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Irkut: Russian arms makers have
redirected exports to non-Nato
members such as China and India
and opened up to foreign equity
investors |
Russia is still heavily dependent on oil and gas but the non-energy sector is growing fast to cash in on ballooning domestic demand that high oil prices have helped to generate.
Economic development and trade minister German Gref said in August that high oil prices had "ripened" the Russian economy and investment into sectors such as food processing and machine building are starting to bear fruit.
Raw material production still accounts for 70% of national production and attracts about 74% of invested capital, according to the EDT, while industry accounts for 27% of growth and its share is expected to fall.
Sectors such as hi-tech still only contribute about 4% to 5%, which is 10 times less than in developed counties. However, some private analysts say that the picture is actually much brighter if the shadow economy is taken into account.
Manufacturing output is growing faster, at 8%, than the extractive industries' output, growing at 6.8%, for the first time since Putin took over in 2000.
Machine building is the fastest-growing of all sectors over the first five months of this year, up by 14.2%, followed by chemicals (10%) and construction materials (9.8%), according to figures from the World Bank.
"This change of the growth leaders is needed if we want to attain sustainable economic growth," Gref told the cabinet. New sorts of Russian companies are now seeking capital from international portfolio and corporate investors to fund their growth.
Euromoney profiles some of the more colourful companies and sectors below.
IRkut:
Defence industry sets the sky as its limit
The producers of Su-XX are hoping that it will be next season's blockbuster movie, following on the foreign success of Russian films Burnt by the Sun and Brat. This time the star of the movie, currently being filmed on the outskirts of Moscow, is a fighter aircraft.
Russian consumer goods might have a poor reputation, but no-one disputes the country's skill in making weapons. Sukhoi fighters are among the best attack aircraft in the world and Russia is selling them like hot cakes to such countries as China and India.
Su-XX's supporting cast includes Malcolm McDowell, the star of A Clockwork Orange – he plays a disillusioned ex-CIA agent who manipulates a Russian pilot into attacking Airforce One with his Su-XX stealth fighter.
The actual fighters used in the film are a Su-27UB and a Su-35, neither of which will be equipped with stealth capabilities until development is completed in 2010.
The producer of the film make no bones about its purpose. "This is a publicity film about Sukhoi – propaganda about Russian weapons, technology and the people who make them," said Oleg Kapanets, who is also the co-screenwriter, in an interview.
Russia's arms exports are rising and have become one of the country's best foreign exchange earners. President Vladimir Putin appreciates the sector's importance. As if he didn't have enough to do already, he appointed himself head of Russia's arms export agency, Rosoboronexport, in August.
Russia's jet fighters, tanks, helicopters and, above all, the iconic kalashnikov sub-machine gun, are still in high demand around the world. Putin's second job is flogging arms to allies old and new: Russia's arms exports have risen every year since he took over in 2000 and were up another 21% last year to bring in $5.1 billion.
The government keeps arms companies on a tight rein, but in March this year fighter jet producer Irkut floated 23.3% on the stock market, opening up the sector to portfolio investors for the first time.
Irkut is by far the largest privately owned arms company in Russia and includes the Irkutsk aircraft building plant and four design bureaux.
The state-owned Sukhoi group owns 13.2%, another 55.3% is in the hands of the management – general director Alexei Fedorov personally owns 20% – and 31% belongs to individuals and institutional investors.
Irkut was founded in 2000 and makes Russia's top-of-the-line jet fighter, the SU 30, which accounts for 90% of its sales. However, it is hoping to expand civilian production.
Politics remains an integral part of the arms business – as in other countries – but the Kremlin no longer doles out bullets and tanks for free to tinpot dictators purely to annoy the west. Irkut is part of the new-look Russian military-industrial complex. It has signed a string of cooperation agreements with western arms producers both to bolster the bottom line and cement relations with its new friends.
Profits are already soaring. In May, the company said revenues had more than quadrupled to $48.2 million in the first quarter, while gross profits were up nearly six-fold, although these numbers were based on the rather less reliable Russian accounting standards.
In June, Irkut announced that it had won a contract to produce $10 million-worth of aircraft parts for Airbus between 2004 and 2008. In July, Irkut said it was keen to become a partner with Canadian aircraft producer Bombardier, in a project aimed at developing C-series mid-range planes intended to compete with Boeing and Airbus aircraft. And the company has said it is interested in selling a stake to the European Aeronautic Defence and Space Company (Eads), which set up a Russian representative office in March.
"Negotiations [between Irkut and Eads] are continuing but there first has to be a decision at the governmental level" given the military nature of the Russian company, Irkut spokeswoman Elena Fiodorovna said in June. The two companies are already cooperating on projects to build a multipurpose Beriev model, the Be-200 amphibious aircraft, which will use Rolls-Royce engines.
Growing force
Management also says that talks with the Bank of New York have already started on launching an ADR programme and the company plans to list on the London Stock Exchange early next year. Analysts say that while both the ADR programme and the London listing will bring in a wider circle of investors, especially Americans who were excluded from the IPO, Irkut is mainly interested in making it easier for Eads to buy the company's shares.