Vertical Integration: Free-Market Substitute
By Yulia Latynina
IN 1916, Lenin wrote "Imperialism, the Highest Stage of Capitalism." In it, he describes imperialism as a capitalist monopoly that arose "when certain of capitalism's fundamental characteristics began to change into their opposites, when the features of the epoch of transition from capitalism to a higher social and economic system had taken shape." What Lenin called imperialism is now referred to as "vertical integration." Russia is caught up in an epidemic of vertical integration. Aluminum magnate Oleg Deripaska bought automaker GAZ. Steel giant Severstal's head, Alexei Mordashev, took control of automaker UAZ. Metals producers are snapping up raw-materials suppliers like hot cakes. This is hailed as a renaissance of Russian industry. In reality, the more of a free market you have, the less vertical integration there is. Vertical integration means that a company buying or selling raw materials, equipment or parts won't be aiming to clinch a deal with the most competitive bidder; instead, it will do business with its own subdivision, even if it pays less, is poorly managed, etc. And if vertical integration has more benefits than disadvantages, then the country doesn't have a free market but something very different. First of all, companies need vertical integration to conceal profits. Vertically integrated oil companies, for example, evade taxes levied at the site of oil production by selling the parent company cheap "liquid from the well" instead of expensive crude. Second, companies need vertical integration to stop themselves getting eaten alive. Ever since aluminum producer SibAl wiped out aluminum holding TWG by blocking aluminum deliveries to KrAZ, and the Urals Ore Mining Co. marched on Nizhny Tagil by way of the Kachkanar mining complex, coal mines and mining enterprises have turned into strategic heights where a company sets up garrison if it doesn't want OMON troops bursting through its doors. Third, vertical integration is tied to an environment where businesses buy what's cheap, not what's needed. As noted by heavy-machinery producer Uralmash's head, Kakha Bendukidze, there are two types of money in Russia: rubles and "administrative currency" (or government connections) - and the latter retains its value only as long as it remains close to its place of emission. As a result, instead of buying an expensive aluminum plant somewhere in New Zealand, SibAl buys GAZ on the cheap. Ideally, vertical integration of this sort provides for a merger with the source of the administrative currency. Observers have noticed, for instance, that the Federal Bankruptcy Service undertakes any investigation suggested by Alfa Group, while GAZ got a visit from the Tax Police and an audit just before SibAl took control. Of course, vertical integration of this kind results in dismissals, like those of former Interior Minister Vladimir Rushailo or ex-Tax Police chief Vyacheslav Soltaganov, the most vertically integrated and valuable assets of all. Such dismissals are tantamount to the instantaneous loss of seniority revenues - revenues from emission of administrative currency. Hence, the epitome of vertical integration in Russia is the governor's seat: Take Roman Abramovich in Chukotka or Norilsk Nickel head Alexander Khloponin in Taimyr. The "new" secret service agents in the Kremlin seem to approve. "Let them collect as much as they can," say some members of the administration. "The more water a sponge soaks up, the easier it is to wring out." Here's the paradox. Major Russian companies become quasi-states: They don't pay taxes, they buy state officials and base their investments on military rather than economic logic. But the more protected a company is from competitors, the more tempted the state becomes to take over. As Lenin wrote, "capitalist monopoly is a transitional epoch leading to a different system." Yulia Latynina is a journalist with ORT.
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