Putin’s Arms Trader Expands Empire With Phones, Pills, Cars

Photographer: Andrey Rudakov/Bloomberg

Sergey Chemezov, chief executive officer of Rostec Corp., at his office in Moscow, Russia, on Feb. 28, 2014. Close

Sergey Chemezov, chief executive officer of Rostec Corp., at his office in Moscow,... Read More

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Photographer: Andrey Rudakov/Bloomberg

Sergey Chemezov, chief executive officer of Rostec Corp., at his office in Moscow, Russia, on Feb. 28, 2014.

If you need a genuine Kalashnikov rifle, Sergey Chemezov is your man. He’d also be happy to sell you a dual-screen smartphone, neonatal incubators, heavy-duty trucks or a few tons of titanium.

As head of Rostec, the Russian state-owned holding company formed around arms exporter Rosoboronexport, Chemezov is branching out. His $9 billion in planned investments through next year will include ventures working on biotechnology, drugs, gadgets and medical devices.

“Our target is to have at least 50 percent of our combined revenue coming from civilian goods by 2015, so we’re not so dependent on military orders,” Chemezov, 61, said in an interview in Moscow.

Finding new markets and customers may be more important than ever for Rostec after leaders in the U.S. and Europe threatened Russia with sanctions for sending troops into Ukraine’s Crimea region. It would also bolster President Vladimir Putin, who began his third term by ordering the government to create 25 million quality jobs through a modernization of the commodities-driven economy.

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Chemezov, who was born in the Siberian region of Irkutsk and got his start as an engineer there, is a trusted ally. He’s known Putin since the 1980s, when they lived in the same apartment complex in Dresden, Germany, during the future president’s stint as a KGB officer.

Rostec, previously known as Russian Technologies, will book more than 1 trillion rubles ($27.5 billion) in revenue for last year, up from 931 billion rubles in 2012, according to Chemezov. About 60 percent of that is still defense-related.

Pentagon Contracts

The U.S., which awarded Rosoboronexport a $572 million helicopter contract last year, said last week that it was putting on hold joint military engagements with Russia. Elon Musk, the billionaire chief executive officer of Tesla Motors Inc., said last week the U.S. shouldn’t award Russia a “huge contract for rocket engines” after the actions in Ukraine.

Rostec has significant industrial cooperation with Ukraine, so the situation “certainly causes concern,” Chemezov said.

“We hope that the lack of a unified approach among governments on certain issues won’t influence relations among our countries, and that earlier agreements with our international partners will be successfully realized,” he said.

Selling Stakes

Eventually, Rostec wants to sell stakes in its successful holdings. Chemezov sold control of OAO VSMPO-Avisma, the world’s largest titanium producer, in 2012 while retaining 25 percent. Rostec sold the stake for about $970 million.

Most of the companies aren’t there yet. Rostec was saddled with hundreds of businesses in varying states of financial disarray after its creation in late 2007. The initial 437 had a loss of 61 billion rubles in 2009, when Russia’s economy contracted 7.8 percent.

About 100 were nearly broke when handed to Chemezov and 28 were already in bankruptcy, he told Putin in a meeting in 2012. Twenty-three more weren’t even operating, he said at the time.

Rostec holds stakes in 663 companies and counting. It’s been profitable since at least 2012, allowing Chemezov to shift from rescuing Soviet-era enterprises to investing in modernization.

About 116 billion rubles, or more than a third of Rostec’s three-year, 332.6 billion-ruble investment program, will go toward overhauling truck producer OAO KamAZ and OAO AvtoVAZ, Russia’s biggest automaker, in which Renault-Nissan bought a controlling stake last year.

Cars, Trucks

Rostec may increase its stake in KamAZ, part owned by Daimler AG, from 49.9 percent now, according to Chemezov. A group of investors who used to own Russian investment bank Troika Dialog haven’t been able to agree with Daimler on a price for their 23.5 percent, he said.

Chemezov is also pushing into health care. Rostec owns OAO Schvabe, which makes everything from optical devices to baby incubators, and Rostec now plans to start accumulating stakes in state-owned biotech firms and drugmakers. The corporation signed an agreement with Russia’s Health Ministry to set up a holding that will develop and produce immunobiological medicines, Rostec said in a statement today.

Last year, Chemezov ventured into consumer goods with the Yotaphone, which he dubbed a “100 percent Russian invention.” The smartphone, sporting an LCD on one side and electronic-ink reader on the other, won awards at shows in Las Vegas and Cannes, he told Prime Minister Dmitry Medvedev in December.

Apple ‘Nervous’

“Apple got nervous, you’re saying, after our smartphone,” said Medvedev, who uses the Cupertino-based company’s gadgets, while inspecting the device.

“That’s absolutely right,” Chemezov said, after conceding that the components were foreign and the phone was assembled in Singapore. “The main thing is that all the intellectual property belongs to Russia.”

While expanding elsewhere, Chemezov isn’t letting go of the arms trade.

Rosoboronexport’s revenue reached a record $13 billion last year, Kommersant reported in January. The arms exporter is looking to boost sales in Latin America and Africa while maintaining its presence in India, China and Southeast Asia, according to Chemezov.

“We probably won’t catch up with the Americans, since their sales are $20 billion or more,” he said. Russian sales will probably hold at about $15 billion, enough to prevent the Chinese from winning the No. 2 spot.

Kalashnikov Investors

Private investors Andrey Bokarev and Alexey Krivoruchko agreed last year to take a 49 percent stake in Izhevsk-based Kalashnikov, best known for the AK-47 rifle, whose inventor Mikhail Kalashnikov died in December.

The company lacked “good marketing and distribution,” Chemezov said. Rostec plans to have Kalashnikov at least break even within two years and may open an assembly plant in India.

Of the defense sales, 30 percent to 35 percent are from jets and helicopters. Rostec owns OAO Russian Helicopters, which delayed a London $500 million initial public offering in 2011, saying investors undervalued the asset.

“Russia is the world’s largest producer of military helicopters,” he said in the interview. “They’re cheaper than European or American helicopters, and the quality is no worse.”

Russian Helicopters may try to sell shares again once the market is favorable, while holdings Schvabe and Radioelectronic Technologies are also preparing, Chemezov said.

“We made a mistake at the time, as we were seeking a listing in London,” he said. “We needed to do it in Asia, where our main clients are and where we’re well known.”

With assistance by Kathleen Miller and Jonathan Salant in Washington.

To contact the reporters on this story: Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net; Elena Mazneva in Moscow at emazneva@bloomberg.net

To contact the editors responsible for this story: John Viljoen at jviljoen@bloomberg.net Scott Rose, Alex Devine

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