Time to Tame Fortune? Russian Upstream Equipment Manufacturers are Trying to Get Attention from the State

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   Shmatko said that not a single joint venture in Russia produces “serious” equipment for oil refining. To organize joint ventures in Russia, the government intends to invite foreign equipment manufacturers. At the same time, many Russian producers are lobbying for the opposite, trying to get the government to raise import duties on foreign equipment as a measure to support Russian players.

The Agents of National Security

   Russian companies are “fighting a lost battle” with foreign producers, especially the Chinese, Volgograd Drilling Equipment Plant (VZBT) board member Dmitry Sinyukov says. “The Chinese government,” Sinyukov complains, “supports its producers with every possible benefit, and the companies themselves do not shy away from blatant low-balling.”

   Sinyukov has much to lament. His company is the second largest in Russia and has clients which include most enterprises in the Russian energy segment: “If we run our upstream on foreign equipment, we are risking the fate of African countries. This is about national security: if we’re unaccommodating, we simply won’t get any spares. The task of government is to protect the domestic producer.”

   Domestic manufacturers of equipment for the energy sector, says Sinyukov, recently appealed to Vladimir Putin again, asking him to introduce higher duties for foreign producers; the Prime Minister promised to study the issue with the Ministry of Finance.

   According to Sinyukov, there is no point in setting the duties lower than 40 percent of the oil equipment cost. Currently the figure is below 10 percent. Manufacturers complain about organization of public tenders, too: “Oil companies buy the cheapest equipment, regardless of the future costs; first of all, operating costs must be considered and compared. If lower – the product is good to buy,” says Vadim Trifonov, a representative of Packer, science and production firm that manufactures packer equipment.

   Meanwhile, Russian manufacturers are using various methods to promote their equipment on the market. Despite the name that brings back the memories of the first Soviet “five-year plans”, Novgorod’s Energomash does not produce its own equipment, but rather operates under licenses from well-known foreign manufacturers. The company is also the exclusive representative of the US-based ValvTechnologies, one of the leading manufacturers of pipe fittings. Energomash uses imported metal for its products because it is unhappy with local suppliers. “We are looking for ways to move the process to Russia, but so far it’s hard. Low quality, you see,” admits Energomash source talking to OGE.

Russian Producers: “Busy as a Bee”

   Experts confirm what the manufacturers are saying – Russian equipment producers are in crisis, as was noted during the “round table” held last October in the Chamber of Commerce. In 2009, the production of equipment for Russia’s oil industry fell 43 percent over the previous year, says data of the Ministry of Economic Development. And the situation continues to deteriorate, holds Alexander Romanikhin, the president of the Union of Oil and Gas Equipment Producers.

   Speaking at the round-table, Rosneft representative Alexander Shmakov noted that patriotism has nothing to do with it – in complex environment Russian companies just lose out to foreign producers.

   The low quality of products that could have been the pride of Russian industry was also noted by the representative of a Russian company selling equipment for the energy industry. “A lot of good ideas are ‘left out in the cold’ as there is no close connection between the ‘brains’ and the ‘hands’,” he complained.

   However, Russian producers also include some very successful businesses, such as Chelyabinsk company Konar, the country’s largest manufacturer of flanges and flange mounting. The company was founded in October 1991, and today Konar’s executives feel confident. “In those days it was not ‘cool’ to manufacture, everyone was engaged in trading. But we were investing everything we earned into development,” the company’s representative Dmitry Shulgin said. Now the company has two plants in Chelyabinsk and Gus-Khrustalny, its clients include such major industry players as Surgutneftegaz and TNK-BP. After the collapse of the Sayano-Shushensky power plant, its operator, RusHydro, turned to Konar in search of new suppliers of nuts and bolts.

   Market experts agree that Russian pipe manufacturers are in the best position. There are only four major players in the country – OMK, ChTPZ, PMK and Severstal, and this helps uniting efforts and lobbying the companies’ interests, even in the absence of a law on lobbying. According to market players, over the past seven years, three out of four pipe manufacturers invested $10 billion in the development (including $4 billion investment by OMK). Chelyabinsk pipers keep the pace, too: the company launched a new workshop, Height 239,  – Europe’s largest workshop for large diameter pipes. It will fully cover the needs of the industry in large-diameter pipes and imports. ChTPZ’ 2010 pipe sales grew 31 percent. ChTPZ source says that today the pipe industry is the most advanced in Russia; this was helped by the need to modernize pipe manufacturing plants built in the 1950s. Otherwise, the industry simply would have ceased to exist.

   Yet, despite the “light at the end of the pipe” for this industry, small businesses have almost no hope. One of the lobbyists “in the know” believes that foreigners’ entrance to the market and localizing the production facilities is the only salvation for the Russians. As an example he cited the purchase of 50 percent stake in the successful Samara-based company Electroshchit, manufacturer of high voltage equipment, by France Schneider Electric: “It’s good that foreigners come to our plants. You can huff and puff as much as you want for pride in domestic manufacturers, but there isn’t one. Our businessmen are shifting production to China, then they sell us the equipment from there, and all we can do is to write Sechin and Putin.”

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