with Philippe Pegorier, Country President, Alstom Russia
Mr. Pegorier, you have previously worked for entities such as Ubifrance and the French Trade Ministry. Moreover, your experience in Russia dates back to Soviet times. How do you see the relationship between France and Russia?
In spite of the recent changes in government both in Russia and France, the relationship between our countries is strong and mature. From an economic perspective, our ministers align their policies and meet regularly, with examples of the recent visits of Prime Minister Medvedev to France as well as of the Minister of Foreign Trade Bricq to Russia. Further visits of Presidents Hollande and Putin are also planned to our respective countries later this year.
France is a special country for Russia. All in all, one could say that our relationship is rather complete. We have political ties as France –unlike Germany– is one of the members of the
Permanent Council with whom Russia can easily deal. Apart from that, we have strong economic, scientific and cultural ties, while we also align our defense programs. France is one of the few countries with whom Russia has such diversified relations.
Such diversified relations cannot exactly be found between Russia and the U.S., China, Great Britain, etc. It is also worth noting that the economic relations with France have multiplied roughly four to fivefold in a period of ten to twelve years.
For Alstom, the relationship with Russia is still relatively new. For the time being, two main contracts have been implemented: Allegro (the train between Helsinki and St. Petersburg) and TPP-26 (Mosenergo’s combined cycle plant in Moscow). The latter is the most effective TPP in the Russian Federation today.
Following the completion of these projects –roughly two years ago– our presence has risen rapidly with important contracts in the four sectors we are present in: transportation, thermal power, renewable power and the power grid. The reason for our rapidly increasing presence can be ascribed to two key factors: the right strategy and the right timing. At the strategy level, we rely on the localization of production with Russian partners. From a timing perspective, our presence has started increasing at a time when Russia wanted to start modernizing its infrastructure and industry.
In 2008, we understood that Russia was implementing some of the world’s best anti-crisis measures during the global economic crisis. These measures included state contracts, the modernization of infrastructure, attracting the Sochi 2014 Winter Olympics, the Universiade in Kazan for 2013, the FIFA World Cup 2018, and so forth.
How do you explain that Russia was able to invest and modernize during times of economic constraint? Doesn’t this pose a paradox?
It is not a paradox. First of all, the anti-crisis plan occurred together with a declining cost of energy. At the same time, the Ruble stabilized as a currency. Russia invested a lot of money in limiting the impact of the crisis and as a result, the impact of the 2008 crisis has been much more moderate than the 1998 crisis. Today, the economic results are good: inflation (roughly 6 percent) has never been this low, the budget is balanced, and unemployment is only around 5 percent.
In the meantime, Russia has also become a member of the World Trade Organization (WTO) during the summer of 2012. While the country is going through its seven year adaptation period, Russia needs to modernize its –especially mechanical– industry in order to be able to compete with its most important competitor: China. To avoid deindustrialization that can now be seen in countries such as France, the Russian government wanted to create a number of world class champions together with foreign partners such as Renault, Siemens and Alstom.
The accession is important because we have received a vital moment for the Russian industry to modernize. Twenty years later, it signifies the end of the ties of the former Soviet Union. From Soviet times to now, the power has shifted from producers to consumers. The latter can be both individuals as well as large industrial consumers. Russia has stepped away from the one-supplier model and its consumers now want to see a better balance. Rosatom, for instance, has called upon us as a second supplier to Power Machines.
Will this generally mean an increased role for foreign suppliers?
For state companies, one still needs to be a Russian company. In the WTO accession process, Russia has not signed any documents to open up these types of contracts.
The government has also announced diversification of the economy as a whole. What do you see as a sustainable growth model for Russia?
Russia, first of all, is the largest country in the world and has a very large domestic market. This makes its networks such as rail, road and electricity some of the most important. Apart from that, the country also has a very strong knowledge base.
In my opinion, Russia does not belong in the BRIC category due to some inherent differences in its knowledge base, education levels, and so forth. In addition, the country has got some so-called world champions in areas such as nuclear, defense, space industry, etc. At the same time, the country is also very strong in the softer –more cultural– areas, with a rich history in ballet and music, amongst other areas. Yet, the main strength of Russia will remain the size of its market.
The Russian economy should also not mirror that of China, as it does not need to be so export-focused. It should first of all fulfill its own market as well as those of the CIS countries.
How do you perceive the risk level as a major foreign investor in the country?
“Those who do not risk, do not drink champagne,” the Russian saying goes. In Russia, risk is rewarded by higher levels of profitability. Russia today is also no longer the Russia from the nineties. Even though there still is work to do, there is more control and an intense fight against corruption. The political risk in Russia is also low due to its stable leadership. The economic risk, however, is more important and linked to the volatility of an economy which, in turn, is linked to the price of oil. The most important risk for Russia is for the oil price to go down.
You describe partnering as a key aspect of your strategy. Can you elaborate?
We use this partnering strategy across our four different sectors. At present, we are engaged in two –rather political– deals. First, in the transportation sector, we bought into Transmasholding, similar to the agreement Renault has with AvtoVAZ. Now a private company, Transmasholding was formerly part of the Ministry of Heavy Machinery. Many of these facilities are very old and in need of investments like ours. Through this agreement, we are directly contributing to the modernization of the industry. More importantly, most of this production capacity is located in the regions, rather than the capital.
Our second approach has been deployed in areas such as nuclear and hydro. There, our strategy consists of entering into joint-ventures with some of our major clients. An example is Atomenergomash with whom we have already signed a contract for the Baltiyskaya Nuclear Power Plant. In this frame, we will also launch the production of big turbines because we want to follow’s Rosatom’s investment program in Russia, as well as abroad in country such as Turkey and Vietnam.
For Rushydro, in turn, we have already signed a contract for the modernization of the Kuban Hydroelectric Cascade and have also entered into a production agreement. The latter focuses on the manufacturing of small turbines in Ufa.
With the Federal Grid Company (FSK), we have entered into a slightly different cooperation format. We have signed a frame agreement which is now in its implementation phase. Under this agreement, we are able to sign joint-venture agreements with private companies with the benediction of FSK for the manufacturing of different types of equipment. In terms of our order pipeline, we still tend to lean mostly towards state orders, which represent roughly 80 percent of our current volume.
Do state and private customers require a different approach?
They do indeed. With state companies, the procedures tend to be completely different and much more elaborate. In addition to that, there are also more reporting requirements.
Going forward, what is your main ambition with Alstom Russia?
My main ambition is to ensure the successful implementation of the contracts that we have signed. If we manage to do so, we will certainly face a bright future with our company in Russia.
Who do you see yourself competing with… international players likes Siemens or Russian manufacturers?
In fact, we will not be delivering Alstom trains in Russia, but trains that carry the stamp of Transmasholding. The same goes for the turbines we will manufacture; they will be Russian turbines. We will produce Russian equipment in Russia. For us, the adventurous and interesting part of every deal remains the sourcing. We need to find Russian suppliers and turn them competitive, which can be a lot of work. Nonetheless, this is what Russia wants us to do. The reason why we are here is to make the Russian industry competitive.
Where does the Skolkovo partnership come in then?
Skolkovo represents an opportunity. For a long time –roughly twenty years– we have had two research centers in Russia. In addition to that, we are developing new R&D capacity in power in the area of gas- and steam turbines. The Skolkovo agreement will provide greater feasibility for our R&D teams in all of our four sectors. It is also a sign that we have faith in the future of Russia and its brains. We are planning around 200 to 250 people for three sectors in Skolkovo: transportation, thermal power and power grids.
Will we see Alstom as a French, international or Russian company in Russia?
It is very clear: we want to be a Russian company in Russia, an Indian company in India and a Chinese company in China.