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At the same time, it would be wrong, from our point of view, to overestimate these prospects. On the one hand, just like in the past, the Russian stock market cannot carry out the redirection of investment flows. Although the RTS index has grown almost 35 percent in 2003, approaching its maximum pre-1998 values, market capitalisation does not exceed US$ 90 billion and ten companies account for 90 percent of turnover (and out of these, two companies Lukoil and RAO UES account for 45 percent). It is quite obvious that the overall prospects of realisation of the bank reform and of the possibilities to grant bank loans to small and medium companies have considerable impact on the Russian financial market. The forecast for international financial markets do not give cause for optimism, either, despite the rise of Russia's credit ratings and of the interest to Russian securities in 2002 on the side of for RUSSIAN ECONOMY in trends and outlooks eign institutional investors that operate with longer term investments and use corporate fundamental indices as a benchmark.

On the other hand, the fact that IPOs are few and far between does not one allow to join in the celebrations of many analysts (especially their interpretation of 2003 as 'the IPO year' that will replace 2002 as 'the year of corporate RUR bonds'). It is significant that the relatively successful placements relate so far to the companies that have been private from their inception and have well-known brands, and their buyers are financial institutes, not strategic investors. It is also important that the IPO procedure is only very briefly described in the Russian legislation, so each project requires by far more consultancy and legal expenses than it would be the case if there existed standard detailed regulations. Usually, potential benefits of an IPO (such as low cost of the obtained funds, as compared with other funding methods, growth of capitalisation, liquidity etc.) exceed total expenses (on information disclosure, fees of advisors, legal experts, underwriters etc.) only at a relatively mature stage of a company's development. E.g., empirical tests carried out on the basis of the life cycle theory demonstrate that during the past 20 years companies performed the IPO at an average age of seven (if one does not count in the dotcom boom of the late 1990-s).

The experience of foreign IPOs is rather modest: Vimpelcom (1996, US$ 100 million), Mobile TeleSystems (2000, US$ 300 million) and Wimm-Bill-Dann (2002, US$ 200 million) at floated their stocks at NYSE. Besides the above-mentioned enterprises, the following companies plan to float their shares in the USA in the next years: Kalina concern (cca. 25 percent of shares, upon publication of an IAS report), MefaFon (cca. 20 percent of shares) and OAO Baltika Brewery (upon integration of the holding's subsidiaries into a single structure).

OAO Rosbusinessconsulting Information Systems was the first Russian entity to carry out an IPO in Russia (at MICEX and RTS, 16 percent of shares). In January 2003, the drugstore network Aptechnaya Set 36.6 floated 20 percent of its shares. In both cases the placement price was lower than the initial estimates by the underwriters (still, this is not typical of the Russian market), and no forecast are made in respect of active secondary circulation.

Corporate Ruble bonds remain so far the only instrument at least, due to the lack of an adequate alternative. Nevertheless, according to certain estimates, the interest to shares as a financial instrument is going to grow in the course of the next two years19. This means, inter alia, that many issuers can (as an easier alternative to an IPO) convert their privileged shares into ordinary shares. And, the other way round, the debt instruments will be of interest to the relatively limited circle of investors (and these will not compete with the investors interested in placements in Russian shares). As regards the IPO, the future placement will be most probably divided into two segments: the external segment for large companies and the Russian segment for small and medium companies (i.e., in fact, the Small Caps market will be created in Russia). For instance, development of the latter segment is fundamentally important for the transition to classifying Russian companies by capitalisation and not by liquidity.

Secondly, the trend towards legal 'closing' of a number of companies has been expressed more clearly.

K. Lynch 2002: the corporate bond year. 2003: the IPO year/ Securities Market, 2002, Issue # 5, pages 60 62;

Interview with P. Helloran, Chairman of the Board of Directors of IC Aton./ Securities Market, 2002, Issue # 9, pages 48-50;

V. Petrov, P. Suprunov, O. Petrova, Is Russia expecting an IPO boom / Securities Market, 2002, Issue # 20, pages 20 - 26.

INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru In the 1990-s oil holdings were transforming their subsidiaries into close-end companies by exchanging their shares for the shares of the holding. In 2000 - 2001 the most consolidated of the companies started to consider the issues of transforming into a non-public single consolidated company. In 2002 the Russian Aluminium considered transforming open-end joint-stock companies comprising the holding into close-end joint-stock companies. IN November 2002 the issue of transforming open-end joint-stock companies comprising the holding into close-end joint-stock companies was, for the first time, regarded in practice:

Uralkali included it on the agenda (Uralkali: the largest potash fertiliser producer, over percent of shares belong to the controlling shareholder, 10,000 shareholders, IAS accounting since 1996, listed at RTS since 1999). Taking into account the company's characteristics, it is not quite clear what the reason for the possible transformation is: 1) the management was trying to neutralise minority shareholders and stop the attempts at collecting the blocking stake (like in the Russian Aluminium, in which the presence of a lot of open-end joint-stock companies in the group is regarded as a significant problem); 2) fixing the established structure of ownership that, following the reorganisation, would be difficult to question in court (including the privatisation deals); 3) speculating for the fall of the open-end joint-stock companies' shares (without real reorganisation purposes) so as to consolidate a block exceeding the qualified majority with lesser expenses; 4) according to the version proposed by the company: the necessity to transform into close-end joint-stock companies corresponds the companies business purposes since de facto, from the viewpoint of ownership, it is a close-end company not interested in outside investments.

This issue has a wider aspect, too. For many medium-sized Russian companies that have been forced to become open-end in the course of the mass privatisation and are highly concentrated from the point of view of the shareholder capital structure there is a number of advantages. Still, such transformation is possible on a large scale only in case there would be created the necessary conditions or, to be more precise, obvious incentives for transforming from an open-end joint-stock company into a close-end joint-stock company20.

One of self-contradictions in the Russian law is that operations of public companies are not sufficiently regulated while the companies with a close-end organisational and legal forms (non-public) are burdened with excessive regulation. E.g., from the viewpoint of the Ministry for Economic Development of Russia, it would be expedient to introduce such novelties for close-end joint-stock companies as eliminating the requirement on the constituent agreement (which often is a duplicate of the charter but is necessary in the course of different voting procedures), introducing the possibility of unlimited member walkout (in accordance with the charter), registering members in the state register etc.

Thirdly, in 2001 - 2002 a number of companies developed option programmes, thus undertaking another innovation. Granting to the company's management options for its shares has been traditionally regarded an efficient tool of boosting capitalisation and the management's interest in the company's development strategy (although the Enron case introduced a pessimistic note into the generally accepted idea and put the issue of tightening the corresponding regulation on the agenda).

In other words, the policy of 'squeezing' companies into other forms by means of a system of incentives and legal limitations seem reasonable. A similar approach (already legally fixed in 2002) has been envisaged for unitary state enterprises.

RUSSIAN ECONOMY in trends and outlooks In Russia certain rules were introduced on 9 January, 1997, when the regulation of the Federal Securities Market Committee ("On an Options Certificate and Its Application and on Approving the Standards for Issuing Options Certificates and their Prospectuses"). The first issue of options certificates, for the shares of OAO Tatneft, was registered in May, 2001. In August 2001 RAO GAZ prom approved a programme of granting options for the company's shares. The board of directors of YUKOS approved in April, 2001, an incentive programme for the remuneration of personnel that envisaged using options for shares and granting shares free of charge. The total amount of shares that may be transferred to the staff in the course of the next three years should not exceed 85 million, or 3.8 percent of the total number of the shares issued by the company. In doing so, the company does not contemplate any additional issues to realise the programme. In October, 2002, a long-term programme of "remunerating the best employees with the company's shares" (by means of an agreement of gift) was announced.

A programme of options for the personnel (the management of subsidiaries and dependent entities) of power industry sector companies was envisaged as part of the overall reforms of RAO UES. The scheme approved by the board of directors in June of 2002 envisages that the management of parent companies of RAO UES would be granted an option right to one percent of the shares of RAO UES and the management of AO-energos would be offered from 0.5 to five percent of the shares of AO-energos. At the same time, general problems of restructuring the joint-stock company, including the relationship between the management and minority shareholders, complicates such schemes considerably.

As far as the companies that were private from their inception are concerned, similar programmes are being developed at Vimpelcom (a system of participation in profits for the staff and a system of options for top management). Undoubtedly, it would be possible to assess the efficiency of such schemes only three to five years after they commenced. Still, just like in the case with the IPO, the existing legal norms require considerable detailed elaboration and revision (despite the amendments to the Law "On the Securities Market" that came into force in January 2003). Likewise, it is possible to apply such schemes at a certain stage in a company's development. It is obvious that, in addition to the considerations of capitalisation, option schemes may be applied in Russia as part of consolidation of corporate control and legalisation of the management's income.

Fourthly, the new development trend typical of established Russian holdings that have exhausted the internal resources for expansion is that they are entering the international market. It is not a purpose of this survey to discuss the exact definitions or concepts of the development of multinational corporations21, however, certain fundamental differences are important, above all the motives behind and the type of internationalisation.

See, e.g., works by S. Heimer, C. P. Kindleberger (the monopolistic advantage model), R. Vernon (the product life cycle model), J. Galbright (technological model), J. Casson, J. McManus (internationalisation concept), S.P. Muggy (appropriation theory), J. Dunning (eclectic model), the materials of the UN Centre Multinational Corporation etc. It should also be noted that the applied definitions are relatively conventional: companies that are similar in their features may be termed 'international concerns' in Germany, 'multinational corporations' in the countries of the Anglo-Saxon tradition etc. And similarly, there is no standard criterion for the international nature of a company (presence of at least one branch or a certain portion of business operations (assets) abroad, a certain amount of export-import operations, foreign shareholders, capitalisation, the share of free float on international markets etc.).

INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru In addition to the traditional motives (first of all, the advantages of vertical or horizontal integration that vary subject to the country and sector specifics), the following motives typical of the Russian holding can be pointed out at the present stage:

increase in the 'physical' power and search for an integration model that would allow to reach a level of international competitiveness that is commensurate with the foreign analogues;

restoration and development of the supply and sales structure that was established in the times of the USSR and Council for Mutual Economic Assistance and has retained its economic importance for Russian companies;

business diversification (within the main specialisation of the Group) so as to protect oneself against changes in the global commodities markets;

the wish to support the company's reputation and ensure the most favourable conditions from the viewpoint of attracting foreign investments (in case powerful outside strategic partners become group members);

political insurance against internal Russian risks.

Transfer pricing - this classical know-how of international companies - obviously deserves special attention. According to P. Lindert's definition, 'transfer pricing is an artistic form of evading the corporate income tax that may be applied by any accountants operating with assets or products that cross national borders'22. Considering the discussion of transfer pricing going on in a number of Russian federal bodies, the forming of a foreign network of subsidiaries and branches can become a preventive measure against possible tightening of the approach.

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