CHEMIZOV TO HEAD NEW RUSSIAN ARMS CONGLOMERATE

This week Russian President Vladimir Putin signed into law a bill passed by parliament to create a new state corporation, Rostekhnologii. The corporation will take over the state arms trade monopoly, Rosoboronexport, and its assets, which include Russia’s biggest car-making company, Avtovaz; one of the world’s main producers of titanium, VSMPO-Avisma; Vertolyoti Rossia, which produces civilian and military helicopters; Oboronitelnye Systemi, which manufactures anti-aircraft and electronic equipment; steel producer RusSpetsStal, and multiple other properties. Rosoboronexport exported weapons worth $5.2 billion in 2005, $5.3 billion in 2006, and plans to sell $5.5 billions in 2007. It also has confirmed arms export contracts worth $22 billion. The value of Rosoboronexport and its industrial assets is estimated at $25 billion. Rosoboronexport will continue to be an arms-trading monopoly as part of the new overall holding corporation. Rostekhnologii will be free to sell and buy assets, issue bonds, and hold IPOs of its subsidiary companies “to promote the production and export of high technology products” (Vedomosti, November 26; Kommersant, November 27).

The new corporation is the brainchild of Rosoboronexport CEO Sergei Chemizov, who began to lobby for the creation of the conglomerate in 2005. Chemizov was first deputy chief of Rosoboronexport from its creation in 2000 until he became CEO in 2004. He is a former KGB operative who served in the 1980s in Dresden, East Germany, together with Putin. In December 2006, Chemizov was elected to the bureau of the Supreme Council of United Russia, Putin’s ruling party (see EDM, January 4). This week Putin appointed Chemizov CEO of Rostekhnologii. Chemizov’s deputy Anatoly Isaykin, a former KGB Special Forces operative and reportedly a loyal lieutenant of Chemizov, will succeed Chemizov as head of Rosoboronexport. Putin appointed a supervisory council for Rostekhnologii, comprised of key government ministers and Kremlin officials, and he named Defense Minister Anatoly Serdyukov as chairman of the council. Chemizov had previously publicly stated that he wanted the former defense minister, First Deputy Prime Minister Sergei Ivanov, to be chairman, but in the end, Ivanov was not even appointed to the board (Kommersant, November 27).

Rosoboronexport trading practices are opaque. Its overall earnings have never been officially revealed. As a monopoly, its commission for services, including arrangements to transport weapons to various destinations, apparently exceeds 10% of Russia’s annual arms exports. Since 2004 Chemizov has used the cash accumulated by Rosoboronexport and his close personal connections to Putin to transform a secretive state-owned arms trading company formed into a huge industrial conglomerate. But having an arms trade monopoly as an industrial holding company has obvious disadvantages. Rosoboronexport could not issue Eurobonds, take loans from major Western banks, hold IPOs, freely use its assets, grab new ones and so on. In short, it could not act like a “normal” Russian state-controlled corporation, such as gas monopoly Gazprom. Now Putin has granted Chemizov the corporation he wanted, but with some important modifications.

Last September Chemizov was reported to have put forward a proposal to make Rostekhnologii a monopoly not only in arms exports, but also in selling weapons to the Defense Ministry. Such a move would have made the new corporation much more powerful and prosperous, since the Russian weapons procurement and R&D budget for 2007 is $12.5 billion and will reach $15 billion in 2008 – almost three times the amount of arms exports. Reportedly Prime Minister Viktor Zubkov supported the idea to transform Rostekhnologii into an overall arms monopoly in principle, but he also began to actively lobby for handing over control of the new corporation to his son-in-law, Serdyukov. Chemizov has reportedly withdrawn the proposal to grant Rostekhnologii a monopoly on procurement, but Serdyukov was still appointed chairman of the supervisory council (Kommersant, November 27).

In recent months Putin’s old KGB buddies have been losing influence to his new favorites – Zubkov and Serdyukov – who apparently do not have a KGB background. Putin appointed Serdyukov defense minister in February, replacing Ivanov, to reverse massive graft, misappropriation, and inefficiency. Zubkov was unexpectedly appointed prime minister last September with the same task on a larger scale, when Kremlin-watchers were predicting the promotion of Ivanov. The father-in-law and son-in-law team – Zubkov and Serdyukov – seem to be today the most influential power group in Putin’s surroundings.

Sudden change of favorites is a constant feature of authoritarian dictatorial regimes. Putin cannot allow any of his henchmen to get too powerful and establish stable alliances that may one day turn against the supreme leader. This is especially true now, when Putin is apparently preparing to abandon the post of president to become a so-called National Leader of Russia – a position of unclear constitutional standing.

Putin has been changing his team and visibly humiliating his once -closest comrades, but he has not sent anyone to the gallows, Siberia, or exile, unlike previous Russian dictators. Putin keeps his former allies and new favorites nearby in important positions, so that his administration and government are torn apart by intrigue and infighting and no one is fully secure.