Goznak is changing the course but remains loyal to its principles 18 2014

Goznak, one of the oldest Russian companies, associated with the state secret, production of banknotes and coins, orders, passports and other documents proving the identity of the citizens of the Russian Federation, is changing the shape of its business activity. The Federal State Unitary Enterprise will be re-organized into Open Joint-Stock Company. The President of Russia Vladimir Putin signed a Decree about it on June 4, 2014. In the document it is stipulated that Goznak will be a market-oriented company with the 100% of shares belonging to the state. Moreover, Goznak OJSC will be granted the status of a strategic company, the shares of which cannot be sold.

What is changing in this case, how reliably will the interests of the people and the state be protected, who will be in the Board of Directors? Rossiyskaya Gazeta asked Arkady Trachuk, General Director of Goznak these and other questions.

RG What does this switch to market mean for Goznak as an enterprise working in the high security conditions? How necessary is it?

Arkady Trachuk:

- The Government of Russia has announced the position that the federal state unitary enterprise is not the most successful business legal structure of enterprises noted for its specifically distributed responsibility more than once. From the point of view of the property complex administration we are no different from other federal state unitary enterprises. But unlike many similar enterprises, some of which solve narrow departmental tasks and are in fact a continuation of federal authorities, Goznak is a large manufacturer of products competitive on the inner and world markets. Unfortunately there is an opinion that Goznak manufactures banknotes and perhaps passports also. In fact we produce a broad assortment of products, and a considerable part of them is subject to item competitive tendering both in Russia and abroad.

The reorganization of Goznak into an open joint-stock company with the 100% state share will contribute to application of better corporate management standards inherent to joint-stock companies. Goznak OJSC should become a market-oriented company able to develop additional activity directions, enter new markets, have better opportunities for adapting its activity to the constantly changing market conditions. And certainly the joint-stock form will be easier to understand for our foreign contractors. One should note that the Decree stipulates maintaining the continuity of the companys activity. Goznaks history started in 1818 when the Expedition of Storing State Papers (Goznak since 1919) was founded by the Decree of Emperor Alexander I. The companys history has not been interrupted for a day in the legal sense or in the human dimension, which is even more important.

Goznaks mission stated in our companys strategy (available at our site) is that we make people sure in the money authenticity, document and information security. We are trying to solve these tasks. And transformation into a joint-stock company does not change anything.

RG What legal organizational form do foreign companies similar to Goznak have?

Arkady Trachuk:

Companies similar to Goznak exist in various legal organizational forms in other countries. If we speak about banknote manufacturers, there are large private companies like De La Rue (England) and Giesecke & Devrient (Germany) among them. There are joint-stock state-run companies with the national banks as shareholders, like in Austria, per example, and in Bundesdruckerei the only shareholder is the Federal Government of Germany. The situation is different in the United States, where the Bureau of Engraving and Printing is not engaged in commercial activity, but only in dollar banknote printing. This form reminds of our public enterprise.

The spectrum of variants of the legal organizational forms of companies similar to Goznak is very wide all over the world. In my opinion, it is always necessary to take into account companys specifics, history and way of development in every country. I believe the solution of transforming Goznak into a joint-stock company is absolutely balanced. The enterprise remains the federal property, and the Decree stipulates that 100% of shares belong to the state.

RG The state represented by?

Arkady Trachuk:

- The Government of the Russian Federation. It is for the owner to decide which authority and manager exactly will sign directives. The matters will be solved in 18 months when the transformation of Goznak into a joint-stock company is completed. So far we are a federal state unitary enterprise, and will remain so until all the procedures necessary for the companys reorganization are carried out.

RG It says in the Decree that the enterprise will receive the status of a strategic enterprise during the reorganization. Please explain what it means.

Arkady Trachuk:

- Goznak has always been on the list of strategic enterprises. The Decree of the President of Russia has fortified the status. It means that any dealing with shares as well as a number of other actions is regulated with special norms and rules. It is clear why it is done. To protect the property interests of the Russian Federation. Including the control of the corresponding authorities of the part of our activity connected with the state security.

RG How will the corporate management be carried out? What will be new here?

Arkady Trachuk:

- In fact, we are to create a brand new system of corporate management. The major novelties are connected with that. It is necessary to take into account that the control mechanism of a federal state unitary enterprise is on one hand is not formalized enough, and on the other it is bulky and does not allow making decisions promptly. In particular, we cant administer property optimally. It is necessary to receive an approval of the Ministry of Finance for any relatively large deal. And if a deal is connected with financial assets, guarantees or realty actions, a separate approval procedure is necessary with Rosimuschestvo, and in some cases even the Government.

Approval of such deals may take months, and sometimes even years.

RG What will change after the reorganization?

Arkady Trachuk:

- In a joint-stock company such decisions are taken at the level of the Board of Directors, according to formalized procedures prescribed by the law. Although detailed argumentations and receipt of the Governments approval will also be necessary. But at the same time not only bureaucrats defending the state interests will be involved in the procedures, but also extraneous people members of the Board of Directors. Including the so-called independent professional directors, managers who understand the business opportunities and will be able to advise many things to us. In this case the potential commercial success and commercial effectiveness are as important as safeguarding the state interests.

The Board of Directors should induce the managers to commercially effective actions, offer solutions enabling the companys business to develop.

RG What solutions do you expect?

Arkady Trachuk:

- To take part in new spheres of business, to purchase new technologies, new enterprises. To enter new markets, including buying players on them. Such things are practically impossible for a federal state unitary enterprise. But it is possible to discuss them for a joint-stock company. It is another question, whether the Board of Directors will support us or not. It depends on how well we prove the commercial effectiveness of our offer.

Goznak has many interests in various fields of production and in various countries where we see perspectives for our participating. But the activity sphere is traditional security printing and production of special sorts of paper. Only 14 countries in the world possess the full cycle of banknote production i.e. have their own printing and paper production. And our competitive advantages are very strong here. During the last five years we have made laid stress on the informational technology development and hybrid document production.

RG What are hybrid documents?

Arkady Trachuk:

- For example, biometric travel passports. From the point of view of the visual identification, they are traditional documents, but they contain electronic data carriers microchips, barcodes etc. there are more and more such documents of the new generation. Policies of obligatory medical insurance. Universal electronic cards.

We applied an interesting solution in creating the first brand protection system in Russia of Sochi 2014 and the Universiade in Kazan.

The companies which manufactured products under the license of the Organizational Committee of Sochi 2014 purchased special stamps, and the information about their goods appeared in the general database available not only to the Organizational Committee of Sochi 2014 and law enforcement authorities. It was available to any person who could make sure whether the product with the Olympic symbols is authentic with the help of the stamp. It was only necessary to enter the web-site of the Organizational Committee or Goznak.

RG Are such solutions in great demand now? Where can they be applied?

Arkady Trachuk:

- For example, to protect medicines against counterfeiting. It is much talked about, but the task has not been solved. Nevertheless, by taking a pack and sending a short message with the barcode on it, a customer may learn when and where the medicine was produced, where it was directed and whether it can be on sale in the Saratov Region, for example. Or that a medicine with this number, these parameters has never been produced or delivered to the Saratov Region. Unfortunately, this opportunity remains non-demanded so far. We have worked a lot upon projects in the field of informational technologies during the last four years. For example, we are discussing the production of a new postage stamp with a barcode with the Post of Russia.

RG And what innovations are you planning in respect of banknotes and coins? Shall we have plastic money, 3000-rouble banknotes?

Arkady Trachuk:

- The Sochi 2014 commemorative banknote was put in circulation not long ago. And I dont think we will surprise you with anything radically new in the nearest future. Neither with a 3000-rouble banknote nor with a plastic one. There are very many countries which start using plastic money and return to paper banknotes in three or four years. There are countries which use plastic money for low denominations, but preserve high denominations on paper. In the service life price - quality interrelation paper money proves to be more effective as a rule. This point of view prevails in the professional expert environment. But taking into account problems with utilization of the plastic money and the fact that only one company produces the substrate for these banknotes in the world, the story turns out to be even less interesting. Perhaps the situation will change later on.

RG Are scientists of the Research Institute of Goznak inventing the money of the future?

Arkady Trachuk:

- We can speak a lot about money of the future. First of all, our scientists are certainly engaged in developing security features. Every year we register more than 10 new objects of intellectual property which provide our competitiveness on the Russian and international markets in the banknote security field. Speaking about the future, already today cash paper money are in great competition with various kinds of non-cash payments with the bank cards, electronic money etc.

RG Do you pertain to them?

Arkady Trachuk:

- Yes, certainly. Goznak is one of the Russian large producers of plastic cards. We have certificates of VISA and Mastercard for the production and personalization of bank cards.

RG Can you assume theoretically that people will do without banknotes and coins in the future?

Arkady Trachuk:

- Definitely not during our lifetime. Id like to draw an example of the United States, one of the leaders of using non-cash payments. Nevertheless, about 45% of payments in the country are carried out with cash. Though the amounts are becoming smaller. In Sweden the share of cash payments has decreased to the level of less than 20 per cent. But the number of banknotes in circulation is only 1.5 times less than in Russia (per person).

Non-cash payments are growing quite actively in Russia. Four years ago they comprised 3 4%, now they amount to 15%. But nevertheless the process of decrease of the paper money is very long and slow. It is connected not only with breakthrough technologies, but also with habits and convenience. On the one hand there are technological limitations, on the other our mental perception of money.

RG As far as I understand, all previous directions of activity will remain after the transformation into a joint-stock company the production of banknotes, subsidiary and commemorative coins, state awards, special kinds of security paper, securities, excise and special stamps, postage stamps, plastic cards, development of sensors and control systems of authentication of documents and banknotes. As for the new directions data processing and storage in the interests of the state authorities is added, right?

Arkady Trachuk:

- Goznak has been developing this new direction of its activity for the last few years. The importance of this work for the provision of the state document circulation is confirmed in the Decree of the President of the Russian Federation.

The Data Processing and Storage Center has been operating for two years already; it enables storing of great volumes of data connected with issuing documents. Both we and our customers ministries, agencies, large government institutions, extrabudgetary funds use the Center. Computational capabilities guaranteeing reliable data storage and uninterrupted infrastructure performance are located here in special conditions.

RG Let us return to the transformation to a joint-stock company. How will the Board of Directors be recruited?

Arkady Trachuk:

- It is a question to the owner that is to the Government of the Russian Federation. The Board of Directors will be recruited within the framework of forming the regulatory body of the joint-stock company before it starts operating.

RG Have you already prepared offers of the composition of the Board of Directors?

Arkady Trachuk:

- Of course, we will submit them because we are interested to have representatives of our customers who are affected by Goznaks activity quite seriously in the Board of Directors. For example, the Central Bank, a number of other federal authorities. But we are also interested to have independent directors, people who understand the business opportunities and are able to advise us something, in it.

RG From what branches of activity should such independent directors be invited?

Arkady Trachuk:

- An independent director is good because he is an experienced person for the point of view of investments and knows well where there is a potential for development today and how to take the best advantage of it. Therefore the activity branch is not as important as the personality. But the last word is the owners.

RG How many people should there be in the Board of Directors? Is it possible to allow foreigners to be independent directors?

Arkady Trachuk:

- In my opinion, the Board of Directors should be small 5 7 people. As for foreign independent directors, we have not discussed this matter at Goznak. I suppose it can appear during the discussion at Rosimuschestvo and other federal authorities. So far I havent got a personal position on the matter.

RG Some experts are afraid that if the access to corporate management is open (Goznak is connected to the state secrets, know-how), then the risk of objectionable elements appearing in the Board of Directors increases. Are there such risks?

Arkady Trachuk:

- Naturally there are more risks for a joint-stock company. But, first of all, not many more than for a federal state unitary enterprise. Secondly, speaking about the state secret, there is separate legislation regulating everything connected with it. As for the commercial secret and a possibility of its leakage, honestly, I dont see a problem here either. Any independent director invited to the activity of any joint-stock company has access to the commercial information equally. But I dont know where there are more risks in spreading such information at a defense company, a petroleum company or at our company.

RG What disadvantages can you name connected with the transformation of Goznak into a joint-stock company? The advantages are clear, but what are the disadvantages?

Arkady Trachuk:

- The main disadvantage which has also been discussed widely in our team is the feeling of losing the strong link with the Ministry of Finance. Since 1818, the moment of foundation of the Expedition of Storing State Papers (thats how Goznak was called before 1919) our company has been under the supervision of the Ministry of Finance.

After Goznak is reorganized into a joint-stock company, there will only be an indirect contact instead of the strong link between Goznak and the Ministry of Finance. Even if the Ministry of Finance keeps the interest in our activity because it regulates the security printing market and a number of other directions. It is a new situation, and well have to adapt to it. The situation is not dramatic, but for the people who have worked at Goznak for decades (and there are many of them, weve got a stable team) there really is a feeling of a strong link with the Ministry of Finance. I sincerely hope that representatives of the Ministry of Finance will join the Board of Directors and have an effect on Goznaks development, but that will be another sort of relationship.

RG By the way, what do they feel at the Ministry of Finance about Goznaks reorganization?

Arkady Trachuk:

- Goznaks reorganization would not have taken place without the corresponding attitude of the Ministry. It is a matter of principle, and it was naturally discussed many times. The attitude of the management of the Ministry of Finance is the following: enterprises belonging to the state should be managed correctly from the corporate point of view. They should face correct tasks. The enterprise strategy should be analyzed by the people who evaluate the companys activity as business first of all thus providing effective usage of property belonging to the state.

RG What about the team? Should we expect reduction of the number of personnel?

Arkady Trachuk:

- I do not think the reorganization will cause dismissal of a single employee. Today Goznak employs about 8.5 thousand people. We always have minor changes. We have been realizing the program of increase in labour productivity for a long time already, implementing new technologies, equipment. Naturally, some jobs are simply liquidated because of that, others, on the contrary, become more actual, and we recruit new specialists.

RG What about salaries? Will they grow if the enterprise shows great profitability?

Arkady Trachuk:

- Our salaries are indexed regularly. Last year the average salary at Goznak comprised about 54 thousand roubles, but already in the first half of this year it has exceeded 60 thousand roubles. Naturally, the work of qualified employees is paid considerably better. Goznak is quite an effective enterprise. The companys branches are equipped with modern machinery; the technological processes, the management and personnel stimulating systems have been upgraded. But the transformation into a joint-stock company provides strategic opportunities we havent got today.

RG How will the reorganization improve export opportunities?

Arkady Trachuk:

- When we become a joint-stock company we will receive an opportunity to enter this or that market by buying a player there. Having purchased our own representatives in the market we will work in it more actively and promote our products. We are naturally planning to take advantage of it and increase our presence in the international markets.

Today we export banknote, passports, subsidiary coins. And a lot of banknote paper. The banknote production is quite an investment-consuming story, it requires great but still acceptable initial investments. The banknote paper production is a more complicated task, and only 25 manufacturers in the world produce banknote paper. Only about ten of them possess capacities enabling to export paper outside their country. Russia is among them, and today we are one of the largest exporters of banknote paper.

An order of banknotes is a one-time purchase. Only large countries place orders during a long time. But as a rule such countries have their own capacities, and they apply external capacities only to carry out some one-time tasks.

We constantly work with about 20 countries. It doesnt mean that we print banknotes for these 20 countries every day. Goznak executes an order, and in a year or a year and a half we return to work with these customers in case they need to print an additional quantity of banknotes or change the banknote appearance.

RG How much cheaper is it for the customers to produce their banknotes in Russia?

Arkady Trachuk:

- We dont aim at selling money cheaper. We are trying to make our products very interesting so that they could compete thanks to the solutions we offer. From the point of view of new security features, delivery time, timely reaction to the customers needs. Banknote paper is an expensive and very individual product. The competition on the market takes place due to very small deviations. The price difference of a stack of banknote paper with the weight of 20 kilograms may be only 1 or 2 US dollars. A ton of paper usually costs around 10 thousand US dollars. The price difference may be very little. Thats why it is important to make an interesting offer first of all.

RG Do the United States order the production of dollars at Goznak?

Arkady Trachuk:

- The United States produce money on their own. Theyve got quite a good production and they never order anything in other countries. Just like the majority of large countries, the USA place orders to their own manufacturers. There is a legislative limitation regarding the euro banknotes they can be printed only in the countries of the Eurozone. There are no legislative limitations in this field in Russia.

RG Does it mean that commercial companies can produce security printed products, banknotes and coins in Russia too?

Arkady Trachuk:

- As I have said already, there are no legislative limitations of it in Russia. There is a principal opportunity for both the Russian and foreign companies. But if a company wants to produce banknotes and coins, it should first of all pass an accreditation procedure at the Central Bank, which determines the order policy for the production of banknotes and coins in the Russian Federation. As for Goznak, on the Russian market we are the only company entitled to apply a number of technologies used in the banknote production.

But if a company decides to produce banknote paper, there are no limitations at all in that case, but they will have to install corresponding equipment at their premises, and that means quite great investments. So far only our company has such equipment in Russia.

RG in Goznaks case, there is a risk that simply its transformation into a joint-stock company will not lead to enhancement of the efficiency of its work. It is necessary to let other companies into the sector, create compatibility. Experts express such an opinion.

Arkady Trachuk:

- Apart from the special kinds of our activity production of banknotes, passports with its own production cycle and corresponding equipment outside the brackets, everything else is quite a competitive market. There are 29 companies on the market in Russia. We compete with them in a whole number of kinds of production, including the production of educational documents.

RG Will Goznak as a joint-stock company bring more profit to the budget? Do experts believe it is sensible for the new joint-stock company to pay dividends to the share holder, which will be raised up to 35 per cent in three years?

Arkady Trachuk:

- As our Motherland says. The state makes its own decision about the amount of contributions. According to the results of 2013, we as a federal state unitary enterprise paid to the budget 25% of net profit, it comprised 1 billion 774 million roubles. If the state decides that we should pay the dividends in the amount of 50% of our profit, we will pay that. And in this sense there is no difference between a joint-stock company and a federal state unitary enterprise. It is another matter, how the growth of contributions to the budget will affect the companys development plan. In the conditions of a joint-stock company we will have to depend on our own forces, but it is another matter, a matter of financial management.

RG Today Goznak incorporates 8 branches. There are the famous mints in Moscow and Saint-Petersburg, printing factories and paper mills, a printing works and a research institute among them. Will anything change in this structure during the reorganization?

Arkady Trachuk:

- They remain branches at the moment. We are not planning to reorganize them into affiliated companies so far, though it has been discussed. I dont see expedience in it. At the moment we havent got plans for any organizational changes of the companys structure. The branches of Goznak remain branches, but they are branches of Goznak joint-stock company already.

RG What advantages of this solution can you name?

Arkady Trachuk:

- It is quite simple. An affiliated company means a whole number of additional functions of corporate management. It is independent business. There is no independent business at our branches in the majority of cases they are involved into the general manufacturing cycle. The banknote paper produced at the paper mills of Goznak is consumed by the printing enterprises of the company. The result of work of one of our printing factory is often passed to another enterprise to complete certain operations. There are a lot of such intersections. We believe it is more efficient to apply the corporate management tools in such conditions.

It is not improbable that after some time we will come to the conclusion that we should possibly create the divisional management structure. A joint-stock company provides an opportunity like that. For example, we can concentrate printing enterprises in one group, paper mills in another, mints in the third. We can group the branches as affiliated companies into divisions.

RG The Presidents Decree about transformation into a joint-stock company stipulates a set of actions the enterprise should carry out in 18 months, by December 2015. Has the countdown started already? What are the procedures, will you be able to carry them out on time?

Arkady Trachuk:

- We are to go a long way in the next 1.5 years. We will take mostly technical steps on the way. They will not affect peoples interests, business or contractors.

There is a large amount of work upon developing normative acts and the charter of a joint stock company ahead. And certainly settlement of property matters. All the property is hundreds of thousands objects. Speaking about realty, that is about a thousand accounting entities: land, buildings, constructions. Everything needs to be recorded and described. A part of property will be transferred to the treasury there are few objects like that, but they exist.

RG - Non-core assets?

Arkady Trachuk:

- Some of such objects cannot be included into the property of the joint-stock company. We already rejected all unused objects long ago. Today we possess a childrens recreation camp, a health center, recreation centers. We will see. Some of these objects are subject to privatization and can be included into the property of Goznak JSC. Some social objects are not subject to privatization and will be transferred to the treasury. Taking into account the fact that we need to use them, we will solve the matter of renting these objects.

RG Is Goznak participating in preparation to the Day of Love and Family that will take place on July 8?

Arkady Trachuk:

- Goznak has always been an enterprise oriented on its team, employees and their families. Since the initiative about celebrating the Day of Family, Love and Loyalty first appeared, we have supported the project produced special awards, medals.

We also support the Living Classics competition of young reciters. Employees of the Moscow Mint work upon the commemorative medals to be given to the winners of the competition with a special feeling. We also support publishing books for children with visual impairment. Not long ago we helped Gokhran of Russia to hold a competition of jewelers. We will continue to support these and other socially significant initiatives in the future.

RG Not long ago the President decreed to return gold medals for graduates who have finished school with excellent results. But the situation is strange. The production of gold medals has been given to the market. Every school orders these distinction marks for its graduates separately. They are often produced in China. Should anything change in your opinion? For example, the metal for the medal production, a list of accredited manufactures with Goznak among them as a guarantor of high-quality products?

Arkady Trachuk:

- Goznak produced the gold and silver medals for school graduates in 1946 for the first time. In that postwar year the medals were produced of pure gold and silver. Later on, for many years there was a centralized order executed by our craftsmen. Though after some time we started to produce medals of nonferrous alloys. Everything changed with the start of the market. The Mints of Goznak still offer the production of medals for school graduates. But the educational establishments may place orders with other manufacturers too. Orders for the sum of over 100 thousand roubles are placed on the basis of competition procedures; both the Mints of Goznak and other state-run and private companies from Russia and abroad may participate in them. Changes of the set order are outside our competence. But there are other things in our competence Goznak produces school medals according to the requirements applied to the award products. It is our position, and we will keep to it in the future too.

RG Arkady Vladimirovich, you are a Doctor of Science, Economics. You read lectures on the Contingency Plan Administration at the Financial University. Does that help you with your main work?

Arkady Trachuk:

- Im more engaged in the Strategic Management. My work at the University helps to keep up-to-the-minute in the management field. Moreover, the students never let one relax they often ask most catchy questions

RG reference

The production capacities of Goznak enable the company to produce 11 thousand tons of security banknote paper, 7 billion banknotes, 5 billion coins, up to 40 million passports as well as necessary quantity of postage, excise stamps and other products per year.

In 2013 the sales proceeds comprised 43.2 billion roubles, the net profit was 7.1 billion roubles.

Source: Rossiyskaya Gazeta
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