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Neither terms and conditions for application of this arrangement, nor selection criteria for legal entities were defined. Only a series of statements made by officials on the subject matter are available, according to which legal entities are planned to be engaged only in exceptional cases related to sale of large and significant assets; large Russian and foreign investment banks are suggested to be engaged as sellers (sales managers); a sort of a scoring procedure will be used in selecting a bank for a specific transaction4.

In October 2010, the Government of the Russian Federation made a list legal entities which may be commissioned to sell of privatized property and/or act as buyers5. The list comprised 10 well-known financial institutions, in particular, VTB Capital, Vnesheconobank See, for example: Titov B., Privatization: New Arrangements] http://slon.ru/blogs/titov/post/344182/.

Federal Draft Law No. 87293-5 On Amendment to Article 43 of the Federal Law On Privatization of State and Municipal Property.

It should be noted that the relevant initiative was launched by the decisions made in mid-November 2009 at a meeting of the Government of the Russian Federation dedicated to the improvement of the legislation with a view to enhancing effectiveness of privatization. It is until the 2009 year-end that the Ministry of Economic Development and Trade prepared a respective draft law which was sent out to the concerned agencies for approval, and early in March 2010, the Ministry published the same (as slightly amended) for independent due diligence on propensity for corruption (http://www.economy.gov.ru/minec/activity/sections/ govProperty/doc20100301_05). In the spring of 2010, the relevant regulation was included into a more general draft law on amendments to the law on privatization, which was adopted shortly (the Federal Law dd. May 31, 2010, No. 106-FZ, On Amendments to the Federal Law On Privatization of State and Municipal Property).

See, for example: T. Zykova. Public Sales. Rossiyskaya Gazeta, July 29, 2010.

The Order of the Government of the Russian Federation dd. October 25, 2010, No. 1874-.

RUSSIAN ECONOMY IN trends and outlooks Investment Company, Renaissance Broker, Credit Suisse Bank (Moscow), Deutsche Bank, Merrill Lynch Securities. Another 13 institutions were added to the list in December 20101.

As part of preparation for the first privatization transaction under a new scheme, the Government of the Russian Federation selected Merrill Lynch Securities LLC as the seller of a 10% interest in VTB Bank, which was the sole contractor of the relevant government contract2. However, neither the decision of the Government, nor the follow-up comments by officials contained any details as to the choice3. A scheme providing for a single contractor for a government contract was used.

Basically, one may expect that by engaging investment banks and companies which have experience in this type of transactions, skilled personnel as well as well-established relations with large global investors, to take part in privatization of federal property would allow a comprehensive analysis of a to-be transaction to be made, which would take account of a privatized joint-stock companys needs for investments, technological modernization, and, in the long run, would allow effectiveness of privatization to be enhanced. On the other hand, one cannot but note a poor transparency of the processes related to compilation of a list of organizations potential sellers as well as selection of a specific seller for the initial transaction, and uncertainty of the relevant procedures and criteria. Perhaps, due to a custom-made nature of transactions which require engagement of legal entities, explicit criteria of their selection from the already approved list are not considered vital, however, the state (represented by authorized agencies) should at least explain choice it makes.

(4) Removing restrictions as to potential arrangements of privatization of large stateowned properties whose book value is more than five million minimum monthly wages Clauses 3 and 4, article 13, under which it is understood that the portfolio of assets owned by FOUSs and federally-owned shares in open joint-stock companies whose fixed assets book value is more than five million minimum monthly wages only could be privatized by way of five of the 10 legally established options of privatization, ceased to be in force in the new version of the Federal Law On Privatization of State and Municipal Property; in particular, options such as sale of property through a tender; sale of shares through a market maker in the security market, sale of shares based on trust management results were not allowed.

Hence, one of the barriers which interfered with flexibility and case-driven approaches towards privatization of large companies, was eliminated. Most importantly, there is existing possibility of a smooth privatization of large companies based on trust management results, because this, on the one hand, allows direct participation of the state in management of such companies to be reduced, and, on the other hand, ensure correct measurement of the results and quality of a new potential owner in making future decisions on alienation of stateowned property.

(5) Simplifying the application of an arrangement of privatization such as deposition of state-owned property to the charter capital of joint-stock companies The Order of the Government of the Russian Federation dd. December 20, 2010, No. 2349-.

The Order of the Government of the Russian Federation dd. November 2, 2010, No. 1928-.

It was reported in mass media, with reference to public officials and representatives from VTB Bank, that Merrill Lynch Securities was selected because of the company has experience in the field of privatization of financial institutions in emerging markets, as well as support of this choice by the top management of VTB Bank. M. Tovkailo, N. Asker-zade. Who is Going to Sell VTB. Vedomosti, November 9, 2010.

Section 6.

Institutional Problems The amendments made to the Federal Law On Privatization of State and Municipal Property in May 2010 relaxed the restrictions imposed on contributing state-owned property to the charter capital of open joint-stock companies. Article 7 thereof was supplemented with clause 2.1 under which no amendments must be made to the forecast plan (program) of privatization for a planning period in contributing, as decided by the President of the Russian Federation and the Government of the Russian Federation, federally-owned shares in open jointstock companies arising from corporization of FOUSs to the charter capital of open jointstock companies. Though this amendment could have been regarded as technical one, aimed at reducing costs incurred by setting up integrated entities, in our opinion, the need in amendments to the plan of privatization at least provided an opportunity to make adjustments and updates to previously made decisions, in particular when multiple of blocks of shares are contributed.

A more important innovation was elimination of the restriction on contribution of shares in large companies (whose fixed assets book value is more than 5 million minimum monthly wages) to the charter capital of joint-stock companies formerly, such shares only could be contributed to the charter capital of strategically important joint-stock companies under regulations issued by the President of the Russian Federation after clause 3 was deleted from article 6 of the Federal Law On Privatization of State and Municipal Property. It should be noted that the explanatory note to the draft law on amendments to the Federal Law On Privatization of State and Municipal Property specified that the need in such an amendment was directly linked with the need to complete the processes of contribution of state-owned property to the charter capital of large companies, namely Russian Railroads OJSC and Rosselkhozbank OJSC.

Hence additional preconditions for setting up integrated entities in the course of privatization were created. This aspect seems to be very important at the moment, because contribution of blocks of shares to the charter capital of joint-stock companies constitutes a very specific way of privatization which results in short-term increase in state participation in the economy rather than its increase due to expansion and strengthening of state-controlled integrated entities in the market. Of course, it is not so simple at all: set-up of integrated entities may be related to alignment of efficient businesses which are assumed to be subsequently privatized. For some reasons, however, it is this option of privatization that may become most preferable for privatized companies, because it is more predictable and allows for preliminary arrangements as to the future of managers and owners of such companies.

(6) Discarding the concept of standard price of property which is subject to privatization The concept of standard price a minimum price at which properties can be alienated, which is to be set pursuant to the procedure establisned by the Government of the Russian Federation, was discarded from article 12 of the Federal Law On Privatization of State and Municipal Property. Only a single option of valuation of property subject to privatization as part of article 12 thereof is left initial price is to be set under the law on valuation. From now on the initial price of a property is to be specified (clause 2, article 14)1 in decisions on terms and conditions of privatization of state-owned property (apart from other terms and conditions) as opposed to the standard price which had to be specified in the previous years.

On the other hand, initial price can be set when the Government of the Russian Federation commissions legal entities to sell privatized property (under paragraph 16, clause 1, Article 6).

RUSSIAN ECONOMY IN trends and outlooks Hence, abolition of the standard price principle created additional preconditions for valuation of a fair market value in the course of privatization of property.

(7) Simplifying privatization of small federal properties, widening access for participation of potential buyers in privatization A package of amendments simplifying access to participation in sale of privatized stateowned property and competition development was made to the Federal Law "On Privatization of State and Municipal Property" in May 2010.

First, e-trading may be used for privatization of property. The Federal Law "On Privatization of State and Municipal Property" was supplemented with Article 32.1 under which :

state-owned property may be sold electronically, in which case a decision on terms and conditions of privatization of the property must contain information thereof ;

open and free of charge access to the relevant information must be ensured in the course of e-trading; bidders may electronically submit their bids and attached documents ;

e-trading bidders must not be charged any extra legal payments ;

contents and terms and conditions of e-trading announcement were specified.

It should be noted that a procedure for e-trading still remains to be developed by the Government of the Russian Federation.

Through e-trading is not provided for all of the options of privatization (it is obvious that e-trading cannot be applicable to corporization (transformation into open joint-stock companies) of unitary enterprises, contribution of assets to the charter capital of open joint-stock companies, sale based on trust management results), it can be applied to auction-based options of privatization as well as tender-based sale of property, through IPO, without price quotation. According to the contents of article 32.1 of the Federal Law On Privatization of State and Municipal Property, e-trading of state-owned property is primarily oriented towards options of privatization such as auction-based options and through IPO.

Second, the terms and conditions of sale through IPO (for reference: this option of privatization is applied when an auction has been declared void) were widely updated and improved in the new version of article 23 of the Federal Law On Privatization of State and Municipal Property. It should be noted that sale through IPO was used in the previous years, because a large part of property was normally failed to be sold at auctions, though it was poorly protected against different types of manipulation.

Following are the most important amendments to the IPO option which focus on improvement of competition and valuation of fair market value :

the opening bid gradually goes down as part of a single procedure (clause 5, article 23) rather than through specific periods ;

an auction must be held when there are more than one bidder with the same bid (clause 5, article 23) ;

property may not be sold through IPO with only one bidder (clause 6, article 23) ;

the Government of the Russian Federation must establish the procedure for sale of property through IPO1.

It should be noted that late in July 2010 the Ministry of Economic Development and Trade of Russia announced that it had prepared a draft order of the Government of the Russian Federation on amendments to government acts in connection with the amendments made to the Federal Law On Privatization of State and Municipal Property which was sent out for interdepartmental approval, in particular of a new version of the Provision on Sale of State and Municipal Property Through IPO (http://www.economy.gov.ru/ minec/about/structure/depreal/doc20100729_07), the text of this document was not published though.

Section 6.

Institutional Problems Third, the size of the required bid bond for auction (clause 6, article 18) or tender (clause 5, article 20) was reduced considerably: from 20% to 10% of the opening bid of privatized property.

Hence, in our opinion, preconditions for rapid and large-scale sale of small assets of stateowned property, clearing of the public sector composition were created in general. This may ensure a better transparency and competition in privatization transactions, extended participation in privatization as buyers of small companies.

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