Kalashnikov, the Russian company behind the notorious AK-47 rifles, will soon be completely owned by private investors.

Kalashnikov
takazart / Pixabay

Kalashnikov is currently owned by the state-holding company Rostec, whose representatives said Tuesday that a deal to sell roughly half of its 51% stake in the company has been made. The details of the arrangement have been negotiated, and the company is now waiting for the government to approve the deal.

The sale of the iconic weapons maker comes as no surprise – it’s a part of President Vladimir Putin’s privatization drive from 2016. Suffering from rapidly collapsing oil prices and sanctions imposed by the U.S. after the annexation of Crimea, the Russian government lacked cash and initiated a broad privatization policy which would see some of the largest state-owned companies fully privatized.

Why sell Kalashnikov?

Last year, the government had overseen the selling of a 19.5% stake in Rosneft, one of the largest oil companies in Russia, to Qatar. According to a CNN report from early December 2016, the country, who teamed up with commodities group Glencore, purchased the stake for $11.3 billion.

The influx of cash into the country hit hard by the recession has helped it fund its growing defense budget in the wake of conflicts in Ukraine and Syria. Almost two years of recession have significantly depleted Russia’s rainy-day fund, leading to what is now considered to be one of the fastest privatization processes ever recorded.

The first money transfers from investors were received within days of the sale, giving Russia a much-needed monetary injection.

However, as oil prices have somewhat stabilized, the pressure on the Russian government to privatize its companies has significantly decreased. That means that selling its stakes in Kalashnikov is a well thought out decision that is bound to benefit both the government and the company’s buyers.

State-owned Rostec owns roughly 51% of Kalashnikov, with the rest being owned by a private company called TransKomplektHolding, which is part-owned by Kalashnikov’s own CEO Alexey Krivoruchko.

The sale would mean that Kalashnikov would fully be in Krivoruchko’s hands, as two other investors in TransKomplektHolding will be selling their stakes. CNN reported Wednesday that a spokesperson for Rostec confirmed that the investors were Iskander Makhmudov and Andrei Bokarev – the President of Ural Mining and Metallurgical Company and Member of the Board of Directors of the UMMC, respectively.

Kalashnikov has seen its revenue grow significantly in the past ten years, only to be seriously affected by the sanctions imposed by the U.S. Before the import ban came into force, roughly 40% of Kalashnikov’s total gun sales and almost 90% of its civilian arms exports were made to the U.S. With such a large part of its revenue suddenly cut off, Kalashnikov had to rethink its business model and consider privatization as the only viable road out of the recession.

Being a privately-owned company, Kalashnikov faces fewer restrictions when it comes to exporting its weapons, and there is a high probability it could continue to sell its iconic rifles in the U.S. again.

Under Krivoruchko, the company has managed to rebrand itself and grow its sales in Russia by appealing to civilians, and it now supplies more than 95% of all small arms in Russia. The company also diversified into making other products such as boats and drones and even has plans to venture into producing clothes.

Selling such a large company can only be beneficial for Russia. Apart from the influx of a large amount of money, the economy will benefit from the newly imposed tax on the thriving Kalashnikov.

Should we expect more companies to be privatized?

Earlier this year during the St. Petersburg International Economic Forum, Russia’s former finance minister Alexei Kudrin said that the Russian government should privatize all state-owned oil companies.

According to the state news agency TASS, he said that Russia is over-reliant on oil and gas exports to sustain its economy. In order to revive economic growth, Kudrin urged President Putin to distance the country from oil.

While Putin’s press secretary, Dmitry Peskov, denied that the Kremlin had any plans to implement such measures, Kudrin’s statements could drive investors to consider buying more stakes in state-owned companies.

Kalashnikov stands as an example of how privatization can have a positive outcome both for the company that was privatized and the state it was bought from. However, Kalashnikov’s increasing revenue growth is an exception. Many state-owned companies are facing an uncertain future, and it is yet to be seen whether or not it will have an affect on potential buyers.

If Russia still keeps struggling with its ever-increasing defense budget, we might be seeing more quasi-privatization deals being made. Last year, the Russian government suggested the idea of selling Bashneft, a state-controlled oil firm, to Rosneft, another state-controlled oil firm. Despite many officials being opposed, and even President Vladimir Putin expressing his doubts about the deal, the government accepted Rosneft’s $5.3 billion bid for Bashneft.

Such state to state sales provide the government with a quick and efficient solution to the budget problems but does very little in terms of resolving the state of the economy.

There doesn’t seem to be a clear answer to the question of how the process of privatization will continue in Russia, but what remains certain is the fact that if the recession is not addressed at its core, the multi-billion-dollar sales that have happened in the last year might not be that frequent in the future.