Thus, until recently, Mikhail Gutseriev, manager of the state company Slavneft, was not very interested in petrochemistry and has only lately tried to expand his presence on the market by coordinating the activities of YaNOS with state petrochemical companies in Belarus, e.g., Belneftekhim and Naftan. Vladimir Bogdanov, the president of Surgutneftegaz, is even more conservative: the high-capacity Kirishinefteorgsintez petrochemical plant in Leningrad Region is enough for him. Bashneft has no aspirations at all to create a petrochemical holding and gave up Salavatnefteorgsintez to SIBUR without a struggle. The conservative development strategy of oil companies has a simple explanation: they have few investment resources even for their primary activity, oil production, and to spend them on resource-consuming and unknown petrochemistry is foolishness. In addition, synthesizing petrochemicals is generally less profitable than processing wellhead gas, so oil companies are not interested in competing with chemists in a foreign field.
Fertilizer manufacturers also belong to the class of enterprises that process raw materials. The main expenditures of agricultural chemical producers, esp. nitrogen fertilizer producers, are not for the raw material, i.e., ammonia, but for natural gas. There are three recognized leaders in this area. The first is Vyacheslav Kantor, head of the Novgorod holding Arkon, one of the largest fertilizer producers in Europe. Apparently, he has managed to stay on good terms with his gas suppliers only because of long-established connections: competitors have been gradually absorbed by Agrokhimpromholding, a subsidiary of Mezhregiongaz. Agrokhimpromholding is actually run by the head of AO Interkhimprom, Yury Titov, who is well known for his previous attempts to consolidate the industry. Finally, AO Apatit, the main supplier in the area of phosphorus fertilizers and a Russia-wide monopolist, formed the Fosagro association, which united five large sectoral producers into a de facto property holding. Nikolai Gorbachev, Fosagro's executive director, heads the team. It is interesting that the MDM Group, which bought the Kovdor Mining and Dressing Combine (it also produced a certain amount of raw phosphorus), immediately saw the charms of the fertilizer business and rushed off to join the struggle with St. Petersburg entrepreneur Aleksandr Sabadash for AO Fosforit in Kingisepp. Of course, it is profitable to sell apatite ore to the West, but it is much more profitable to make fertilizer out of it. In spite of antidumping investigations in Europe and the United States, demand for fertilizer is extremely high. So the head of MDM Group, Sergei Polov, should soon be trying on the title of "chemical baron."
The standard market tactics of raw-material producers include either horizontal integration or isolation from competitors. The ammonia plant owner who can defend his enterprise against a hostile takeover, like Vladimir Makhlai, the president of AO Tol'yatti Azot, for example, is a lucky man: in principle, except for the foreign market situation, he has nothing at all to worry about. After all, considering that Russian prices for energy resources and raw materials are far less than world prices, he will be able to sell his goods abroad at minimum cost in almost any case.
Multistage Synthesis
Creating a production chain costs a lot of money; the chemical industry distinguishes 13 to 14 processing conversions from raw hydrocarbons to raw materials for the production of consumer goods. In practice, a chain is formed from a minimum of five enterprises, each of which has to be placed under control, preferably under property control. Otherwise, each member of the chain at a certain point will draw in all the profit to itself and not allow the others to develop. To all practical purposes, the Soviet chemical industry (no new large chemical enterprises have been built in the last ten years) was represented by four or five production megaholdings, which guaranteed it a certain stability. SIBUR president Yakov Goldovsky was probably the first manager to make the restoration of Soviet methods in the chemical industry his business. It is related how Rem Vyakhirev was informed through advisors that certain strange people were involved in some sort of activity around gas-processing plants in Siberia that were then managed by Gazprom. Mr. Vyakhirev demanded more precise information, and after analyzing what "this Goldovsky" was doing, instructed his secretary to immediately summon the team representatives for a meeting. It is interesting that Goldovsky himself had been trying to obtain an audience with the head of Gazprom for two months already. The intrigues of the ill-wishers turned into a paradoxical situation: Vyakhirev blessed Goldovsky's team for creating SIBUR and even gave him $120 million. This money lasted SIBUR's president four years, during which time he consolidated more than 80 industry enterprises and achieved a dominant position on the Russian fiber, tire, and rubber markets and on the markets of a number of other important products. He even ventured to expand into Eastern Europe. By any standards, SIBUR was the only Russian group to be a full-fledged representative of the Russian chemical industry abroad.
SIBUR's experience was called for within three years. Vagit Alekperov started down the same path after deciding to invest part of the profits from crude oil exports into petrochemical processing. As a result, the LUKOIL-Neftekhim subsidiary holding has the lion's share of the plastics market. To all appearances, LUKOIL-Neftekhim's development is still only beginning, although the company has already successfully started expanding into the CIS after gaining real control over the Ukrainian company AO Oriana. The construction of another large chain, AO Tatneft, is proceeding much more quickly: Tatar oilmen were able to increase the scope of oil refining by buying the Efremov synthetic rubber plant in Tula Region and AO Nizhnekamskshina, the country's largest tire factory.
Admittedly, Tatnefts general director, Shafagat Takhautdinov, did not succeed in adding the tastiest morsel of Tatar petrochemistry, AO Nizhnekamskneftekhim, to the holding. Company head Vladimir Busygin was able to convince President Mintimir Shaimiev of Tatarstan that it was more convenient for it to develop separately from Tatneft. This is probably true. Nizhnekamskneftekhim is one of the few chemical enterprises in the country that representatives of chemical giants such as BASF and DuPont have shown an intense interest in.
Relics of the Post-Soviet Era
Undoubtedly, consolidation in the Russian chemical industry has already gone a long way. However, this by no means implies that independent companies are a thing of the past.
Thus, for example, a significant share of the plastics and polymer market belongs to companies that are not part of vertical or horizontal chemical holdings. These companies include Sayanskkhimplast created by the Eastland Group from the state company AO Sayanskkhimprom; Kauchuk ("Rubber") of Sterlitamak, which the unknown private owners categorically refuse to sell to anyone, although demand considerably exceeds supply; and a large number of state companies that were privatized in 2001, such as AO Plastik of Voronezh, which controls 15% of the Russian PVC market. In addition, there are some unique enterprises. The Novocherkassk state synthetic product factory is already a subject of negotiations of several companies, although there has been no talk yet of privatizing it (the fact is that with a reasonable amount of investment it could capture a quarter of the Russian methanol market). Finally, with the exception of the market for synthetic cleaning products (foreign companies like Henkel and P&G are strong players on this market), the sector producing household chemical products in Russia is virtually independent. Thus, the New Community group, which is now engaged in restructuring the Aviastar factory, started by expanding the Empils varnish and paint factory of Rostov, one of the leaders on the market.
On the whole, the ownership structure on the chemical market is already fully determined and we should not expect any huge changes. The primary task of the "socialist" model of the chemical market, which is to establish the rule of four or five superholdings on the market, will be accomplished in the next five years without any great difficulty. However, as is well known, the devil is in the details. Judging from the fact that the chemical industry today is one of the main sources of scandal in the business world, this process will not be boring.
by Dmitry Butrin
TRENDS
In the year that has passed since the publication of the last edition of "Who Owns Russia," there have been no fundamental changes in the development of the Russian chemical industry. Literally all major deals concerning Russian enterprises have been governed by one idea: consolidating capital concentration. However, in contrast to the situation a year ago, fully independent companies and not just subsidiaries of large industrial groups are competing for assets. Obviously, today's widely held opinions that SIBUR is really Gazprom and Fosagro is a creation of YUKOS will soon become irrelevant. Children of giants grow too quickly.
The SIBUR Issue
The placement of another SIBUR share issue, which was designed to make the industrial group a European-scale chemical company, may be considered the event of the year in the chemical industry. At the same time, in the course of the transaction, Yakov Goldovsky's team was supposed to get the money owing to it for consolidation work carried out in the industry.
The issue began very mysteriously. In an interview with Kommersant on December 31, 2000, Mr. Goldovsky reported tersely that SIBUR, 51% of whose shares had been bought by Gazprom in November, was preparing a new stock issue. To the question of what the owner of the controlling share block thought of the offer to buy it again (in essence, this was exactly what was being proposed), the president of SIBUR very firmly replied, "We are an independent company."
At that time, it was difficult to believe in SIBUR's independence; however, oil companies soon confirmed that Gazprom would nevertheless have to buy its share in the new issue. Oil industry analysts who studied SIBUR's offer in the issue prospectus of up to 70 billion rubles were surprised to discover that, in effect, giant SIBUR was an extremely loose conglomeration of companies in which the Siberian-Ural Petrochemical Company (SIBUR itself, in which Gazprom had bought 51% of the shares) was by no means the biggest heavyweight, and it would cost money for SIBUR to become a company with consolidated assets. For Gazprom, this amount was fixed at $700-800 million, either in cash or in shares of enterprises that SIBUR was interested in.
It looked as though a row would break out: it was obvious that Mr. Goldovsky's team had assembled the holding on Gazprom's money in such a way that the gas monopoly was obliged to finance its development under threat of losing ownership in it. However, in spite of the audacity of the offer, Gazprom agreed to buy out its share of the additional issue. Why did it do this rather than blocking the offer at the board of directors? Probably because the managers of the gas colossus understood that a share in "big" SIBUR was better than everything in a "small" company. When the Hungarian Borsodchem and TVK combines that Gazprom had acquired after a fight were added to it, SIBUR could definitely consider itself one of Europe's largest chemical companies with capitalization of no less than $8 billion in 2004-2005. The sum that Mr. Goldovsky's team was requesting to complete this grandiose plan did not seem too high.
The Sale of Ammofos
There was still another important deal last year, namely, the sale of AO Ammofos (Cherepovets) by its perpetual chief for the last ten years, Valery Babkin. The deal was landmark one: no one had forced Mr. Babkin, who had transformed the Cherepovets giant into one of the largest market producers of phosphate fertilizer in Europe, to sell Ammofos. Moreover, no one had pressured him. It was simply that at a certain point it became clear that Ammofos was fated to join a larger structure that would continue its development. Alone, he would be left with a merely profitable enterprise without prospects.
Ammofos is a recognized leader in the phosphate fertilizer market both in Russia and in Europe. The company accounts for about 33-35% of domestic production of this product. In addition, Ammofos was the second enterprise in the country to be privatized. According to legend, Anatoly Chubais personally gave permission to sell its shares. Supposedly, the head of the State Committee for the Management of State Property (GKI) secretly came to Cherepovets for this purpose, looked over the enterprise, was introduced to its management, and gave the nod. In spite of the fact that this happened in 1992, when the word "share" was associated more with the MMM pyramid than with shares having real value, the management team headed by Valery Babkin succeeded in doing everything, as they say, by wits. A few years later, a certain Swiss company, NW Nordwest AG, became the owner of 51.9% of Ammofos' shares; the powers of Mr. Babkin, who had controlled the company, became incontestable for an immeasurable period, and Ammofos, which exported up to 90% of its production, became the object of its competitors' unattainable dreams.
Then in December 2000, rumors appeared that NW Nordwest was going to change the owners. At first, no one believed this, but in January 2001, a shareholders' meeting was convened, whose agenda mentioned elections of a general director of Ammofos and a new board of directors. It seemed that an intriguing scandal was on the verge of unfolding around Ammofos involving the confiscation of stocks, criminal charges, and the OMON (riot police) as the final argument; there was talk that Rosprom was interested in the enterprise.
When the expected shareholders' meeting took place at the end of February, no one believed that it was all over. In fact, the exporter of a third of the country's phosphate fertilizer, the first "privatizer" in its history, and simply competent manager Valery Babkin quit his post. He was replaced by Nikolai Gorbachev, vice-president of the Fosagro association, which had been created from enterprises in competition with Ammofos by the Murmansk raw materials supplier AO Apatity.
So what compelled Mr. Babkin to sell the enterprise? Nothing is known for certain. However, by spring, Ammofos began to coordinate its operations with Fosagro. It was rumored that Ammofos' general director was fed up with his career as a businessman and had decided to become just a millionaire. The fact is, however, that for the first time in the industry, a large enterprise changed owners without a "war of influence."
The Fight for Fosforit (Kingisepp)
In contrast to Ammofos, its competitor AO Fosforit of Kingisepp, Leningrad Region has obviously been unlucky with privatization. The Fosforit Invest fund created by the company's management in the mid-1990s and now managed by the labor collective was able to get control over 36% of the company's shares. The remaining 64% of the shares have changed owners countless times in the last five years; for example, Fosforit has been managed by some German investors, by structures close to the Ministry of Communications, and by trading companies. A large-scale battle has developed at the enterprise this year. On one side, there is MDM Group, which has bought up 54% of the company's shares from their last owners; on the other side, there is Aleksandr Sabadash, a well-known St. Petersburg entrepreneur. Sabadash does not own Fosforit shares, but he is close to getting complete control over the company. The fact of the matter is that Fosforit, which is in the most advantageous location for exporting fertilizer to Europe, is bankrupt.
In May 2000, Fosforit, which had once more changed owners of the controlling share block, came under a supervisory procedure on the claim of a medium-sized creditor. Vladimir Oreshko, a staff member of the central apparatus of the Federal Financial Recovery and Bankruptcy Service of Russia, was appointed temporary administrator. After a few months of management, Mr. Oreshko succeeded in transforming the situation at Fosforit from bad to a state of conflict. He fired the general director, uncovered evidence of deliberate bankruptcy, quarreled with most of the creditors, acknowledged only 680 million rubles of the declared bills payable of 2 billion rubles, and proposed a plan for getting out of this situation. The proposed escape plan was simple: remove assets from Fosforit to new company and transfer control over it to the creditors, that is, to Mr. Sabadash.
Meanwhile, MDM Group, which had invested in the purchase of a controlling block of Fosforit shares, has been continually trying to stop attempts to bankrupt the enterprise, which, as a matter of fact, can hardly be called unprofitable; few of the country's enterprises have firm export sales of 90%. However, Mr. Sabadash insists that Fosforit de facto belongs to him.
Notice that neither MDM Group nor Aleksandr Sabadash have ever been involved in the chemical industry. So what is it that attracts the adversaries to Fosforit? To all appearances, both Sabadash and MDM Group, which is well known for its aggressiveness, have sensed that much bigger money would soon be coming to the chemical industry than before. Therefore, the battle for Fosforit will not be easy, since it is of the last chemical enterprises of its scale that still does not have a sensible owner.
A Holding from Scratch
However, unification of the chemical industry does not only interest investors on the scale of MDM Group or Apatity. As the experience of the last year has shown, the only thing really needed to create a large chemical group in the country is experience in working in a large business and a reasonable amount of starting capital. Plus energy, connections, and the desire to work. Up to the middle of last year, former vice-president of the Alliance group Viktor Tarkhov was unknown in the chemical industry; now he is a manager of an important chemical group, Khimpromindustriya. Mr. Tarkhov, vice-president of the YUKOS oil company Leonid Simanovsky, and a number of other top managers of large oil companies created Khimpromindustriya literally from nothing; they started with telephone calls, hours of negotiations, constant flights back and forth, and a modest amount of their own and borrowed money.
AO Khimprom of Novocheboksary, one of the flagships of domestic war gas production, and Fosfor of Tol'yatti, which had previously produced the raw material for these gases, formed the basis of the holding. Plans for creating the holding were announced in September 2000. Solidarity Bank, which had close ties with the Samara regional administration, provided support for the newborn Khimpromindustriya.
Business was conducted extremely aggressively. In September, AO Volga Investment Company, one of whose founders was Mr. Tarkhov, won a tender for trust management of 25.5% of the shares in the Novocheboksary factory for five years. Within a month, the Chuvashia Property Fund put out 24.5% of the preferred shares of AO Khimprom for investment tender. Khimpromindustriya's founders won the tender through the Samara firm Dekort, created by the managers of Solidarity Bank. Simultaneously, the oilmen attempted to gain control over Fosfor. The Investment and Privatization Agency, a local company that owned 34% of Fosfor's shares, and a certain other local company, which had transferred 10% of Fosfor's shares in trust to Tarkhov and Simanovsky's team, became Khimpromindustriya partners. By that time, to be sure, the controlling share block had been consolidated by the A-Teks company, which had managed Fosfor since 1998.
Fosfor and Khimprom responded to Khimpromindustriya's expansion with lawsuits. The charters of both companies provided extensive grounds for both defense and offense. Thus, according to Khimprom's charter, no single shareholder had the right to more than 25% of the votes; and at Fosfor, the owner of 30% of the shares was obligated to offer the remaining shareholders a share redemption. In addition, it was discovered that about 15% of Khimprom's shares were owned by publisher Oleg Mitvol', chairman of the board of directors of the newspaper Novye Izvestiya. He kept the partners nervous and sold his share block only in summer 2001. Both A-Teks and Khimprom's shareholders vehemently opposed the creation of a new group on the base of property that they had become accustomed to regarding as their own.
Nevertheless, by summer 2001, Khimpromindustriya already controlled the situation at Khimprom and had reached an agreement on dividing spheres of influence at Fosfor. Mr. Tarkhov promised future growth of the holding through the purchase of new enterprises (including enterprises in Ukraine), implementation of an investment program at Khimprom, and expansion of the company's business to a Russia-wide level. Only a year ago, Khimpromindustriya had nothing but a name, an idea, and the desire to realize it. This means that the situation in the industry is still going to change more than once.
Dmitry Butrin
All the Article in Russian as of Sep. 11, 2001
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