Why The Kremlin Is Selling Its Stake In AK-47 Maker: Debt And Management Problems With Kalashnikov Producer

State-controlled Russian industrial conglomerate Rostec is selling a 49 percent stake in the AK-47 rifle maker Kalashnikov Group to private investors to further combat the company’s heavy debt, less than two years after it declared bankruptcy.

The two Russian investors will pay 2.5 billion Russian rubles ($78 million) over more than two years for their stake, which still leaves the government with a controlling interest of 51 percent.

“These funds will be used, among other things, to pay off debt as well as to pay the corporation’s loans,” according to a Rostec statement on Monday. That comes in addition to the 1.2 billion rubles Rostec has invested in the Kalashnikov Group over the past two years.

NPO Izmash, a former subsidiary that made the rifles, received help from Rostec in 2010, as the “Russian small arms industry was in deep crisis,” Rostec said on Monday.

“Izhmash had an opaque and cumbersome management system: It consisted of 32 legal entities, some of which were in offshore jurisdictions. It relied on illegal methods for withdrawing funds. The company was on the verge of bankruptcy,” Rostec said.

The eventual Izmash bankruptcy in 2012 was preceded by a net loss of $80 million in 2011, according to state-funded Russian news agency RT.

The deal allows Russia to push for a public-private partnership, part of broad defense reforms, and seek a fresh strategy for the Kalashnikov maker.

By 2020, said Rostec and the Russian Ministry of Industry and Trade, small arm sales revenues will grow fourfold to 24 billion rubles, with production of guns tripling.

The two buyers are Andrei Bokarev and Aleksey Krivoruchko, both experienced in the rail industry. Bokarev was formerly president of major Russian rail manufacturer Transmashholding, and Krivoruchko is a business partner and CEO of rail company Aeroexpress. They also have experience in the Russian defense industry and are expected to better manage the Kalashnikov Group, which sells automatic weapons, sniper rifles and artillery shells, as well as machinery and tools for civilians.