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Russian oil plant. Photo: unknown

In 1987 Bendukidze founded the company Bioprocess with Mogutov and three other colleagues. He took the position of the Chairman of the Board of Directors and served in this role until the company's dissolution in 1999.[47] Bioprocess was one of the first private companies in Russia to produce biochemicals for use in scientific research.[48] By 1989, Bendukidze was already wealthy. In 1996 he remembered:

"When I was appointed head of laboratory, my colleague Anatoly Altshtein told me, ‘Kakha, you're already a Candidate of Science[49], but you're still wearing these patched up jeans.' I told him, ‘But that's the only pair I have … And in 1987, I was already earning seven to eight thousand roubles a month by doing biosynthesis. I had never earned that much. At that time, you could buy two cars for this money, or an apartment. And then I realized: actually, science is profitable!" [50]

An interviewer in 1996 noted that there were open questions about this period: "The history of your company and your personal history have a blank spot between 1988, when you were producing thin chemical compounds, and the moment when you started buying enterprises." [51] These were years in which a lot of money could be made in many different ways, particularly trade. By 1991, Bioprocess was described as a "medium-sized trading and industrial company" with a turnover of roughly 10 million USD.[52] However, it was still too small to take advantage of the growing investment opportunities in Russia. A bigger, more powerful investment vehicle was needed.

In November 1991, Bendukidze and his partners, together with representatives of the Russian oil and gas industry and regional authorities, established the People's Oil Industrial Investment Euro-Asian Corporation, better known by its Russian acronym NIPEK:

"We were sitting in the "Peking" restaurant in Moscow and came upon this idea [to create NIPEK]. It was clear to us by then that we couldn't move forward without big markets. Or rather it was possible, but without big returns. We thought about oil, grain, such global products. And created NIPEK, during the Soviet times, under non-liberalized prices."[53]

The timing was historic: several months earlier, in August 1991, a communist coup against Gorbachev had failed. One month later, in December 1991 the Soviet Union would officially cease its existence.

NIPEK was registered in Khanty-Mansiisk, a city in Western Siberia in a major oil and gas-producing region over 3,000 km from Moscow.[54] The majority stake in NIPEK, 53.6 percent, belonged to Bendukidze's Bioprocess and a Soviet-Lebanese company headed by Mikhail Mogutov. Twenty-eight percent in NIPEK belonged to the Moscow Petroleum Exchange (the largest oil trading entity in Russia); other investors included regional oil and gas companies.[55] Both Bendukidze and his business partner Mogutov were members of the Board of Directors. From the outset, Bendukidze played a leading role in NIPEK, frequently speaking in the press on behalf of the company.[56]

NIPEK launched a massive and very effective campaign to raise investment capital, with the participation of over a hundred brokerage firms across Russia, from Moscow to the Far East.[57] The company's connections to the oil and gas industry helped sustain investors' optimism. Optimistic press reports helped create a rush to buy NIPEK stocks.[58] As the New York Times reported in 1992, NIPEK set out to "raise three billion roubles for an ambitious but vague program of oil exploration, refining and processing," achieving "stunning" success:

"Four days after it opened its doors to the public at sales offices across the territory of the old Soviet Union, the company had sold 300 million roubles' worth of shares at 1,000 roubles each, with the average sale five shares."[59]

It was certainly one of the most successful marketing campaigns of the period, but for Bendukidze it was just the beginning.

The autumn of 1992 saw the launch of the massive privatization programme in Russia. On 1 October 1992, vouchers with a nominal value of 10,000 roubles each (about US$63) were distributed to 144 million Russian citizens for purchase of shares in medium-sized and large enterprises. However, voucher holders could also sell them to investors, enabling those with access to cash to accumulate vast numbers of vouchers and a favourable starting position in the privatisation process.[60]

Having accumulated a large amount of capital through the investment fund NIPEK, Kakha Bendukidze set out to acquire privatization vouchers in order to purchase state-owned assets at knock-down prices. The enterprise that finally attracted his attention was Uralmash (Ural Heavy Machinery Plant), the legendary flagship of Soviet engineering. The company dominated the economy in the city of Ekaterinburg in the Middle Urals. Writer Maxim Gorky had famously called it "the father of factories" on account of its role in the Soviet industrialization process. Nikolay Ryzhkov, the last Soviet Premier (1985-1991), had been its General Director.

Uralmash casthouse
Uralmash casthouse. Photo: Pavel Gorshkov

Uralmash produced equipment for the mining, casting, metallurgic and other sectors, drilling rigs and a multitude of other products. In the midst of the severe industrial downturn of the early 1990s, few in Russia were interested in heavy engineering. Bendukidze was quick to recognize the potential of Uralmash, despite its empty order books and a payroll of over 45,000 employees. Uralmash also produced primarily for the civilian sector and thus did not have to deal with the highly complicated task of conversion that many military plants were facing.

While some of his colleagues thought this acquisition was something "from the realm of fantasy,"[61] Bendukidze insisted on the purchase. As Russian business daily Kommersant reported, Bendukidze's Bioprocess submitted 130,000 vouchers, thus obtaining an initial 18 percent stake in the enterprise. [62] In a 1995 interview with the Financial Times, Bendukidze claimed he had been able to buy the company for "one-thousandth of its real worth."[63] This was not unusual: many of Russia's most valuable assets were sold for only a fraction of their value.[64] In many auctions there was little competition:

"When we started doing serious business, there were very few investors like us … So we would take our vouchers, come to an auction – and this involved tens of other enterprises besides Uralmash – and there was no one! There was no auction! So we would purchase our stake and leave."[65]

The news of the sale of Uralmash to Bioprocess was received with a great deal of surprise in Russia. As Kommersant-Vlast wrote in 1993, it was

"the first time that such a large stake was bought not by a bank, or a foreign investor or a related enterprise, but a simple broker organization, even if it had extensive experience in the Russian market."[66]

While Bioprocess took part in the auction, the vouchers submitted as payment were obtained through NIPEK. NIPEK also purchased a large number of other assets, many in the oil, coal and oil processing sector. In Kremlin Capitalism (1997), Blasi, Kroumova and Kruse write that NIPEK "bought shares in about 100 enterprises in the chemical and petrochemical industries and civilian machine building."[67]

It was on the basis of Uralmash that Bendukidze established an industrial holding in 1996 under the name of Ural Machine-Building Plants (UMZ). In the same year, he became the chairman of the company's Board of Directors.[68] With the 1998 acquisition of St Petersburg-based Izhora Plants, previously one of the main competitors of Uralmash in the area of mining equipment and a manufacturer of nuclear reactors,[69] the holding was renamed United Machine-Building Plants (OMZ).[70] Bendukidze became its General Director in 1998 and stayed in this position until the spring of 2004.[71] He launched a radical restructuring, sold "non-profile" production facilities, cut costs and dismissed workers.[72] Over a span of just a few years, the employment at Uralmash, the core production facility of OMZ, fell by more than half, from 45,000 employees in 1993 to only 19,000 workers in 1995.[73] By 2003, this number would be further reduced to a mere 5,800 workers.[74] In April 2004, planning to expand its nuclear and steel businesses, OMZ acquired two subsidiaries of the Skoda holding in the Czech Republic, including the division producing equipment for nuclear power plants.[75]

Not everyone was happy about the changes at Uralmash.[76] The authorities in Ekaterinburg, where Uralmash production facilities are located, denounced Bendukidze's management decisions. In March 2006 the regional governor accused Bendukidze of bringing Uralmash into a critical condition:[77] "It's all Bendukidze's fault. In fact, he destroyed the plant. He split Uralmash into five enterprises and privatized them."[78] However, OMZ as a whole turned out to be a good performer. By 2000, OMZ had greatly strengthened its positions in a number of fields. It was producing 70 percent of the drilling equipment in Russia, over 90 percent of mining equipment, 78 percent of metallurgic equipment and about 50 percent of equipment for nuclear power plants.[79] In 2003, it became the fourth Russian company to receive a full listing on the London Stock Exchange ;[80] in 2004, Global Finance journal named OMZ the best Russian company in the field of engineering,[81] and a year later, the renowned Russian Ekspert agency announced that "OMZ demonstrated the best results in the growth of rouble-denominated revenues over the previous 10 years among the 400 biggest Russian companies."[82]


[47] Mikhail Mogutov, "If You Are a Member of the Society, Live according to Its Principles" (in Russian),, 18 July 2005.

[48] "Kakha Bendukidze: A Biography" (in Russian), News.Ru, Nov. 3, 2005.

[49] Candidate of Science (kandidat nauk) is a post-graduate degree in Russia and some other former Soviet republics.

[50] "Каха Бендукидзе: империя, рожденная вирусом" (Kakha Bendukidze: An Empire Born of the Virus). Kommersant Dengi, no. 37 (97), Oct. 16, 1996.

[51] "Каха Бендукидзе: империя, рожденная вирусом" (Kakha Bendukidze: An Empire Born of the Virus). Kommersant Dengi, no. 37 (97), Oct. 16, 1996.

[52] "Каха Бендукидзе: империя, рожденная вирусом" (Kakha Bendukidze: An Empire Born of the Virus). Kommersant Dengi, no. 37 (97), Oct. 16, 1996.

[53] "Каха Бендукидзе: империя, рожденная вирусом" (Kakha Bendukidze: An Empire Born of the Virus). Kommersant Dengi, no. 37 (97), Oct. 16, 1996.

[54] It is notoriously difficult to provide a foreign exchange equivalent for amounts in Soviet roubles, since the official exchange rate was highly overvalued. At 50 roubles per USD in November 1991, the capital could be estimated at 500,000 USD. Yet due to the rampant inflation, the exchange rate less than a year later was already estimated at 350 roubles per USD. Source:

[55] These included Nizhnevartovskneftegaz, Komineft, Orenburgneft, JSC Yugraneft, as well as the authorities of the Khanty-Mansiisk Autonomous District and the Tyumen Branch of the Foundation for Social Development of Russia "Vozrozhdenie."

[61] "Каха Бендукидзе: империя, рожденная вирусом" (Kakha Bendukidze: An Empire Born of the Virus). Kommersant Dengi, no. 37 (97), 16 October 1996.

[62] Alexander Kovalyov, "Uralmash Doesn't Yet Know about Its New Owner" (in Russian), Kommersant, 25 May 1993.

[63] Financial Times (1995), cited in: Maksim Chizhov, "Becoming an Oligarch. The Infamous Millions" (in Russian), Argumenty i Fakty, Jun. 1, 2006.

[64] "Russian Privatization Revisited: A Debate between Goldman and Aslund," Beyond Transition, December 2003- April 2004, pp. 23-26.

[65] "Каха Бендукидзе: империя, рожденная вирусом" (Kakha Bendukidze: An Empire Born of the Virus). Kommersant Dengi, no. 37 (97), 16 October 1996.

[67] Joseph R. Blasi, Maya Kroumova, and Douglas Kruse, Kremlin Capitalism: The Privatization of the Russian Economy (Cornell University Press, 1997): p. 156.

[68] "Interview with Kakha Bendukidze, General Director of OMZ: The Balance Is Broken" (in Russian), Vedomosti, no. 19 (2059), 5 February 2004.

[69] Interfax, "Company Profile: Uralmash Plants" (in Russian), Interfax (id: MTFQBAAA), 3 November 1997.

[71] Renata Yambayeva, "Machine-Building" (in Russian), Kommersant Vlast', no. 25 (578), 28 June 2004.

[72] OMZ, Annual Report 2002, p. 4.

[73] "Restructure or die," Economist, 4/8/95, vol. 335, Issue 7909.

[74] OMZ, Annual Report 2002, p. 33.

[75] Libor Kukal, "Kakha Bendukidze Bought a Part of Skoda" (in Russian), Cesky Rozhlas, 26 April 2004. See also: OMZ.

[76] Maksim Kotin, "To Be Left Alone" (in Russian), Kommersant – Sekret Firmy, no. 47 (134), 12 December 2005.

[77] "Bendukidze Destroyed Uralmash, Said Rossel" (in Russian), 29 March 2006.

[78] "It's All Bendukidze's Fault" (in Russian), API, 29 March 2006.

[79] Denis Prokopenko, "Kakha Bendukidze's Plans to Buy Krasnoe Sormovo under Fire" (in Russian), Nezavisimaya Gazeta, 14 March 2000.

[81] "Cover Story: Stars of the New Russia," Global Finance, April 2004.

[82] OMZ Group official website, "History".

Suggested readings

There is an interesting NYT article which described the early stages of the creation of NIPEK, "Russians Take a Flier on Oil In Capitalism for the Masses," published in January 1992:

"Nipek, a company with roots in the oilfields of western Siberia, is not making specific promises, although its salespeople talk vaguely about a 20 percent return on investment.

But what appeals to investors like Mrs. Revazova is Nipek's connection to oil. The word still has a promising ring to Russian ears, despite the difficulties of the industry here. Oil production has fallen steadily, and according to one estimate, by the end of 1993, production will have dropped by 20 percent compared with 1991. The reasons are to some extent connected with the overall decline of the economy, resulting in a reduction in capital investment, a shortage of equipment and confusion over which layer of government is responsible for the oilfields."

In Owning Russia: The struggle over factories, farms and power (2006), Andrew Barnes talks about the establishment of NIPEK and its initial accumulation of wealth.

Russian privatisation is also discussed in Marshall Goldman's "The Piratisation of Russia – Russian Reform goes awry" (2003): as its title indicates, it offers a critical assessment of the impact of the privatisations of the 1990s.

Read the debate between Goldmann and the Swedish economist Anders Aslund on Russian privatisation. As Aslund put it:

"Since 1999, something remarkable has happened … The economic recovery of the countries of the former Soviet Union has been spearheaded by large, private corporations that have revived old Soviet energy and metallurgical companies … These corporations are big. The 10 largest private Russian companies have about 200,000 employees each. They were all bought by outsiders, either from the state for a song, or equally cheaply from former private owners, either incompetent state managers or haphazard state officials. The new core owners are few, and because of their concentrated ownership they can undertake badly needed, profound restructuring. As a consequence of the privatization of old Soviet smokestack industries, Russian oil extraction is skyrocketing, and modern metallurgical plants are working at nearly full capacity in both Russia and Ukraine."

The key to capitalism, so Aslund, is to respect property rights, regardless of their origins:

"The U.S. robber barons were more similar to the Russian oligarchs than people realize. Half of them made their fortunes in the railways, and the secret of their success was their acquisition of land from the state for free. Does that not sound like loans for shares? The difference, however, was that the United States had no KGB. When President Theodore Roosevelt challenged John D. Rockefeller, he stopped at antitrust measures, using neither arbitrary punitive taxation (as advocated by Goldman) nor confiscation (seemingly being considered in the Kremlin). Many European properties derive from outright gifts from a monarch, many of them exempt from taxation until recently. Capitalism requires private property, and how it can be established is always a matter of politics. The secret of successful capitalism is to respect property rights regardless of how they originally emerged. The sooner that happens in Russia, the greater its economic growth will be."

April 2010

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