Russian multinationals' foreign assets up 4 times in 3 years

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2008-11-14 14:34:38 - The second annual survey of Russian multinational enterprises (MNEs), released today, reveals a continuing global expansion of Russian firms. SKOLKOVO analyzes Russian MNEs' performance and considers the challenges these companies will have to face in the present economic situation.

According to the findings, Russia's Top 25 MNEs - ranked by foreign assets - had, at the end of 2007, USD 90 bln assets abroad, had about USD 220 bln in foreign sales (including exports) and employed nearly 140,000 persons in other countries. Foreign assets have increased four times since 2004, and employment abroad has tripled. Over half of foreign assets are concentrated in Europe. Three oil/gas firms - Lukoil, Gazprom and TNK-BP, - and nine metals and mining firms, led by Norilsk Nickel, together account for 80% of the total foreign assets of the Top 25.

Russian MNEs' Growth Dynamics 2007 2004
Top 25 aggregate foreign assets (bln USD) 89.6 22
Top 25 foreign sales (bln USD) 220 87
Top 25 employment abroad (thousand persons) 140 46


Compared with the previous year's list, the aggregate foreign assets of the
Top 25 rose by over 50%, and the 'entry ticket' jumped up to USD 200 million. While several of the companies were restructured in various ways, the only real newcomers on the list are the Industrial Metallurgical Holding, the real estate developer Mirax Group and the gaming group Ritzio Entertainment.
'The Top 25 companies on our list have increased their aggregate foreign assets rapidly, sustaining yearly growth rates of over 50% for several years now, and the preliminary data for this year indicates that the rate for 2008 is likely to be similar', notes Alexander Mansilya-Kruz, the researcher responsible for the ranking at SKOLKOVO. 'However, now that the economic environment has changed dramatically both globally and at home, these companies will have to deal with new challenges.'

Russia's Top 25 MNEs by foreign assets in 2007 (bln USD)

Rank Previous Rank Name Industry Foreign assets
1 1 → Lukoil oil/gas 20,805
2 2 → Gazprom oil/gas 17,236
3 6 ↑ Norilsk Nickel metals/mining 12,843
4 11 ↑↑ Evraz metals/mining 6,221
5 3 ↓ Severstal metals/mining 5,130
6 5 ↓ Sovcomflot transport 4,874
7 4 ↓ Rusal metals/mining 4,533
8 7 ↓ MTS telecoms 3,812
9 8 ↑ VimpelCom telecoms 3,572
10 14 ↑ Novolipetsk Steel metals/mining 1,594
11 13 ↑ PriSCo transport 1,208
12 10 ↓ TNK-BP oil/gas 1,150
13 12 ↓ FESCO transport 1,055
14 newcomer IMH /OAO Koks metals/mining 978
15 17 ↑ Eurochem agrichem 901
16 15 ↓ InterRAO electricity 799
17 16 ↓ TMK metals/mining 606
18 newcomer Mirax development 470
19 18 ↓ GAZ automotive 384
20 21 ↑ ChTPZ metals/mining 262
21 23 ↑ Acron agrichem 261
22 20 ↓ Alrosa metals/mining 231
23 newcomer Sitronics hi-tech 226
24 19 ↓ OMZ engineering 207
25 newcomer Ritzio Entertainment entertainment 200
TOTAL 89,558
Source: SKOLKOVO 2008 Ranking of Russian multinationals

Booming expansion

• Most of the investment from Russia is being made by private companies: only four out of the Top 25 companies, accounting for about 30% of the aggregate foreign assets, are majority-owned by the state (Gazprom, Sovkomflot, InterRAO and Alrosa).

• The expansion of Russian multinationals is continuing very rapidly: in 3 years, their aggregate foreign assets grew four times, to USD 90 bln; their foreign sales (incl. exports) increased 2.5 times, to nearly USD 220 bln; and foreign employment tripled to 140,000 people.

• In most cases, international expansion does not impede investment or employment at home: the Top 25's domestic assets more than doubled from 2004 to 2007, and their domestic employment grew by more than 20%.

• While the foreign assets of Russia's global players is still concentrated in Europe (52%), the move toward North America, Africa, Australia and South Pacific Asia is becoming more significant.

• Reflecting the country's resource endowments, Russian multinationals are mostly in extractive industries: 44% of the aggregate foreign assets of the Top 25 belong to three oil & gas companies and 36% to nine metal & mining firms. This compares to 53% and 25%, respectively, for the previous year's list.

• The dominance of oil/gas conglomerates in the transnationalization process of the Top 25 is clearly decreasing: in 2004, they accounted for as much as 63% of aggregate foreign assets compared to 44% in 2007.

• Telecom companies are expanding dynamically. They now own 8% of the Top 25's aggregate foreign assets (about as much as shipping operators), compared to 7% in 2004.

• Norilsk Nickel and Evraz showed the most significant growth rate. Norilsk Nickel foreign assets rose five fold from USD 2,427 mln in 2006 (rank 6 in 2006) to USD 12,843 mln in 2007 (current rank 3) due to the acquisition of LionOre. Evraz foreign assets grew five fold as well, from USD 1,322 mln in 2006 (rank 11) to USD 6,221 mnl in 2007 (rank 4).

• The aggregate Transnationality Index of the Top 25 has risen from 28.5% to 35%; this relatively slow growth rate reflects the fact that domestic operations have also grown rapidly.

The challenges ahead

While the ranking shows a steady pace expansion of Russian multinationals from the early 2000s through 2007, it remains to be seen how resistant this trend will prove to be to a global economic downturn. In the last few weeks, there have been clear signs that the credit crisis is slowing the international expansion of Russian companies.
At the same time, most leading multinationals seem resolute to continue their expansion:

• Lukoil (#1 in our ranking) has reaffirmed its willingness to conclude purchases of refineries in Sicily (Italy) and gas stations in Turkey, for a total of USD 1.9 bln;
• Gazprom (#2) has signed memorandums to enter new markets in Africa and Latin America;
• Polyus Gold (a spinoff from Norilsk Nickel, #3) is buying KazakhGold for an estimated USD 373 mln;
• Rusal (#7) has signed agreements to build large plants in Vietnam and Lybia, and has confirmed plans to expand its facilities in Nigeria and Armenia;
• Altimo, the largest shareholder of VympelCom (#9), is intending to compete for the soon-to-be-privatized Nigerian Telecommunications;
• InterRAO (#16) has declared that expansion into Latin America and Southeast Asia will be among its top priorities.

Whether these plans are going to be realized will depend primarily on macroeconomic factors, but also on how well the companies adapt. 'They have mastered aggressive international growth; now they will have to show that they are able to manage efficiently across borders and to refinance the debt accumulated along the way', underlines Alexander Mansilya-Kruz, the researcher responsible for the ranking at SKOLKOVO. 'Those groups that make it through successfully will be in a position to acquire more foreign assets at bargain prices.'

Forecasts

The possible developments can be summarized in three scenarios. Under a worst-case scenario, many Russian multinationals could be forced to sell their overseas units to pay their creditors. On the contrary, in an optimistic scenario of liquidity becoming available again soon to large Russian groups, they could benefit from the low asset prices. The third scenario, possibly the most realistic one, involves a period of cost-cutting and regrouping, followed by renewed expansion.

Summing up the research results, Andrei Volkov, SKOLKOVO Dean, stresses the leadership power of the Russian managers: 'The talent of the Russian business to survive in hard times and its headway for further expansion despite global turmoil bears witness to operational excellence and maturity of the management that has seen not a single disturbance. This experience resulted in peculiar managerial durability potential, which, however, is bound to meet yet other challenges.'
'Will Russian leader become a global one? On the face of it - yes. Russian leaders tend to confine themselves to the limits of their own model, culture and traditions. They tend to move on, to shift, to evolve. Moreover they are able to work under extreme conditions and even work to the best advantage when absolutely new and alternative approach and seeing are needed. Consequently, to release this leadership power will become the challenge of tomorrow', underlines Wilfried Vanhonacker, SKOLKOVO Dean.


Emerging Markets Global Players Project
The SKOLKOVO 2007 Ranking of Russian Multinational Enterprises was conducted in the framework of the Emerging Markets Global Players Project, a collaborative effort coordinated by the Vale Columbia Center on Sustainable International Investment. It brings together researchers on FDI from leading institutions in emerging markets to generate annual ranking lists of emerging market MNEs. Visit www.vcc.columbia.edu for further information or contact vcc@law.columbia.edu

Moscow School of Management SKOLKOVO
The Moscow School of Management SKOLKOVO is a joint project by major Russian and International business leaders. SKOLKOVO is a dynamically developing international business school with a vision based on a unique mix of three dimensions: entrepreneurial leadership, emerging markets and experiential learning.

Being realized in partnership with the government of the Russian Federation, SKOLKOVO is a part of the national priority projects programme, funded exclusively by private business. Dmitry Medvedev, the President of the Russian Federation is the Chairman of the SKOLKOVO International Advisory Board.

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Vale Columbia Center on Sustainable International Investment
The Vale Columbia Center on Sustainable International Investment (VCC), led by Dr. Karl P. Sauvant, is a joint center of Columbia Law School and The Earth Institute at Columbia University. For more information, see www.cpii.columbia.edu.