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Also rather indicative in the context of consolidation as a general tendency and corresponding outlooks for Russias equity market is the negative position taken by TNK with respect to floating its shares on the domestic market after its consolidation. Among reasons for the companys actually closed character and its unwillingness to publicly float its shares are named the following: a minimal number of minor shareholders, fears of scandals and corporate blackmailing that can harm the companys reputation, its disinclination to use cheaper internal price quotations.

The policies of corporate image enhancement and artificial pumping of capitalisation can in particular be an evidence of preparations for sales or an international parity merger.

Should all other conditions persist appearance of foreign co-owners in some of Russian oil companies (in different organisational forms) is being assessed as only a matter of time, which is conditioned in the first place by Russian companies reaching a certain level of their correspondence in price to their foreign counterparts if their value is recalculated taking into account their oil stocks, and secondly by presence of other alternatives to invest proceeds into the Russian economy18.

In 2002 a number of large holdings (groups) embarked on restructuring programmes aimed at tightening control and consolidating the management of the purchased assets, thus following the example of the oil sector. The two main aspects of such a restructuring are as follows.

Firstly, it is the strategy of asset regulation (getting rid of the companies that are not in the main line of business (non-specialised assets) that was typical not only of the oil sector but also of the majority of large, relatively organised groups in 2002.

The restructuring programme of OAO Obyedinennye Mashinostroitelnye Zavody (OAO OMZ) is not related to asset consolidation; it provides for establishing in 2003 six business following divisions within OMZ, without legal independence at the first stage, but with independent balance-sheets and budgets: Mining, Nuclear, Metallurgy, Oil and Gas Equipment, Special Steels and Shipbuilding. It is possible that subsequently the divisions will be transformed into independent companies and sold. OAO Severstal started a similar programme of Used assessments by investment company Tzentrinvest, IC Finans-Analytic, The Institute of Financial Research, IC NIKoil, IC Prospect, IC Aton, surveys at RusEnergy.com.

INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru asset restructuring in 2002. It is assumed that three holding will be formed (the metallurgical company OAO Severstal, car-building company OAO Severstal-Avto and mining company OAO Severstal-Resurs) under the control of ZAO Severstal-Group. The purpose of such a restructuring is to clear the Group's main business, steel production, of non-specialised assets and increase its capitalisation so as to enter the US stock market subsequently.

RAO Gazprom's policy of asset regulation seems much more complicated, in particular due to the need to return to the company some of the previously stripped assets that belonged to its core business. The control regained over SIBUR in 2002 is not enough for efficient management, and Gazprom needs to increase its share to qualified majority. It should also be noted that in 2002 control was regained over the companies Zapsibgazprom, Purgas, Vostokgazprom, the South Russian Deposit and others. At the same time, non-specialised assets are being sold (the revenues in 2002 were RUR 7 billion and expenses of returning the core business assets cca. RUR 9 billion). Still, it is obvious that Gazprom's status of a federal natural monopoly prevents one from regarding these processes as a restructuring programme. More serious reforms in Gazprom must have been frozen at least for the next 18 months.

Secondly, the tightening of management and property control; this is typical both of the groups that have completed their expansionist programmes and of the groups that are continuing the corporate formation. In contrast to the relatively widespread Western practice of consolidating only the management, in Russia management consolidation usually follows property consolidation and is never considered sufficient (or only provisionally, at the phase of gaining control over property).

The creation of industrial sub-holdings of the MDM group has been practically completed. According to group officials, the concluding deal was the acquisition of 80 percent of AO Azot by the Mineral and Chemical Corporation Evrokhim. The first step of the restructuring, like in a number of other groups, is vertical tightening of the asset management structure.

In the first place, the holding's representation in the boards of the main companies has been strengthened. In the second place, management functions are being consolidated: instead of general directors appointed and dismissed by the boards of directors or general meetings of shareholders companies should be locally governed by executive directors appointed by the holding and acting on the basis of a power of attorney.

The next logical step would be to transfer each of the holdings (MCC Evrokhim, the Tube and Metallurgical Company, Baikal-Ugol) to a single share (creation of a single legal entity that would include all the companies under control as divisions), transform it into a public company and enter the stock market (IPO in 2003 or 2004). As a result of the restructuring, the MDM Group core may also subsequently decentralise its subholding management.

Tougher strategies of control over group companies have also been introduced in the Russian Aluminium (under parity control by Sibneft through Millhouse and by O. Deripaska's group). The issue of creating a subsidiary company OOO Rusal - Upravlayushaya Kompaniya, a single management body for the holding's eight companies, was considered in early 2002. It was proposed that the companies belonging to the group's main specialisation (the main assets) should remain legally independent and all auxiliary assets should be centralised.

According to that proposal, the former directors of the holding's companies would lose their general director status and would carry out their functions by proxy as executive managing directors working in a close-end company. But as soon as in the autumn of 2002 consolidation of the holding's 27 companies into six business areas and transfer to a single share gained greater priority (at least, according to official statements). While there is a number of legal RUSSIAN ECONOMY in trends and outlooks issues that need to be solved (obtaining the permission of the RF Ministry for Antimonopoly Policy to purchase more than 20 percent of shares, the procedure for transformation of openend companies into close-end companies for a number of companies, forced exchange / buyback of minority blocks in an acquisition / merger), OAO SUAL carried out a similar acquisition of the works under its control in January 2001.

Interestingly, the restructuring started in 2002 in the car-building plant GAZ controlled by Bazovy Element is going in the opposite direction from a single company to a classical holding and is in fact selling off structural units into subsidiaries. Such subsidiaries can be established on the basis of the Mold and Press Form Works, Gearset Works, Car Bridge Works, Foundry Works, Passenger Car-Building Plant and Lorry-Building Plant, etc. Besides cutting production costs, the plan is to establish joint ventures on the basis of the subsidiaries.

The industrial holdings going through the forming period and continuing asset expansion are introducing tight control over the newly purchased assets.

An expansion example in the food industry is Gosinkorholding, which is currently forming a horizontally iterated confectionery subholding on the basis of the blocks of shares of Rot Front, Krasny Oktyabr and nine regional candy factories. The plan for 2003 is to acquire five more candy factories and gain full control over Babayevski. Starting from general management of the holding has been transferred to the management company United Confectioneries (Obyedinyonnye Konditery) and sales and marketing have been centralised in the trading house Obyedinyonni Torgovy Dom that have been established for these particular purposes.

The continuing expansion of the Ural Mining and Metallurgical Company (UGMK) is related to the forming of a vertically integrated copper holding that comprises, through a system of off-shore assets, over 20 companies in the mining and non-ferrous metallurgy sectors.

At the same time UGMK acts as the Management Company. At present the task is to ensure 'legally clean' control over a number of companies that are already involved in the Group (it is necessary to obtain a permission of the Ministry for Antimonopoly Policy to acquire large blocks of shares of the Gaisky Ore Mining and Processing Enterprise, Uralelectromed and others). The next logical step in the process of legalising (increasing the transparency of) the system of the Group's assets would be to transfer the controlling blocks of the Group's member enterprises from off-shore companies to UGMK, then convert to a single share and float the shares of the consolidated public company on foreign stock markets. Still, experts believe that the Group's acquisition strategy has not been completed yet.

Further restructuring of Evrazholding implies transition of the holding's steel-casting enterprises (the Novosibirsk, Kuznetsk, West-Siberian and Nizhny Tagil Metallurgical Enterprises) to a single share by 2005; however, a precondition for such an operation is the potential problems relating to management of the enterprise (obtaining the powers of an executive body) should be regulated. In particular, it is planned that the holding should obtain the status of a management company in relation to the North-Siberian and Nizhny Tagil Metallurgical Plants (this requires at least 75 percent of votes in a shareholder meeting). It should be noted that liquidation of the general director's functions and transfer of executive powers to a special management company (and this implies qualified control) has the indisputable advantage of limiting the top management's ability to act in an opportunistic manner (the extreme case:

control take-over in agreement with the management). Thus, the current phase of reorganisation can be aimed only at defence; however, the strategies purpose, like in some other companies, may be to enter the stock market or to sell the company.

INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru It should be noted that the issues of tightening the control over the top management's activities have been considered in state-owned holdings, too: one may refer to the Government's Decree No. 1512-r of 29 October, 2002 "On Introducing Changes in the Charter of the Federal Unitary State Enterprise Rosspirtprom" as an example. According to this decree, the holding's right to borrow independently, put the election of boards of directors and executive bodies on the agenda of the companies whose shares have been transferred in the Enterprises charter capital and terminate the authorities of the subsidiaries is withdrawn. From now on all such operations may only be carried out with the permission of the Government that would make recommendations on the amount dividends to shareholder meetings of the said companies and decide on changes in their constituent documents and charter capitals. Appointments of the general directors of subsidiaries and of deputy general directors and the chief accountant of the holding itself will be co-ordinated with the Ministry for Agriculture of the Russian Federation. Previously Rosspirtprom's limitations related only to additional share issues and the conversion of shares into bonds. The main reason cited by the Government for such a step is the necessity to cut the number of deliberate bankruptcies in the alcohol production sector.

Moreover, several relatively new trends related, as we have mentioned above, to intergroup programmes of a number of the largest companies were typical of 2002. Besides the above-mentioned tightening of management control, the following trends are of interest.

Firstly, the restructuring and consolidation processes in 2002 were distinguished by the clarity of interim purposes, in particular, the task of entering the Russian and international stock markets. Such purposes have been cited by the industrial subholdings of the MDM Group, UGMK and Severstal; it is also highly probable that Evrazholding, Rusal and a number of machine-building enterprises will embark on such programmes. According to estimates, in the next one to two years, as a result of the concentration of capital in the machinebuilding sector continuing against the background of a growing appeal of machine-building company stocks, a number of the sector's largest holding structures and groups (Russian Machines, Power Machines, Severstal-Avto) will enter the stock market. Several large companies in the agroindustrial sector have also declared their intent to enter the stock market: the agroindustrial enterprise Cherkizovsky (the blocking stake worth cca. US$ 150 million will be placed on NYSE in 2003), agroindustrial farm Rusagrocapital (the blocking stake worth US$ 25 to 30 million will be sold in 2005) etc.

Obviously, the consolidation of property and management control is a condition that is indispensable but not sufficient. It is just as crucial to create the image of transparency for prospective investors. In this connection one may predict a growth in real demand for new corporate governance initiatives related to information disclosure and corporate financial accounts.

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