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Serving two masters is famously difficult, especially two as different as the Kremlin and Wall Street. Yet doing so is the challenge facing Russia's corporate managers.
The virtual destruction last year of Yukos Oil Co., Russia's most dynamic oil producer, demonstrated what can happen when even a 100 percent privately owned company strays too far politically. Moscow business executives do not expect a repeat of the Yukos debacle, but they continue to feel government pressure through seemingly capricious tax audits and apparent favoritism toward state enterprises.
Still, while the Kremlin retains the power to break business giants, it is no longer in the business of making them. The age of parceling out state assets and creating billionaire oligarchs with a stroke of a ministerial pen appears to be over, and the economy is becoming more open. Businesses now compete more or less freely, and a new generation of homegrown companies has sprung up to serve Russia's increasingly flush consumers. "In the early 1990s people talked about the 'Snickerization' of Russia; that we would just export resources and import the cheapest international goods," says Alexander Izosimov, chief executive officer of Moscow-based cellphone provider VimpelCommunications (see box, facing page). "But there turned out to be many more talented entrepreneurs than everyone expected."
After just four initial public equity offerings in 2002'03 and eight in 2004, Russia is on track for ten to 12 IPOs this year. The domestic bond market has doubled in size every year from 2002 to 2004, and this year bankers expect an additional $6 billion in issuance, bringing total market volume to about $20 billion. Corporate Eurobond exposure grew from $1.2 billion in 2001 to $20 billion at the end of last year. All of this means that the most dynamic Russian businessmen -- CEOs, presidents or general directors, as they are usually known locally -- must be able to manage fast-growing companies that sprawl across and sometimes beyond Russia, mollify a renascent post-Soviet bureaucracy, and simultaneously win over investors, preferably in polished English. The Russian business leaders who do it all best, as reflected in the opinion of scores of investors polled by Institutional Investor, range from highly Westernized under-40 executives in entrepreneurial settings to state employees coaxing modern performance out of repackaged Soviet monopolies. The first category includes the winners in Consumer, Industrials and Telecommunications: Timur Goryaev of Concern Kalina (see box, facing page), whose once-humdrum soap factory now competes successfully against international cosmetics giants; Severstal-Auto's Vadim Shvetsov (see box, at right), who transformed a crumbling military jeep factory into an up-and-coming maker of popularly priced sport utility vehicles; and Izosimov of VimpelCom, whose experience at U.S. candy maker Mars brings packaged-goods marketing gusto to Russia's No. 2 cellular operator. The state-enterprise managers in the winners' circle are Financial Services' Andrei Kazmin of Sberbank (see box, page 56), who is modernizing a 20,000-branch state savings bank, and Utilities' Anatoly Chubais (see box, below), the uniquely Russian politician-businessman who heads the giant state-owned Unified Energy System. Also featured are "red directors" Vagit Alekperov of Lukoil Oil Co. (see box, facing page) and Vladimir Lisin of Novolipetsk Iron & Steel Corp. (see box, page 56) -- Soviet-era managers who steered their enterprises through privatizations and who have succeeded in making cautious changes.
As Russia's top managers move forward, they continue to struggle with the nation's Communist legacy. "The hardest part of our job is changing the mentality of the people," says Shvetsov of Severstal-Auto, referring to the Soviet Union's rigid hierarchical structure, its egalitarian rhetoric notwithstanding. "The general director was something close to God," says Ian Hague, co-founder of New Yorkbased Firebird Management, which has $660 million invested in the former Soviet Union, of which $440 million is in Russia. Bosses demanded absolute obedience and were notoriously secretive. With profit and loss taboo topics for discussion and real economic data hidden by the government, success was measured by head count.
"Most Russian natural resource companies still have huge work forces because low wages and cheap energy make management think they can afford them," says Sergei Ambartsumov of Moscow's Hermitage Capital Management, which manages $1.6 billion in Russian securities. "International competitors use two to three times fewer people for the same result."
The melding of Soviet mores and capitalism during the wild privatization of the 1990s resulted in the new oligarchs acquiring assets and fending off attacks from each other and incumbent red directors, then rescuing as much as possible from creditors after the financial crash of 1998. The operating paradigm -- enabled by a weak legal system -- was that control of any cash-producing property would translate into riches for the controlling party, regardless of the business's long-term financial health.
The playing field started to change when Vladimir Putin became president in March 2000. For one thing, the oligarchs ran out of new properties to acquire and had to start managing the ones they owned. Putin delayed an anticipated second wave of privatization involving utilities, fixed-line telephony and airports; and he put natural gas, the greatest prize of all, indefinitely off-limits by increasing support for the state-controlled monopoly Gazprom. He also put teeth into laws on repatriation of hard-currency profits and, more recently, on corporate tax collections.
The Russian economy, meanwhile, started to grow. After a decadelong contraction, GDP has expanded at more than 5 percent a year since 1999. Wages, which many factories didn't bother to pay in the '90s, have more than doubled in the industrial sector since 1999, according to the World Bank. And business leaders became aware of the domestic market's potential. Kalina, for example, recognized demand for quality cosmetics and beauty products; Lukoil and other oil giants built up their refining and retail networks; and steel exporters like Severstal invested in domestically oriented manufacturing. "We chose to build 4X4s because they are less subject to globalization than lighter vehicles," says Severstal-Auto's Shvetsov.
With asset grabbing over, Russia is now in the stage of profit maximization, says Hermitage's Ambartsumov, who believes that incentives for efficient management will increase as Russian companies lose their tax and energy-price advantages. He estimates that until last year's shutdown of domestic tax havens, many enterprises paid effective tax rates below 10 percent. "These are now rising closer to the statutory 24 percent. Electricity, a key cost in metals and other industries, will rise closer to world levels as local power generators privatize and Gazprom phases out subsidies for natural gas," he predicts. The big question is whether Putin's tilt back toward Soviet-style control will impede the ongoing de-Sovietization of Russian management. The answer differs considerably by sector.
Repercussions have been easiest to perceive in the oil industry, which has the greatest strategic importance to the Kremlin. Sibneft, the company that most resembled Yukos in its double-digit annual production growth, if not its politics, looks set to be acquired by Gazprom. Russian oil men are retreating from recent internationalism and becoming more circumspect in dealing with foreigners, says Firebird's Hague. Yet Lukoil's Alekperov has managed to remain in good political odor while expanding his relationship with Texas-based ConocoPhillips.
Utilities are even more hostage to politics. The sector's future depends on Chubais's overhaul of UES, which has bogged down because of objections from Prime Minister Mikhail Fradkov. Metals, by contrast, is fully privatized and relatively free of state entanglements -- one reason steelmakers like NLMK and EvrazHolding are rushing to equity markets to get a jump on their rivals. Consumer companies, whose reliance on former state assets and infringement on presumed state prerogatives are minimal, are also naturally buffered from politics.
Yet no Russian manager can feel entirely safe from arbitrary exercises of Kremlin power. A case in point is VimpelCom. This post-Soviet start-up was slapped last December with a $158 million back-tax bill that was slashed to $17.6 million in January. "Managers are setting aside part of their profits as a sort of reserve fund for tax liabilities, which is putting a drag on capital expenditure programs," says Andrei Ivanov, a portfolio manager at Renaissance Capital Asset Management, which oversees $650 million in Russian securities.
Nevertheless, for a country where checkbooks were unknown 15 years ago, the sophistication of Russia's best-managed companies is a considerable national achievement -- even if it is one neither its top politicians nor the public at large seem much inclined to appreciate.
LUKOIL OIL CO.
YEAR NAMED PRESIDENT: 1991
COMPANY EMPLOYEES: 145,000
12-MONTH STOCK PERFORMANCE: +39.40 percent
ONE INVESTOR: "He just keeps getting better and better."
Vagit Alekperov might as well have oil in his veins. Born in Baku, Azerbaijan, the heart of the Soviet Union's energy industry, this oil worker's son graduated from the Azerbaijan Institute of Oil and Petrochemistry and worked on Caspian and Siberian rigs before becoming Moscow's deputy Energy minister in 1989. Two years later, as the Soviet Union crumbled, he assumed control of Lukoil -- an acronym of the Langepas, Urai and Kogalym oil fields. In 1993 the company was privatized.
Outsiders describe Alekperov, a repeat leader in this category, as low-key. "He doesn't make big or bold bets and has moved more carefully than other Russian chief executives," says New Yorkbased Bear, Stearns & Co. oil company analyst Marc McCarthy, who rates Lukoil's shares outperform. McCarthy raised his earnings expectations and price target in May following Lukoil's release of its 2004 results, which showed revenues up 53 percent and net income up 65 percent over 2003, surpassing expectations. He projects Lukoil will end the year at $41 a share, up 35 percent, with earnings of $4.52 per share. Alekperov, says one buy-side fan, "gets up every morning thinking about how to make Lukoil a better oil company."
Not that he doesn't have other things on his mind. In addition to his 10 percent Lukoil stake, Alekperov has interests in banking, television and the media, including news daily Izvestia. Lukoil is diversified, too. In 2000 it became the first Russian company to acquire a publicly traded U.S. corporation, Getty Oil Co., and it has exploration contracts in Azerbaijan, Colombia, Egypt's Gulf of Suez, Iran and Kazakstan. With Texas-based ConocoPhillips, Lukoil is exploring for oil in Iraq and plans to develop energy fields in Arctic Russia's northwest corner. "Cost controls, planned pipeline expansions in Russia and its strategic alliance with ConocoPhillips all bode well for Lukoil's future," says Michael Borisov, a Moscow-based analyst for Raiffeisenbank. -- Pam Abramowitz
UNIFIED ENERGY SYSTEM
YEAR NAMED PRESIDENT: 1998
COMPANY EMPLOYEES: 496,000
12-MONTH STOCK PERFORMANCE: +20.30 percent
ONE INVESTOR: "Maybe Chubais can't reform the energy sector, but he has the best chance."
Anatoly Chubais, who engineered the privatization of most of Russia's economy as state property chief in the early 1990s, has proved to be the most durable of that period's free-market crusaders. Since 1998 he has captained Unified Energy System and overseen Russia's most vital, if tortured, infrastructure reform: breaking up UES, a state-owned monopoly that controls the world's biggest power grid. The goal is to create dozens of more-manageable regional utilities, then transfer most of them to private hands.
The endurance of Chubais has been tested afresh recently. In March he survived the most recent of several assassination attempts -- and then calmly drove to work. In May, after Moscow suffered its biggest blackout since 1949, President Vladimir Putin publicly blamed UES management for the failure, casting more doubt over the company's restructuring. Yet Chubais has hung in, and investors are sticking with him. UES shares rose 6.8 percent between the May 25 power failure and mid-July.
"It's hard to see who else could make reform of the energy sector both politically acceptable and efficient," says Anatoly Poloun, a portfolio manager for DWS Investment Russia, a division of Deutsche Bank that controls about $30 million.
Chubais, a returning winner in this category, has already made great strides. When he took over, 52.5 percent state-owned UES was virtually bankrupt, collecting just 10 percent of its bills in cash. The rest were either forgiven outright or paid through an opaque web of barter and IOUs. Today, UES meets international accounting standards, and the company earned 24 billion rubles ($865 million) in 2004, down just 2 percent from a year earlier, even though sales fell by 33 percent as revenue was transferred to new paper entities in preparation for the corporate breakup.
In June, Chubais outlined his latest refinement of a program to restructure the country's electric power system. He proposed creating 21 private generating companies, three or four of which would be foreign-owned, with the state keeping control of the transmission grid. "To talk about stopping the reform is madness," says Chubais, who has set his latest deadline for sometime in 2007. -- Craig Mellow
YEAR NAMED GENERAL DIRECTOR: 1996
COMPANY EMPLOYEES: 2,600
12-MONTH STOCK PERFORMANCE: +76.50 percent
CONTROLLING SHAREHOLDER: Timur Goryaev (56.67 percent)
ONE INVESTOR: "Unlike many other chief executive officers, he basically created the business himself, and from an extremely low base."
Russian cosmetics customers often refer to Concern Kalina as "the Russian L'Oréal." That Kalina survived the Western cosmetics giant's invasion of Russia in the early 1990s -- and is being compared to a world leader -- is testament to general director Timur Goryaev's skills as a manager.
Kalina, a producer of cologne, soap, shampoo, skin-care items and toothpaste since 1942, went public in 1992. Four years later, Goryaev, just out of law school, acquired a controlling stake in the company and began to make changes. He junked outdated Soviet equipment, automated production with new German machinery and expanded Kalina's product line. Sales exploded from $10 million in 1996 to $118 million in 2000, in part, say analysts, as a result of the 1998 economic crisis, during which foreign competitors cut off Russian wholesalers. Goryaev supplied the abandoned middlemen and was rewarded with their loyalty when the foreign companies returned. In March, Kalina reported that net earnings were up 43 percent for 2004, to $19 million, on revenues of $182 million.
As a marketer, Goryaev spent $1 million on a rebranding campaign in 1999 and is now focusing more heavily on Kalina's more profitable beauty products. His risk-taking has endeared him to investors. "For five years in a row, with fierce international competition and the strengthening ruble, he managed to almost double revenue while improving profit margins substantially," says Alexander Golovtsov, head of investment research at Moscow-based Uralsib Asset Management, which manages more than $800 million. In April, Kalina acquired 60 percent of Germany's Dr. Scheller Cosmetics, marking the first public takeover of a German company by a Russian bidder. "If we are sufficiently dedicated to our strategy and maintain the confidence of shareholders," says Goryaev, "in five to seven years, we will become a global company." -- Constance E. Richards
YEAR NAMED CEO: 2003
COMPANY EMPLOYEES: 10,900
12-MONTH STOCK PERFORMANCE: +31.00 percent
CONTROLLING SHAREHOLDERS: Alfa-Eko Telecom (32.90 percent), Telenor (26.60 percent)
ONE INVESTOR: "You feel like you know what's going on in the company, which is unusual for Russia."
With three roughly comparable national carriers competing in a market approaching 80 percent saturation, cellular telephony represents a sector where Russia appears most like the rest of the world. To stand out from the competition, Alexander Izosimov, chief executive officer of Moscow-based VimpelCommunications, drew on his experience at U.S. candy maker Mars, where he spent seven years, beginning in 1996. Convinced that Russian consumers would flock to a service that "makes their lives brighter," he turned his Beeline brand's zingy yellow and black stripes into Russia's first real corporate logo. Over the past year the uplifting marketing elevated Russia's perennial No. 2 carrier to a tie in subscriber numbers with leader Mobile TeleSystems (MegaFon Group is No. 3). VimpelCom's first-quarter 2005 financials showed a 55 percent year-on-year rise in sales, to $641 million, while profits increased by 45 percent, to $110 million. To increase average revenue per user, VimpelCom is emphasizing mobile Internet, which doubled, to 4 percent, last year as a share of company revenue.
"Because of Izosimov, competition is now about marketing," says Sergei Ambartsumov, a fund manager at Moscow-based Hermitage Capital Management, which manages $1.6 billion in assets. With his almost perfect English and Western business training -- an MBA from Insead and a stint at McKinsey & Co. before Mars -- Izosimov has enhanced VimpelCom's already strong reputation for governance and transparency. "He is very communicative and consistent in his message," says David Sohnen, a fund manager at Drake Management, a New York asset manager.
"My mission impossible is to prove you can not only do business in a normal way in Russia but have great success at it," Izosimov says. One not-quite-normal development he faced: a $158 million back-tax assessment levied last December that was slashed to $17.6 million in January. -- C.M.
YEAR NAMED CEO: 1996
COMPANY EMPLOYEES: 219,000
CONTROLLING SHAREHOLDER: Central Bank of the Russian Federation (60.60 percent)
12-MONTH STOCK PERFORMANCE: +69.19 percent
ONE INVESTOR: "He runs an amazing franchise with huge potential for growth."
By almost any measure, Sberbank is the biggest banking game in Russia. With more than 219,000 employees, 20,000 branches, 60 percent of Russia's retail banking deposits and 50 percent of its retail lending market -- not to mention assets exceeding $70 billion -- Sberbank easily dwarfs its closest competitor, Rosbank, which has less than $6.8 billion in assets and fewer than 600 branches.
Chairman and chief executive officer Andrei Kazmin took the helm of the 164-year-old institution in 1996, after serving as Russia's deputy minister of Finance and as a faculty member at the Russian Academy of Sciences and the Moscow Institute of Finance, where he earned a Ph.D. in economics. Kazmin's business achievements include the ongoing geographic restructuring of the bank and weathering the 2004 banking crisis, in which the interbank lending market dried up, one bank failed and the government intervened to stabilize the banking system.
Sberbank's size, says Simon Nellis, a London-based banking analyst with Smith Barney Citigroup, makes it an "amazing franchise" but also invites political pressure to serve customers who otherwise would have no place to bank or save. Sberbank has closed roughly 16,000 underperforming branches in the past few years, and Alexander Golovtsov, head of investment research at Moscow-based Uralsib Asset Management, which manages more than $800 million, says Kazmin has successfully turned "an inefficient, socially oriented state behemoth into a highly profitable and fast-growing market institution that has almost quadrupled its assets in the past five years."
Although Sberbank has reported results according to U.S. generally accepted accounting principles since 1996 and maintains an English-language Web site, shareholders and analysts grouse that management does little to foster relations with the investment community. "I'd like to see them come to London," says one U.K. buy-sider. -- P.A.
NOVOLIPETSK IRON & STEEL CORP.
YEAR NAMED CHAIRMAN: 1998
COMPANY EMPLOYEES: 50,000
CONTROLLING SHAREHOLDER: Stinol-Invest (95.60 percent), controlled by Vladimir Lisin
12-MONTH STOCK PERFORMANCE: +46.56 percent
ONE INVESTOR: "He has built the most effective and profitable company in the sector and the most efficient business in Russia."
Like a skilled yachtsman, Vladimir Lisin has tacked his way to success. Chairman of one of the world's biggest integrated steel producers -- as well as an owner of several Russian media properties, making his personal worth a reported $3.8 billion -- Lisin began his career in 1975 as a welder in a coal mine. Next came studies at the Siberian Metallurgical Institute, a job as a steelworker, then graduate training at the Russian Academy of National Economics. His credentials earned him a position at the Karaganda Iron and Steel Works in Kazakstan as a deputy engineer, from which he rose to become the company's No. 2 manager. When his boss was appointed minister of Metallurgy in 1991, Lisin joined him in Moscow.
The following year, with the Soviet Union dissolving, Lisin left to manage one of Russia's leading steel and aluminum exporting companies, which came to be controlled by traders operating as the Trans-World Group. He became chairman of one of the group's mills, Novolipetsk Iron & Steel Corp., or NLMK, in 1998, and maintained a majority stake in the unit when Trans-World broke up in 2000.
Lisin wins investor praise for improving his company's products and its bottom line. In 2004 revenues increased by 86 percent, to more than $4.5 billion, while earnings skyrocketed 170 percent, to nearly $1.8 billion. "He has been absolutely correct in anticipating industry trends, such as demand for semifinished product," says Andrei Ivanov, an analyst at Renaissance Capital Asset Management in Moscow, which manages $650 million in Russian securities. Ivanov says NLMK has wisely invested in Russian-manufactured value-added products such as galvanized steel and steel sheets, which have been strong sellers, rather than looking for "questionable acquisitions in Europe or America." -- C.E.R.
YEAR NAMED GENERAL DIRECTOR: 2002
COMPANY EMPLOYEES: 37,800
STOCK PERFORMANCE: 5.10 percent (from IPO on April 26, 2005, through mid-July)
ONE INVESTOR: "Shvetsov has led a complete change in operating management and a very successful IPO."
When cash-starved Russian automakers were pressed to barter cars for raw materials in the late 1990s, Severstal Group, one of the nation's top steel producers, reluctantly entered the auto business. At one point, it accounted for 20 percent of the sales of all Zhigulis, Russia's most popular domestic compact car. The company went from selling to manufacturing autos in 2000, when it bought the Ulyanovsk Automobile Factory, a producer of 1970s-vintage military jeeps. To make the facility competitive, Severstal chief Alexei Mordashov turned for assistance to his sales director, Vadim Shvetsov. The former steelworker, who was born in Severstal's factory town of Cherepovets and attended the Moscow Institute of Steel and Alloys before earning an MBA from Northumbria University Business School in England in 2001, has made a good start on the job. He is transforming Severstal-Auto into a manufacturer of low-cost, four-wheel-drive sport utility vehicles -- a perfect choice for Russia, considering its harsh climate, terrible roads and tariffs on imported vehicles that escalate with engine size. The strategy is working; sales rose from $490 million in 2002 to $799 million last year, while profits jumped from $20 million to $47 million. "Shvetsov and Severstal turned around one of the worst companies in Russia," says Andrei Ivanov, an analyst at Moscow's Renaissance Capital Asset Management, a manager of $650 million in Russian securities.
"We have wonderful workers and specialists," Shvetsov says. "What we need is management that is not afraid of change and understands quality."
The automaker, which was spun off earlier this year in a $450 million initial public offering, has concentrated on improving its vehicles, which are sold to the army and to developing countries for about $6,000 a piece. It is rolling out the $12,000 Patriot model this summer, and future plans include a fully loaded, $30,000 SUV to be built in a joint venture with South Korean off-road specialist SsangYong. -- C.M.