Why did Andrei Bokarev become a co-owner of the Kalashnikov concern?

In May 2014, a transaction was completed to sell 49% of the shares of the Kalashnikov concern to the co-owner of the Ural Mining and Metallurgical Company, Kuzbassrazrezugol, Transmashholding and Aeroexpress, billionaire Andrey Bokarev, and the CEO of Aeroexpress, Alexey Krivoruchko. Andrey Bokarev was the first from the Forbes list (No. 65 in the ranking of the richest businessmen in Russia, net worth $1.5 billion) to become a co-owner of a company that produces weapons under the most famous weapons brand in the world. The Kalashnikov Concern produces 95% of Russian small arms.

Bokarev and Krivoruchko, in equal shares, bought an additional issue of shares of Kalashnikov for 1.3 billion rubles and should invest another 1.2 billion rubles in the development of the concern in the next two years. Formally, this is not the first attempt by large Russian entrepreneurs to get into the arms business. In 2005, tobacco magnate and owner of the Mercury group of companies Igor Kesaev bought a stake in the ZiD company (Degtyarev Plant), which produces small arms and cannon weapons. But, firstly, he concluded the deal rather by accident, at the request of the head of ZiD, in order to save the enterprise from a hostile takeover. Secondly, the fame of the ZiD weapon is incomparable to the world fame of the Kalashnikov. Developed in 1949 by Mikhail Kalashnikov, the assault rifle is now in service with armies in 50 countries around the world; 100 million Kalashnikovs have been produced throughout history, six times more than the American M16 rifle, which competes with the assault rifle.

The Kalashnikov Concern was created by Rostec in August 2013 on the basis of the Izhmash NPO. In addition to assault rifles of various modifications, it produces sniper rifles, submachine guns, sports and hunting weapons, aircraft guns and shells. The company's revenue in 2012 was 1.16 billion rubles, the net loss was 403 million rubles. Despite the worldwide popularity of the arms brand, the share of Russian-made Kalashnikovs in the world small arms market has decreased tenfold since 2007, to 2–3%; production capacity in 2012 was loaded at a maximum of 14%. 17 million small arms have accumulated in the warehouses of the Russian Ministry of Defense, so the army did not purchase new weapons.

In 2013, the concern's revenue increased to 2.3 billion rubles, and the loss increased to 1.9 billion rubles. Rostec, together with the Ministry of Industry and Trade, has developed a strategy for the development of the small arms industry, in accordance with which Kalashnikov’s revenue should grow to 24 billion rubles by 2020. To implement this strategy, it is necessary to carry out a major overhaul and technical re-equipment of the enterprise for 4 billion rubles, of which 2.5 billion rubles are planned to be raised from private investors. In the fall of 2013, it became known that these investors would be Bokarev and Krivoruchko. Rostec specifically noted that the deal was approved by the Ministry of Industry and Trade and supported by Vladimir Putin.

Bokarev believes that the Russian production of small arms has enormous potential, but its implementation “requires significant funds and managerial competencies.” “Our decision to invest in Kalashnikov is primarily financially motivated,” says Bokarev. “We already have experience in creating financially successful enterprises in the field of high-tech mechanical engineering and are ready to apply these competencies in the development of the Kalashnikov concern.” His partner Krivoruchko predicts that the investment will pay off within five years.

For Bokarev, the weapons project became the first independent business, because since the late 1990s he has been a junior partner of Iskander Makhmudov (No. 23 in the ranking of the richest businessmen in Russia, worth $6.1 billion) in almost all of his projects. One of the partner enterprises, Transmashholding, cooperates with the military-industrial complex, producing self-propelled chassis for the Buk, Tor and Tunguska air defense systems, diesel engines for submarines, railway platforms for mobile missile systems and containers for missiles.

“In addition to investments, it is especially important to attract the market competencies of investors, coupled with their responsible attitude towards the assets they receive,” said the head of Rostec, Sergei Chemezov, commenting on the sale of 49% of Kalashnikov to Bokarev and Krivoruchko.

At the beginning of 2014, Krivoruchko was appointed general director of the concern. The company's revenue for 2014 is estimated at 9 billion rubles; in the first half of the year, 60,000 small arms were produced, twice as many as in the same period a year earlier. In the next three years, Kalashnikov plans to increase the annual production volume to 300,000 units.

Big politics interfered with the plans of Kalashnikov owners in 2014. In July, the US Treasury and in September the European Union added the Kalashnikov concern to the sanctions list. The United States accounts for up to 90% of the concern's exports of civilian small arms; at the beginning of 2014, a five-year agreement was concluded on the supply of Kalashnikov products to North America - from 80,000 to 200,000 small arms per year. It is possible that the concern will be able to partially compensate for the loss through a tender from the Russian Ministry of Defense for the supply of a new AK-12 assault rifle. The Army order will increase production by 50,000 small arms per year.

Perhaps Kalashnikov will be able to return to the North American market if Rostec cedes a controlling stake in the concern to Bokarev and Krivoruchko, because so far sanctions have only been imposed on state-owned enterprises. There is already an example. At the end of September 2014, it became known that Rostec decided to sell Bokarev a 74.9% stake in the Izhevsk Mechanical Plant (Izhmekh), which produces sporting and hunting rifles, combat and sporting pistols (including Makarov pistols and Yarygin pistols). Rostec thus insures Izhmekh against possible inclusion of the enterprise in the sanctions lists of the European Union and the United States.

Pioneer: Billionaire with a machine gun