Restructuring Programmes It should be noted that restructuring concepts are visibly varied in different surveys (a detailed analysis of these is not included in the present research). They agree only in the part of a most general approach to restructuring, when it is defined as “changes in operations, in The “administrative resource” notion (materially motivated decisions of courts, federal and regional authorities, etc), which is so wide-spread at present and being rather evident in its essence, is at the same time difficult to be interpreted and even more difficult to be legally proved (which was spoken of with confidence in one of his interviews by the president of “Alpha-Bank” and leader of one of the most aggressive Russian groups in the sphere of corporate absorptions M. Friedman). The president of “Sibneft” Y. Shwidler stated for example that each of oil companies in the course of its development got its share of the administrative resource and it is namely this fact that defines the real competitions at the oil market (Kommersant-Vlast, 2003. January 20-26, p.
25). It is noteworthy that according to the original version of the same source, the standardisation and the mass character of using the procedure of the “administrative resource” in 2002 led to a reduction of its price and simultaneously caused a situation when rivalling parties use same methods (balanced support actors) and are most often uncapable of bringing their cases till final victory of one of the parties. In such a situation expenditures that correspond to the corporate conflict become comparable to the real price of the assets and civilised negotiations become more economical.
For more detail about theoretical and legal aspects of this problem see in Radygin A., Entov R., Shmelyova N.
Problemy Sliyaniy I Pogloscheniy V Korporativnom Sectore. Moscow, IET. 2002.
INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru teractions (interplay) and motivations in the direction of reaching success in the changing market situation”15. In practice the traditional meaning of “restructuring” both in Russia and in the West is “improvement of enterprise’s activities”16. On the whole the restructuring process, being a multidimensional concept, includes the following components:
restructuring as a legal matter (the subject of it is solely reorganisation of a juridical person (company) as a subject of the law, including amalgamation and joining in Russian law-terms);
restructuring of a group of companies (legalisation of a holding and its owners);
restructuring as a matter of production, that is changes in the production and technical structure of an enterprise, restructuring of an enterprise as a subject of company’s property (object of restructuring here is the property used for business undertakings as subject of law);
restructuring of the owner or restructuring of a company as a subject of property of its owners, including shareholders (only at the initiative of owners themselves), including amalgamation and joining;
restructuring of the system of daily management;
restructuring of financial flows;
restructuring with respect to employees.
There exist also other approaches based upon Russian peculiarities: the major problem of restructuring Russian companies lies in the fact that when they are being restructured there is made a redistribution of shadow business, when there is no credence attached to one’s partners; in the majority of cases restructuring of Russian companies does not sue any economic purposes, but political ones, it is not done to optimise company’s activities, but to withdraw money flows from it, and finally, restructuring today is a mere continuation of privatisation and a subsequent redistribution of property17.
It is rather evident that the goals pursued within the framework of restructuring programmes are to a considerable degree defined by concrete development stages of enterprises (groups of enterprises).
Table Formation of formal standards for corporate governance in the oil sector and some of their related characteristics SurgutLukOil Yukos TNK Sibneft** Tatneft neftegaz Withdrawal of non-profile assets 2001 1998* - - 1997 US GAAP reporting 1998 2001 2002 - 1998 Dividends at least 10% to the profit (“west- 1993 2001 ern” analogues – from 30 to 70%) (about (about 2-5% - (about 2-5% 15%) 15%) 15%) Ericson R. Restructuring in Transition: Concept and Measurement. Comparative Economic Studies, 1998, 40.
Blake E., Levis F. Mify O Restrukturizatzii V Rossii / Rynok Tzennykh Bumag, 1998. #6. p. 24-27.
See materials of conferences arranged by the Publishing House “Commersant”: Restructuring of companies, alliances, merger, take-over. Moscow, October 2000. Successful restructuring of enterprises. Problems and practical solutions. Moscow, October 2001. To describe general processes of changes at enterprises (within groups) we will further on use notions “restructuring”, “reorganisation” and “transformations” of enterprises (groups) as synonyms, meaning not only legal aspects, but also economic and first of all “property” aspects of the process.
RUSSIAN ECONOMY in trends and outlooks Independent directors 2002 2000 - - 1998 - Code (charter, principles) of corporate gov- Draft in ernance Febru- 2001 - 1998 ary Presence of a corporate governance committee - 2000 - - 1998 in the board of directors ADR issues 1996 2001 - - 2000 Disclosure of data about the property structure - 2002 - - - - Withdrawal of major owners (shareholders) - - - - 1996 from the management Share of free float shares, in % to the author- 52-ized capital stock, December 2002 (>25 after 20-25 N/a 10-15 15 N/a 2000) Possibility for minor shareholders to influence the level of income (compensation) of the 2001 - - - - managers and to obtain corresponding information Equality of market’s subjects with respect to the issuer (ban to use insider information at purchase of shares by employees (affiliated - - - - - persons), ban to transfer not published information of vital importance to private persons and organisations) Option programmes - 2001 - - - Place in the corporate governance rating (IKPU), in all 25 companies, 3rd quarter (2nd 7(9) 5(5) 17(19) 20(20) 6(7-8) 21(22) quarter) **SKRIN-Naufor popularity rating, 50 issu1(1) 7(10) 4(4) 16(18) 14(15) 17(14) ers, January 2003 (January 2002) * At the end of 2001 – beginning of 2002 (prior to privatisation of the remaining government owned shares) the problem of assets withdrawal from “Yukos’s” subsidiary VNK was discussed, though it never got a univocal interpretation. The problem of acceptable economic and legal limits (conditions) for withdrawal of assets and transfer price formation acceptable from the viewpoint of minority shareholders is typical of the majority of holdings (groups), though.
** The company’s reports in 1998, as well as its “independent directors” called for a whole series of criticisms on the part of analysts. It was quite evident that 90% of the profit paid out in 2001 as dividends could not be interpreted in the context of standard goals of a dividend policy.
Source: companies’ WEB-sites; “Commersant – Neft I Gaz”, 2002. # 114; assessments by the author.
Finalisation of institutional formation (consolidation) processes of stable business groups in the oil branch by the beginning of the 2000s does not exclude a further expansion in oil and other industries. Nevertheless, the current restructuring programmes for the largest oil companies are rather similar and in the first place are aimed at an optimisation of property assets, lower per barrel cost prices in oil production, raised oil production and increased exports of oil products, development of the gas producing sector.
Programmes of oil companies “Yukos”, “Sibneft” and since 2002 of “LukOil” include also a set of standard measures to increase the companies’ capitalisation: US GAAP reports, withdrawal of service and non-profile structures, inclusion of independent directors in their boards, dividend policies, etc (table 10). For example “LukOil” that has lost its leading position in the branch recently plans sales of 206 non-profile companies, shutdown of of noncommercial wells (about 5000), staff reduction. The board of directors consisting of 11 member at the annual shareholders’ meeting in 2002 got 3 independent directors (in “Yukos” the board of directors elected in 2002 in addition to two top managers of the company includes independent directors or directors at least not directly connected with the company). Never INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru theless, the existing complicated structure of the holding and the level of transparency do not quite correspond to the task of increasing the company’s capitalisation. On the contrary, one of the major corporate events of 2002 was the fact the “Yukos” disclosed its data on the structure of the group’s property, which also had an effect upon capitalisation growth (an incentive for it was listing by the New York stock exchange and floating of ADR of the 3rd level).
It is evident that capitalisation growth that from the viewpoint of the investors automatically testifies to a high effectiveness of assets management gives the company a whole number of advantages – an effective participation at the stock market, good image and enhanced prestige of its managers, accessibility of credits on the security of its shares, profitable sale of the company and its merger, realisation of compensation programmes for its employees, etc. At the same time (and this is not just a Russian trait, which is testified to, for example, by the case of Enron) capitalisation does not necessarily reflect the dynamics of the basic showings, but can be connected with the inertial “fashion” for already overestimated securities in conditions of a limited market (due to insufficiency of traded securities) and an effective information support (PR, positive financial reports by analysts, etc).
To give an example, according to estimates “Surgutneftegaz” is one of the most effective companies in Russia that has a substantial basis for its growth (production increase, volumes of extracted resources) supported by large investments. At the same time the company’s policies are characterised by privacy of data, it ignores interests of minor shareholders and has much smaller dividends compared to its rivals. In 2002 “Surgutneftegaz” published its financial reports for 2000-2001 according to US GAAP meaning to publish quarterly reports in future and to develop a programme of a better corporate image. Nevertheless, the company plans to hold the annual stockholder’ meeting as early as in March, not at the end of spring – beginning of summer 2003 as is usual in other companies, which can be viewed as an indirect evidence that the company will continue to pursue the above policies also in 2003. The reason for that in all probability is a possibility that soon there will be made amendments to the Law “On Joint-Stock Companies”, which will give a more precise definition to the “net profit” notion. Using the current, not defined by the law approach there is an opportunity to interpret the net profit as profit after deduction of taxes, investments and amortisation, while the new amendments (1st reading on December 25, 2002, 2nd reading on February 14, 2003) give a clear definition to the net profit as profit after deduction of taxes. For establishing preferred dividends, which shall be at least 10% of the net profit, this makes a great difference.
State-owned “Rosneft” in 2002 also published its financial reports for 2000-2001 based on US GAAP. Nevertheless, from the point of view of property relations that are being established in the holding the company still lags behind its rivals. When the latter have actually finalised their processes of consolidation of subsidiaries and went over to single shares at the end of the 1990s – beginning of the 2000s, the consolidation policy in “Rosneft” is far from being finalised. One of the problems in this respect is the pattern of its property in its subsidiaries – 51% in equities, but only 38% in the authorized capital stock (should “Rosneft” fail to pay preferred dividends it will thus lose control, which already happened in 1997). “Rosneft’s” clear final goal is achieving a qualified control over its subsidiaries with a follow-up transfer to single shares. This becomes even more pressing for the company taking its conflicts with minority shareholders in 2002 about transfer price formation in the holding into consideration.
Many events connected with “LukOil’s” activities in 2002 (denunciation of the Iraq contract within the framework of the production sharing agreement (PSA) on “Western RUSSIAN ECONOMY in trends and outlooks Curna-2” field, its withdrawal from Azeri-Chirag-Gunashli Consortium, sales of the tanker fleet of the ice class, taking out of bonds that can be converted into “LukOil’s” shares started by British Petroleum in advance in January 2003, cancellation of its application to participate in privatisation of “Slavneft”, etc) cannot be unambiguously interpreted with respect to assessments of the company’s development. At the same time as distinct from the overwhelming majority of the largest oil producing companies in Russia “LukOil’s” freely floated shares at the market as of the beginning of 2003 according to assessments can account for 52-54% of its authorized capital stock. This free float figure alongside with the transparent property pattern, information openness and the profit shares in dividends are of decisive importance for portfolio investors (with respect to assessment of the issuer’s and its affiliated structures’ capabilities to manipulate the market). In comparison with “LukOil” free float of TNK amounts only to 10-15%, “Sibneft” – 15%, and “Yukos” – 20-25%. One more potential advantage of “LukOil” are its investments into petroleum refineries and sales companies in Eastern Europe, which allows the company to feel to a certain degree comfortable in cases of crude oil price falls.