Russia's Federal Anti-Monopoly Service has officially barred Siemens from buying into a Russian company, Silovye Mashiny, thus drawing a line under a dispute between German businessmen and the Russian state, and under the broader issue of whether foreigners should be let into Russian defense companies.
The saga began when Interros, SM's key shareholder (94%), announced a planned joint venture with Siemens in summer 2004, pledging 73.4% of SM shares for the authorized capital. The deal triggered a bitter dispute in Russia.
Silovye Mashiny is Russia's leading producer of power generating machines for nuclear, thermal, gas and hydraulic power plants. SM includes Leningradsky Metallichesky Zavod (Leningrad Metal Plant), Elektrosila, Zavod Turbinnykh Lopatok (Turbine Blades Plant), the Polzunov Design Center (St. Petersburg), Kaluzhsky Turbinny Zavod (Kaluga Turbine Plant), and a sales company, Energomasheksport. The company is also a contractor for the Russian military, producing and providing overseas maintenance for various missile and naval equipment. Naturally, the controversy over the proposed deal focused not only on economic and national security issues, but also on whether or not it was legal. The joint venture met particularly stiff resistance from the Russian Ministry of Industry and Energy and Yevgeny Velikhov, head of the Kurchatov Institute, Russia's leading nuclear center.
Some Russian lawmakers added fuel to the flames by describing the deal as the effective acquisition of a Russian company by the Germans. Yury Saveliev, a member of the Homeland faction in the Duma, said the acquisition of SM by Siemens would force Russia out of the domestic and international energy machines market - worth $30 billion and $40-50 billion, respectively - for 15 to 20 years.
The lower house of parliament sent a special statement to the government on the SM-Siemens deal, in which it described the planned deal as presenting a danger for the whole nation. The letter reads that, since SM accounts for over 60% of national production of power generating machines, "the sale of a controlling stake to Siemens could result in failures in fulfilling the state defense order, leaks of classified information, and a decline in Russia's mobilization readiness."
At the same time, the deal had a powerful lobby inside Russian officialdom, including Economic Development and Trade Minister German Gref, who tried to find a mutually acceptable compromise. Notably, he proposed separating SM's civilian and military production facilities, which could have made the deal a completely different matter. However, Industry and Energy Minister Viktor Khristenko described such separation as impossible. The main problem was that Russian legislation does not contain legal procedures for deals involving defense enterprises.
The dispute threatened to end up in a deadlock when the Federal Anti-Monopoly Service stepped in. Several months before, Siemens had applied for the Service's stamp of approval, without which no merger and acquisition is possible, and recently, amid fierce political discussion, the competition watchdog ruled that the deal was not in line with the Law On Competition and Restriction of Monopoly on Merchandize Markets. The Service reached the conclusion: "If implemented, the deal could restrict competition on the power equipment market. Both companies produce power equipment of all types and scales and compete on the Russian and international energy equipment market."
This story, however, should not be deemed as a sign of worsening relations between Russia and Germany. The Hannover Trade Fair has shown the immense opportunities for cooperation between the two countries as Russia tries to improve its business climate to attract foreign investors. The problem is that German businessmen were the first to buy into a Russian firm so closely engaged withthe defense sector. What this test case has shown is that Russia is not yet ready to loosen its grip on defense technologies.
Still, the line drawn under the deal might turn into a new starting point as Gref said today: "Talks with the companies are not over yet, and a different configuration of the deal is being considered."
