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In general, total revenues from privatization in the period between 2011 2013 are estimated at a level of RUB 1 t. The biggest part of the revenues is linked to privatization of largest companies. Net of these companies, revenues from privatization in 2011 are estimated RUB 6 bln, in 20122013, RUB 5 bln each year (but these revenues are also are forecasted in connection with planned privatization of eight large companies).

Table Plan of privatization of the largest open joint-stock companies leading in relevant industries State-held block of shares Largest privatized companies As of Novemand banks 2010 2011 2012 2013 2014 ber 1, VTB Bank 85.5% 75.5% 65.5% 50% +share Sovkomflot 100% 100% 75% 50% +1 share <50% United Grain Company 100% 100% 0% Unified National Electric Grid 79.11% 79.11% 75% +1 share Sberbank of Russia 57.58%* 57.58% 50% +1 share Rosneft Oil Company 75.1% 75.1% 50% +1 share RusHydro 57.9% 57.9% 50% +1 share Rosselkhozbank 100% 100% 75% +1 share Rosagroleasing 99.9% 99.9% 99.9% 99.9% 50% +1 share Russian Railroads 100% 100% 100% 100% 75% +1 share * owned by the Bank of Russia.

Source: the forecast plan of privatization of federal property for 2011 2013 and the document of the Ministry of Economic Development and Trade of Russia Planned Sales of the Shares of Large Companies Leading in the Industries of the Russian economy, in 20112015 (http://www.economy.gov.ru/minec/ activity/sections/investmentpolicy/doc20101123_08).

It was previously reported that the state would invest a part of the revenues from privatization in privatized companies: according to the comments made by public officials, about RUB 1 t is expected to go to the budget and RUB 800 bln to privatized companies (in particular, through IPO and SPO) of the total of revenues from privatization generated over five years (RUB 1,8 t). It remains to be seen, however, which companies and under which terms and conditions will become the recipients.

In general, the following should be highlighted with regard to work-out and approval of plans of privatization in 2010 :

1. Terms and scope of privatization of specific large companies continue to be the subjectmatter of heated discussion. In particular, there is a serious contradiction between ministries and government agencies as to privatization of Russian Railroads, Aeroflot, Svyazinvest, It should be noted that this list didnt include a few of the largest companies which previously were not mentioned as potential targets for privatization, namely Aeroflot and Sheremetyevo.

RUSSIAN ECONOMY IN trends and outlooks AIZHK, Transneft and Zarubezhneft. For example, the Ministry of Transport of Russia insists that privatization of Russian Railroads and Aeroflot should be postponed until reorganization of these companies is completed: Aeroflot is expected to receive the shares in six airline companies, and Russian Railroads is expected to become an infrastructural company.

2. In spite of the declared principle of transparency of privatization at all stages, the processes of discussion of the list of large companies which are planned for privatization were far from being public, which, however, was compensated by numerous comments in mass media as to the decisions made and existing disagreements.

3. Generation of additional revenues to the budget progressively became the dominating issue in privatization planning while structural objectives fell by the wayside. Such a shift of emphasis was logically accompanied by focusing on privatization of expensive and liquid blocks of shares in large financial institutions, banks, oil companies.

4. In spite of planned privatization of the blocks of shares in a series of largest companies, the state tends to retain its dominating participation in the charter capital of such companies in years to come, whereupon it is needless to talk about any large-scale reduction of the stateheld share in the economy (in GDP).

Finalizing examination of actual plans of privatization, it may be reasonable to note that the federal authorities intend to initiate privatization at the regional level in 2011 2013, which is supposed to be comparable with the planned privatization of federal property in terms of revenues from sale of assets.

In the fall of 2010, the regional authorities were assigned to prepared and approve largescale programs of privatization. Many regions, holding blocks of shares in major companies, are qualified for allocations from the federal budget. In the meantime, the regions own a great deal of property and assets which can be offered in the market. The Ministry of Economic Development and Trade and the Ministry of Finance of Russia have been discussing a scheme under which account will be taken of whether or not the regions have a program of privatization when they apply for transfer from the federal treasury in order to keep their budget in balance. If the regions are holding any attractive assets, they are not entitled to apply for transfers from the federal budget unless they sell such assets.

Potential Risks Arising from New Privatization The development and implementation of the national policy in the field of privatization may result in a series of internal contradictions and issues. It is hard to holistically characterize such risks, because the process of development of terms and conditions and principles of new privatization remains to be completed, and the state measures give ground to both increase the relevance and restrict specific risks. Nevertheless, we consider the following risks as relevant.

First, the risk arising from immaturity of legislative procedures for privatization of large companies and extension of terms and conditions for the custom-made approach towards privatization of large state-owned properties.

This risk will remain relevant until the single issue is resolved: restrictions on options of privatization of large companies have been lifted, but new options of privatization have not been defined, even the framework, on a regulatory basis.

The gaps in the legal structures of new arrangements of privatization and disposal of property (such as sale of shares to a strategic investor on a sole source basis, tender under investment terms and conditions, or transfer of assets for management), first of all lack of explicit Section 6.

Institutional Problems criteria for application thereof extend preconditions for making rule-of-thumb, situational decisions, lobbying and administrative bargain. Uncertainty of to-be rules (and even nontransparent motives) makes the policy of privatization of large state-owned companies less predictable, sidelines participation of foreign investors in privatization of large Russian companies.

It should be noted that lack of explicit rules and regulations as applied to new tools of alienation of state-owned property and the custom-made nature of decisions may raise questions about invalidity of privatization in the future.

Second, the risk of imposing serious formal and informal restrictions on participation of external investors in privatization, providing specific buyers with preferential terms and conditions.

The basic precondition for this is that in some cases the state is not ready give up on direct participation in companies due to immaturity of regulation for a given industry. Foreign investors may find themselves to be exposed to high risks for the same reason. To avoid such risks, investors must have a clear picture of the statutory framework in which companies are operating (this is particularly true for companies operating in infrastructural industries).

After the Government of the Russian Federation was entitled to sell specific state-owned properties outside of the law on privatization, the risk of biased, subjectively selective treatment of shareholders and potential investors became higher. Let us recall that this innovation was connected with the need to enlarge options of privatization, in particular by way of direct sale of federally-owned blocks of shares to the strategic investors of company. This is because the existing strategic investors of the company may act as a break on the process of privatization in fear of that new investors may come.

Perhaps, public representative presumed that specific large shareholders who would buy blocks of shares through direct sale would assume more strict and explicit obligations for modernization and development of a given company. It is not inconceivable that the state intends to prevent potential corporate conflicts in large companies in case of reallocation of assets in the course of privatization. As likely as not, however, the state intends to maintain a usual composition of the owners with whom it has long-term relationship.

In any case, assessment of when the Government of the Russian Federation should apply this arrangement may be found to be nontransparent and related to a subjectively custommade judgment on good and bad shareholders in terms of the development of a company, incorrect assessment of the value of blocks of shares in case of direct sale.

Third, the risk of that control over large companies management may be retained and even nationalized in the course of privatization of the property owned by large companies. This can be manifested both directly by inviting representatives from public authorities at different levels to participate in boards of directors, and indirectly, e.g., through, in particular, participation of state-controlled entities in boards of directors. The main problem here is even worse transparency of public interests with regard to such companies, appearance of even greater number of preconditions for replacing public interests with narrowly-specialized interests (both bureaucratic and private interests) against the option of direct public participation in charter capital.

Forth, the risk of expansion of public and quasi-public entities in the course of privatization on the basis of contribution of state-owned property assets to the charter capital of open joint-stock companies.

RUSSIAN ECONOMY IN trends and outlooks It should be noted that through from outside this would look like privatization of stateowned property, shortening of the list of strategically important enterprises and companies, reduction in the number of state-owned companies, but indeed may result in strengthening of direct participation of the state in management of economic affairs in specific industries due to widening of the scope and scale of business of the remainder companies in which the state holds an interest.

Though under the law on privatization legal entities in which the state holds an interest of more than 25%, may not participate in privatization of state-owned property, this prohibition is not applied to the type of privatization such as contribution of state-owned property to the charter capital of open joint-stock companies. In addition, since the law on privatization is not applied to arrangements of alienation of state-owned property assets by the decision of the Government of the Russian Federation and transfer of property to state-owned corporations, this prohibition cannot be applied to such corporations.

Public measures in this field are very controversial. On the one hand, regulation of terms and conditions for setting up and expanding integrated entities of the public sector through contribution of federal property to the charter capital of open joint-stock companies is relaxed, whereas the need to begin and complete integration processes is used as a ground for a long-term postponement of privatization of specific large companies.

On the other hand, efforts have been made to withdraw non-core assets from state-owned companies, restrict their potential for expansion. For example, the need to sell non-core assets by the largest state-owned companies (Gazprom, Russian Railroads, Russian Technologies State Corporation, etc.) is being under discussion1. It is assumed that in 2010 the companies will prepare plans of sale of the said assets2, and begin to sell the same in 20113. In addition to this, restriction on the right of state-owned companies to set up subsidiaries (by including relevant regulations into their charters) is being under discussion.

In our opinion, in some cases, completion of the processes of establishment of large integrated entities is an important element for enhancing their effectiveness, however, explicit deadlines and scope of subsequent denationalization of such integrated entities should be set in the first place.

Fifth, the risk of limited private fundraising, shortening of planning horizon by new owners and managers, and utilization of public resources in privatization, state banks, including those which were assigned in the course of recession counter measures.

Since inner-circle potential investors have limited private resources, large state banks are likely to participate at the administrative level with a view to providing support to respective transactions. This course of events would lower considerably new owners interest in developing the privatized business, defining explicit terms and conditions for its operation, on the other hand they act as operators governed by the principle of behavior in accordance with informal restrictions and requirements in exchange for additional public support. Conse Such actions are formally not regarded as privatization, because the assets of state-owned companies (save for unitary enterprises) are not held by the state.

According to the available information, Russian Railroads Open Joint-Stock Company already prepared and submitted such a plan to the concerned agencies for approval. ( See, M. Tovkailo, A. Nepomnyaschiy. The Property Will Be Transferred to a Single Owner. Vedomosti, March 3, 2010. ] ).

T. Zykova. Public Sales. Rossiyskaya Gazeta, July 29, 2010.

Section 6.

Institutional Problems quently, the range of large, formally private companies which nonetheless will be regarded as being in need in unconditional public support and constant care, may expand.Sixth, the risk of competition at the public level between different approaches towards privatization, and broadening of conditions for under-the-counter struggle of competing interests.

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