Examines Russian choices on the road to capitalism
Stein, Judith
THE RELATIONSHIP between democracy and the economy has always been contested terrain. In Russia, many people, including intellectuals, do not see democracy as important to economic...
...In comparison, wages have risen in the United States, but so has productivity...
...It is difficult to acquire mills in Japan, Korea, China, or even India, where governments control steel industries as the Europeans used to do...
...One of the candidates whom he helped elect got him his job at Severstal...
...He sees nothing wrong with this mode of redress...
...William and Sergei told me that Severstal would like to be one of the companies still standing after the final shakeout...
...In addition to its Russian and North American mills, Severstal owns the Lucchini Group, which has twenty plants in Italy, France, the United Kingdom, and Sweden...
...In 2004, Severstal, the thirteenth-largest steel company in the world and the largest in Russia, bought the bankrupt Rouge Steel, once a part of Henry Ford's auto empire in Dearborn, Michigan...
...He said that Russian wages were rising but productivity was not...
...Labor costs make up about 30 percent of the cost of a ton of steel in the United States and 6 percent in Russia...
...There were few workers anywhere...
...History at Moscow State University this past spring...
...Although the country was already urban and industrial, it was internationally competitive only in the military sector...
...I met with William and Sergei (I have used pseudonyms for all of the Severstal people with whom I spoke) at Na Melnitse, a traditional Russian restaurant frequented by businesspeople...
...Like William and Sergei, Vladimir spoke excellent English...
...The management of Arcelor was trying to prevent the current number one, Mittal Steel, from taking it over...
...He was an assistant to Professor Anatoly Chubais, who became the architect of Russian privatization in the 1990s...
...He responded by telling me how much Mordashov had done for the mill and the city...
...After his graduation in 1988, he returned to the mill in Cherepovets...
...In the late 1990s, he was a partner in McKinsey and Co., the management consulting firm advising Severstal...
...In 1964, he had started working as a carpenter in the mill and was a trade union leader in the Soviet period, when unions did little more than organize social welfare...
...After less than an hour in the air, Olga and I were met at the airport by Vladimir, the assistant director of strategic planning...
...Instead of looting the company of its assets, he invested in production, modernized its mills, and acquired coal and iron mines...
...Georgi Arbatov, founder of the Institute for the U.S.A...
...But neither the energy nor metals industry employs enough people to make Russia prosperous...
...He is currently studying for a business degree from Northumberland University in Great Britain, where many Severstal managers, including Mordashov, obtained their masters of business administration degrees...
...Ninety percent of Severstal stock is owned by forty-year old Alexsei Mordashov, Russia's seventhrichest man, with a fortune estimated at $8.5 billion...
...A sophisticated man, William speaks six languages, holds degrees in law and philology, and studied international relations in Bologna, Italy...
...He is on various boards that advise the president on such matters as entering the World Trade Organization...
...In the lingo of mergers and acquisitions, Mordashov was Arcelor's white knight...
...Gorbachev's high status in the West is evidence that his actions unnecessarily compromised Russian power...
...He also encouraged people to build their own houses in the surrounding countryside by giving them free timber...
...They remember Boris Yeltsin's years as an era of rigged elections, stolen wealth, lawlessness, and economic disintegration...
...ALTHOUGH ITS main plant is in Cherepovets, a city 600 kilometers northwest of Moscow and 450 kilometers southeast of St...
...William and Sergei are in charge of mergers and acquisitions and are very knowledgeable about global steel trends, which is what they wanted to talk about...
...China is the second largest exporter to the United States...
...But states have economic choices...
...Vladimir added that cheap energy also offers a way to buy off domestic dissent...
...Clearly, there are certain things that the company needs to do to keep the president happy...
...Although managers often disparage workers, their across-theboard criticism clarified for me the difference between Russia and China...
...The absence of economic ties is important because much of what we know about the Chinese economy comes from the corporations that invest there and the unions whose members compete with Chinese workers...
...The absence of genuine parties, a free media, and a real trade union movement means that global markets and Russia's elites will determine this issue by default...
...In Russia, many people, including intellectuals, do not see democracy as important to economic reconstruction...
...He readily agreed and arranged for me to go with his English-speaking, twentyfiveyear-old assistant, Olga...
...Then I realized what I had seen...
...But Russia could not have chosen the cheap-labor road...
...They are the new Russians—bright, university trained, and heading for the corporations...
...Severstal gets 40 percent of its revenue from investments outside of Russia, and it seeks more...
...And, what's good for Severstal may not be good for Russia...
...To get some insight into the new Russian economy, I used professional connections I developed when I wrote a book on the U.S...
...He had acquired technical skills in the army, but worked for a political consulting firm after he finished his military obligations...
...Russia does not even make the top fifteen...
...the economic chaos of the 1990s...
...When I asked William to explain the purpose behind Severstal's purchase of a television station, which the company does not mention on its Web site, he testily replied, "I had nothing to do with it...
...Now, steel production is being managed to prevent such chaos, but it is the corporations, through mergers and takeovers, who are in charge...
...And, like them, he was more interested in the global than the Russian I2 n DISSENT / Fall 2006 economy...
...Severstal, by contrast, was a productive, seemingly well-run enterprise...
...Molten iron puts on quite a show wherever it flows...
...I asked whether I could go to Cherepovets and talk to some people there...
...At the university, Mordashov met people who are part of the St...
...He has been buying up media, arresting politicians and businessmen who challenge him, substituting appointed for elected local officials, and bringing the judiciary under executive control...
...I was intrigued not simply because of my interest in the steel industry, but because most of the talk about Russian business was about the scandalous privatization schemes, the looting of state assets, and the jailing of businessmen who showed political independence...
...Mordashov phrases it differently: "As with all other countries, we try to maintain positive relations with our government because we are good corporate citizens...
...It trades mostly with Germany, followed by Belarus and Ukraine...
...Putin and those Russians who turn a blind eye to his dismantling of democracy are wrong...
...Arcelor, in effect, solicited the marriage with Severstal...
...Still, if both China and Russia are more or less authoritarian, why has the Chinese economy produced double-digit growth for the past twenty years while the Rus0 n DISSENT / Fall 2006 sian economy contracted through the 1990s and has grown about 6 percent annually over the past seven years...
...Every single person I met complained about the Russian labor force...
...DOING BUSINESS in Russia requires good relations with the Kremlin, and Mordashov is close to Putin...
...It was seeking mills everywhere, but its holdings are mostly in Europe and North America...
...In all, it employs about a hundred thousand workers, of whom slightly more than half are in Russia...
...In their view, Russia crashed during the 1990s, but China prospered, modernized, and planted an entrepreneurial culture...
...The Chinese economy is more riddled with bribery opaque statistics, and arbitrary law enforcement than the Russian...
...William is the deputy chief executive officer of Severstal...
...Steel consultant Mike Locker told me about a Russian company that was expanding in North America...
...Like many young Russians, he lives at home with his mother...
...Severstal owns the airline that flies twice daily from Moscow to Cherepovets, as well as a car factory and a dozen businesses, employing more than a third of the work force of this city of about three hundred thousand...
...For example, workers faced a housing shortage, as do most people in Russia...
...Whether this can continue is another question...
...JUDITH STEIN was the Nicholay Sivachev Distinguished Professor of U.S...
...She teaches history at the City University of New York and is finishing a book on the changing political economy in the United States from 1945 to the present to be published by Yale University Press...
...The American presence in Russia is heavily weighted with nongovernmental organizations that report on Russian democracy, not its economy...
...Putin's facile solution to these deep problems is to offer bonuses to mothers who produce extra children...
...In Russia, the state will have a lot to say about its economy, as it should...
...They are unconcerned by President Vladimir Putin's steady elimination of the content, if not the form, of democratic institutions...
...So, RUSSIA struggled in the 1990s and only found salvation in the commodity and energy boom of the early twenty-first century...
...I toured the plant with the Swedish ambassador, who was in Russia trying to drum up business...
...Vladimir and the other managers believe that Russian inefficiencies resulted from the slapdash work culture, inherited from Soviet times, and the current demographic crisis...
...But young workers lack savings...
...In fact, many Russians attribute the country's current economic growth to the order that Putin has imposed...
...Possessing a vast territory (eleven time zones) and vast natural resources, Russia has a small population (142 million) for its size...
...When I returned to the hotel for dinner, a large group of Germans was in the dining room...
...So far, China has increased its industrial capacity and improved its living standards...
...But China made other decisions that Russia could not have...
...Yuri told me he presents all problems to Mordashov, who often agrees with him...
...Although he thinks unions should be more militant, he has no ideas about how to change them...
...Mordashov studied economics at the Leningrad Economic and Engineering University...
...Mordashov's parents worked as engineers in the steel mill in Cherepovets, which was built during the 1950s...
...This spring, Arcelor, the steel company created from the mills of France, Luxembourg, and Spain, announced that it would merge with Severstal...
...steel industry...
...The Kremlin also hopes to attract one million Russian-speaking immigrants from former Soviet republics by offering passports and perks...
...Western criticism of Putin stokes a nationalistic pride...
...Many Russians also reluctantly admire the Chinese road to wealth—growth without democracy or, as one academic put it, growth with order...
...Vladimir told me that although Russia has advantages now—cheap raw materials and labor— they are not permanent...
...Petersburg, Severstal's headquarters are in Moscow, which is both the financial and political capital of Russia...
...a high male death rate due to alcoholism...
...Sergei was smart and a workaholic...
...William told me that Severstal's technology and safety record were nearly as good as those in European mills...
...In the United States in the 1970s, the United Steel Workers of America proposed government-negotiated agreements to manage global steel production to prevent the overproduction and resulting liquidation that followed...
...The administrative, political, and property decisions that China made could have been made by Russia...
...When I mentioned the Russian oil and gas boom and the resulting increased demand for the production of pipe, Vladimir had dismissed it as insignificant, even though the company does make pipe for the energy industry...
...Defending his near-monopoly of Russian television, Putin claimed that Russians want to know the truth, not its many variations...
...The work force was educated, but not highly disciplined (as the old Soviet joke went, "They pretend to pay us, we pretend to work"), and was accustomed to minimum but certain levels of social welfare (housing, pensions, schooling, and so on...
...Eugene, the head of Human Resources, agreed that it was difficult to find workers...
...Each of the six leading steel firms in Russia is owned by a single man who acquired his company in a similar manner...
...Undeterred, DISSENT / Fall 2006 n 13 POLITICS ABROAD Severstal intends to continue its global mission, scouring the planet to accumulate steel assets at a time when most economists believe that there is a shortfall of investment in Russia...
...Mordashov's history departs from that of many oligarchs...
...He formed a company that bought the shares of the factory that were issued by the privatization plan...
...The company also teamed up with John Correnti, the founder of the minimill Nucor, to build a new facility in Columbus, Mississippi...
...and the collapse of the health system...
...The steel industry is undergoing massive consolidation...
...In the most recent shakeout, from 1997-2003, fifty steel companies in the United States filed for bankruptcy...
...Both the right and left in the United States opposed it...
...The population has been falling for at least a decade for four reasons: urbanization, which yields smaller families everywhere...
...The authority of the Communist Party did not make China into the model of transparency hallowed by the Harvard Business School...
...With its labor force as bait, China would obtain needed capital and technology...
...Will it become a nation with islands of prosperity linked to global markets or a nation whose industries rely more on domestic demand...
...I thought I would learn more about the workers from Yuri, head of the labor union at Severstal...
...his sister is studying international law, in preparation for a corporate career...
...His assistant, Sergei, a Muscovite in his twenties, graduated from one of the new universities in Moscow that teach management...
...Most of this work was controlled by computers, as in the United States...
...Russia is at a crucial stage...
...Mike was impressed with Severstal and thought it was much more pro-labor than most steel companies...
...Given their economic needs and lack of knowledge, workers readily sold the undervalued plant to Mordashov...
...Of course, William and Sergei did not make these decisions...
...An Austrian in his mid-forties who has an apartment in Moscow, William commutes once a month to visit his wife and children, who still live in Vienna...
...We inspected one of Severstal's three blast furnaces, which was pretty impressive...
...Putin considers Russian natural resources to be weapons forged to reassert Russia's role as a superpower, a goal that most Russians applaud...
...POLITICS ABROAD Because the mortgage market is undeveloped, people must pay cash for the meager number of available apartments...
...Aided by his father's political connections to the region's governor, he became financial director of the factory, and in 1992 was put in charge of privatization...
...and Canada, told me, "We do not have real capitalists in Russia...
...This is not a question about markets and states...
...The Chinese model was not simply a route to capitalism that maintained the power of the Communist Party, which most commentators, including Russians, believe is the key difference between the two economies...
...Petersburg group that surrounds Putin...
...He had been in Columbus, Mississippi, to help set up the company's new minimill...
...They were in the city to do business with Severstal...
...I asked Yuri, the only man I spoke with who had deep roots in the mill, whether he resented Mordashov's appropriation of the mill's wealth...
...14 n DISSENT / Fall 2006...
...We live with that decision...
...Severstal had also attempted, unsuccessfully, to buy Stelco, Canada's largest POLITICS ABROAD steel company, which was in financial straits...
...Party leaders bet that satisfying global capitalism's desire for cheap labor would be in China's national interest...
...As this is written, in midsummer, Arcelor has decided to merge with Mittal, after contentious months of dispute...
...When I asked Vladimir about encouraging non-Russian immigration, he shook his head, saying, "You would call me a racist...
...Under the plan, he would end up owning about 25 percent of Arcelor...
...Not one of the Severstal men I spoke with had said a word about Russia's domestic market for steel...
...At a June 26 news conference in Luxembourg, he explained, "What I did was perfectly legal, I was just the last camel in the caravan when it turned around," alluding to the way that insiders bought the country's indusDISSENT / Fall 2006 n I I POLITICS ABROAD trial assets cheaply...
...Mordashov is now building two thousand apartments in the city that will require only 10 percent down and twenty to thirty years to repay...
...The mill, near the foreign carmakers that are springing up throughout the South, planned to use an innovative technology to make auto-grade sheet, something that minimills have been unable to do...
...The rise of the price of oil from $11 to over $70 a barrel has certainly helped the Russian economy in the past few years, but the American analysis of the Russian economy has more to do with Kremlinology than economics...
...Unit labor costs in the United States, the key statistic, have been falling...
...In the 1980s, when China embarked upon its economic growth, the nation had meager natural resources, industry that used outmoded technology, and a huge peasant population...
...Little money goes into construction of nonluxury housing...
...To most Russians, Mikhail Gorbachev was the man who gave away the empire and received nothing in return...
...Mordashov has announced that his goal is to make the company a "global champion...
...Part of the reason is that Russia has few links to the U.S...
...That is not a majority, but in a company where the largest owner has about 7 percent, he would have huge control over what would be the largest steel company in the world...
...He accepted a permanent job with the steel company...
...The Netherlands and Italy are more heavily involved in the Russian economy than is the United States...
Vol. 53 • September 2006 • No. 4
