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Third effect predominantly concealing nature of lobbing interests as part of privatization, more opportunities for making individual decision amid ill-defined legal framework, poor official rationale for decisions made. In our opinion, a certain lack of focus regarding the conditions of privatization, in particular of large companies, is, to a certain extent, reasonable costs conditioned by an effort to change in reasonable time the situation amid high administrative barriers as coordination of well-defined regulations and rules of privatization between stakeholder groups. The same, however, boosts competition between different approaches towards privatization and leads to lesser predictability of its conditions at the level of every large company with state participation.

With respect to prospects of privatization, provision of the effective socio-economic development given the significance of a series of political decisions (provision of structural effect, restriction on direct representation of sector-specific ministries in the governance of companies, defining the possibility for the state to give up its controlling interest in a series of largest companies), the following significant risks are worth noting.

First risk expansion of the public (quasi-public) sector amid privatization processes. In our opinion, the scales of denationalization, on the one hand, and consolidation of assets See the schedule of measures of transformation and liquidation of state-owned corporations and Avtodor state-owned company, approved by the Chairman of the Government of Russia on December 29, 2010, No. 6793p-P13.

RUSSIAN ECONOMY IN trends and outlooks within specific large companies (banks) with state participation, their growth in competitive activities, on the other hand, can be found to be comparable. This risk seems to be more important in the near term.

Second risk is more important in the mid- and long-term prospects: lack of efforts for the development of sector-specific regulation of privatization of large companies will subsequently increase an informal effect on them from the state. This can be explained by that given poor regulation in certain sectors, which previously was offset by direct state participation in the governance of certain large companies, if the state withdraws from such governance, it would need other tools for resolving publicly relevant objectives. The major problem here is represented by even more deteriorated transparency of public interests with regard to such companies, preconditions for replacement of public interests with parochial (both departmental and administrative) interests vs. the option of direct state participation in the capital. In addition, a positive structural effect of privatization may be limited significantly by the retarding nature of external measures aimed at improving the investment environment.

Third risk ill-defined conditions and criteria of privatization of large companies with attracting investments for the development thereof; discrepancies which may arise between the state and the owners of such companies in perception of mutual obligations. This makes the parties put more pressure on each other, and provides politicians with more chances to appeal to a segment of the society which is traditionally focused on injustice and cheapness of privatization.

Fourth risk the quality of state-owned property management tools available for the state (it means unitary enterprises and shareholding) seems to have reached its objective ceiling.

The risk of conservation of the prevailing model of governance remains very high, which may result in palliative measures and reduce the effectiveness of any measures aimed at further denationalization.

6.2.3. New dimension of denationalization The policy of state-owned property management and privatization must move to a new dimension in the near future. The following important approaches should be considered.

Gradual approach. The remaining scope and quality of most of public sector assets prevent from implementing an analogue of accelerated large-scale privatization. Denationalization should be based on the principle of controlled steadiness of privatization, which requires a whole package of preparatory measures and stepwise approach. Unnecessary radicalization of the approaches makes equal the expected advantages and losses.

Multisector approach. A big variety of public sector assets implies availability of differentiated models (planning) of privatization and governance.

Strategic nucleus model. There are no visible arguments against (temporal) retaining a series of largest companies in state ownership, but there are reasonable arguments in favor of gradual decrease in control thresholds, creating equal competitive conditions, transparency and modification (of quality) of corporate governance.

Structural approach. Economic effect of privatization (efficient owner) is unlikely to be achieved without having to implement modernization of the sector; the sector cant be modernized amid state domination/without widening the private sector; there is no point to widen the private sector without changing the quality of the institutional environment.

Pragmatic approach means identification of strategic nucleus of the economy (strategic, core enterprises), priority of deep privatization of large companies, getting rid of anachroSection Institutional Issues nistic and palliative types of business entity and illiquid assets, modernization of the existing system of state-owned property management.

In our opinion, the state long-term policy of state-owned property management and privatization must be governed by the following general principles:

- make sure that privatization is reasonable; follow the principle under which all companies, save for a selected group of companies, with state participation, unitary enterprises, state-owned corporations and state-owned companies may be subject to privatization;

- make sure that participation of foreign investors in the capital of privatized companies, including large companies, is reasonable;

- maintain the existing social commitments and/or provide direct reduction of public sector functions;

- create alternatives to direct state participation in the capital of companies in terms of meeting public interests; constantly combine efforts of privatization and widening of institutional and economic preconditions for privatization;

- take any measures which directly or indirectly increase the state weigh in the economy, including through the mixed sector, must be exclusive, reasonably sufficient and well coordinated;

- state controlled companies must not operate in the sector with private entrepreneurial initiative, establish terms of competition, on the one hand, build up barriers to prevent new companies from entering markets within their scope, on the other hand;

- ensure high priority of structural effect of privatization on economic development;

- the principle of reasonable aggression, succession and gradualism, limitation of risks;

- ensure transparency of the processes of state-owned property management and rationale for decisions made; openness to various forms of public control and assessment;

- create an integral system of incentives for all players; inviting the society and business community to participate in a dialogue with the state on the policy of privatization and state-owned property management.

Two stages should be reasonably highlighted from the point of view of general top objectives of the state policy of state-owned property management and privatization: 2012and 20162020. These stages differ in objectives to achieve, the level of expected risks and the need to take a series of preparatory measures.

Ensure high priority of implementation of current plans, making minimum radical decisions, getting rid of illiquid assets, making a site ready for the second stage at Stage 1. The level of potential risks can be assessed as minimal. In particular the following should be reasonably foreseen as part of this stage:

- implement the target plans on reduction of a share of state participation in largest and large companies;

- impose constraints on companies with state participation (their subsidiaries and related entities) for purchase of privatized assets, receive financing from state-owned banks and state-owned companies, consolidation of assets within state-owned companies;

- increase the number of large companies with mixed ownership (privatization up to a level of 75% +1 share);

- enhance significantly the quality of corporate governance at companies with state participation (enhance the status of independent directors, incentives for managers and their reporting to boards of directors, etc.);

RUSSIAN ECONOMY IN trends and outlooks - reduce the number of state-owned entities through liquidation of a wide range of FSUEs which went out of business;

- undertake privatization of illiquid assets (small value minority shares);

- implement a package of measures aimed at widening the potential base for privatization at Stage 2;

- identify principles and special features of privatization at the regional and municipal levels;

- implement a small-scale action strategy (ensure transparency of progress reports on privatization, changes in the public sectors socio-economic role, accounting and registration of all assets owned by unitary enterprises, state-owned corporations, integrated structures with state participation, etc.);

- create a single media space of sale of federal, regional and municipal property assets.

At Stage 2, provision should be made for drastic reduction of direct state participation in the economy, which may be exposed to a higher level of multidimensional risks. The following key measures can be implemented at this stage:

- undertake deeper privatization with regard to largest companies (or full privatization or privatization through holding a blocking interest);

- restrict state participation in state-owned institutions for development and special banks;

- restructure assets of large companies, identify and privatize sub-holdings of conglomerate integrated structures;

- reorganize state-owned corporations (a part thereof are to go out of business, another part thereof are to be incorporated into OJSCs and subject to a certain degree of privatization);

- applying the principle of multiplicity of options, transform unitary enterprises operating on the basis of economic management, depending on the nature and scope of the core activity, into OJSC (standard scheme); into state-run enterprises; into non-profit organizations; into public institutions;

- undertake privatization of most mid-sized and large companies with state participation (even a blocking interest, whenever appropriate).

The foregoing stages can be identified with two different (in terms of the degree of radicality) scenarios of state policy in the field of privatization and state-owned property management. With some degree of conventionality, the first (inertial) scenario suggests extrapolation of the first stage objectives in the period of 20122020. The second (radical) scenario implies full-fledged implementation of the key measures at the first and second stages in the period of 20122020.

This suggests development of the existing mechanisms and implementation of a wide range of measures which serve as the basis for six most significant functional lines of state policy in the field of state-owned property management and privatization.

1. Limit risks of overgrowth of the public sector in the economy, increase its weight in certain sectors, widen the range of state-owned entities.

2. Ensure sustainable and orderly reduction of direct state participation in the economy.

3. Achieve structural effect of privatization: depth of privatization of large companies;

modernization of the sector and replacement of direct control with sector-specific regulation;

improving the terms of participation in privatization of foreign investors; engaging efficient owners and developing a competitive environment.

Section Institutional Issues 4. Undertake institutional optimization of the public sector: reduce the number of stateowned entities, liquidate and reorganize inefficient enterprises of the public sector.

5. Enhance effectiveness of the nucleus of public sector, define its scope, and optimize levels of required direct state participation.

6. Enhance corporate governance in companies with state participation.

Each of above listed lines provides for a wide range of potential innovations and applied measures with the possibility to vary the degree of radicality. Without getting into a detailed analysis, let us provide just a few examples (see Table 14).

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