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This is most readily illustrated by the following data of the RF Accounting Chamber : 89% (of those disclosed by the RF Accounting Chamber) of violations during privatization were caused by government authorities, whereas private businesses were responsible for only 11%.

An interview with S. Stepashin, Chairman of the RF Accounting Chamber // Rossyiskaya Gazeta. December 20, 2004.

Section 4.

Institutional and Macroeconomic Challenges In fact, these problem issues also represent comprehensive recommendations of the RF Accounting Chamber for the future, which are undisputable with few exceptions.

For example, the thesis on further thorough examination of privatization practice and restoration of violated ownership rights of the government at law on the basis of obtained and proved evidence can not be rejected. It is quite another matter that such facts as illicit privatization, undervaluation of property during privatization, inobservance of investment terms and conditions, etc. can be detected, as the need arises, in any privatization transaction for any Russian enterprise. Most likely Article 301 of the RF Civil Code (legiti mate owners right to reclaim its property from illicit possession by other entity) is referred to here to resolve the problem of limitation period related to privatization transactions.

Eventually, the need for open political moratorium in revision of the results of privati zation has been manifesting itself. Such moratorium must be applied to all privatization transactions, except for those involving flat violation of the laws applicable at that moment (also as an element of corruption) as well as material elements of criminal offence. The list of the latter should be well defined in a special regulation. Such a decision could seriously restrict any attempts to of pseudo legitimate redistribution of assets on a large scale basis subject to objective law enforcement practice.

In addition, effectiveness of practical recommendation on redressing the situation which is most advocated by the RF Accounting Chamber, is questionable. It suggests to utilize an independent, i.e. external public financial control body. It is not so much as strengthened independent control as the range of possible interpretations of such strengthening that arises concern. The most revealing example of it as follows. At a meet ing with British top managers of N BP in 2004, the Chairman of the RF Accounting Chamber S. Stepashin unambiguously classified large businesses into those investing in the Russian economy and observing tax liabilities and others. As applied to N BP, this could mean discontent with both the merging transaction of 2003 and profit centers avail able outside Russia (the merging resulted in establishing TNK BP Ltd. which was incorpo rated in British Virgin Isles, well known offshore zone). At the same meeting, the Chairman of the RF Accounting Chamber provided assessment of the results of privatization over a decade52. A statement of corporate structure optimization merger of , SIDANKO and ONAKO was first response of N BP. However, restructuring plan was announced in 2005 (two stage consolidation of 17 principal Russian assets of JSC N BP HOLDING located in Tyumen).

Eventually, the assessment of the results of privatization in Russia produces no negative response and is objective within certain context and typical not only of Russia but also a variety of other countries with economies under transition53. As noted above, the re port provides no discoveries whatsoever with regard to Russian privatization.

The question at issue is complex: who is the formal author of the report (private or public entity), who is the informal customer (unless the report was a politically correct ini tiative by the RF Accounting Chamber itself), which socio political environment is it repli cated in and, consequently, who is going to need such conclusions for practical applica tion. According to practice of the mid 2000, there is demand for negative assessment of the results of privatization. It is our opinion, however, that the companies mentioned in the report of the RF Accounting Chamber will not necessarily be selected as most likely candi dates for deprivatization.

Refer to : Russkiy Fokus. 2004. No. 3., P. 9.

An illustrative example is notorious scandals related to funneling assets from Czech privatized enterprises (the scheme is called the tunneling effect), though Czechia used to be considered a benchmark in terms of large scale privatization.

RUSSIAN ECONOMY in trends and outlooks From all appearances, the primary political task of the report (perhaps, the authors of the report had no such desire whatsoever) is to a priori increase uncertainty for all sub jects, whereas certain sanctions will be imposed on selected ones by authorities other than auditors of the RF Accounting Chamber. It is obvious that under the circumstances large businesses will be treated strictly on the basis of the three criteria as follows: whether a company is a government supporter or cosmopolitan, whether it is politically loyal and whether it can be selected to become a new tycoon. At the same time, the transaction with the shares of YUGANSKNEFTEGAZ revealed quite effective and legal options of seiz ing property at any level by using non judicial methods and bypassing regulations on com panies, bankruptcy and nationalization.

* * * Hence one can assume that the issue of protection of ownership rights has evolved to a qualitatively new level, which is a long lasting problem for modern Russia. Referring to the analysis provided in Annex to the present section, the issue of illicit sale of shares dur ing the YUGANSKNEFTEGAZ transaction is not so much a case as the antithetic situation when the shares were most probably sold on a formally legitimate basis. And, paradoxi cally as it is, this is the key ground for basic risks in terms of protection of business related ownership rights in Russia.

First, the YUKOS case, in particular the sale of its primary oil production asset YUGANSKNEFTEGAZ, has demonstrated that the applicable Russian regulations provide a formally legitimate basis for taking over the control of any company. Second, taking a le gitimate control over YUGANSKNEFTEGAZ by a public company is a revealing example of assets reassignment by bypassing bankruptcy procedure and avoiding corporate wars. All the aforesaid means that the present Russian legislation and the law enforcement system provide for no protection of private ownership by the government to the full extent. Finally, the sale of YUGANSKNEFTEGAZ and, as a consequence, collapse of a major Russian company YUKOS may become a threshold of a new stage of reassignment of assets in Russia.

Third, the aforementioned latest innovations of the Russian law proposed in 2005 are quite illustrative in this context. Positive effect from restrictions imposed on tax audits of the RF Federal Tax Service (the only innovation that is favorable for the business) will be compensated multiply by new measures tightening business operations and enabling the government to subjectively interfere in private sectors affairs. The liberal government offi cials seem to be well aware of that as well. Tax regulations (above all tax amnesty) would not be eased and privatization transactions would be subject to revision, acknowledged G.

Gref, Head of the RF Ministry of Economic Development and Trade, at a meeting of the So viet of the Federation in February 2005. Rights of the business community and the gov ernment are distributed in prejudice of the former, whereas liberal rhetoric of several gov ernment officials is accompanied by a rigorous administration which is incompatible with the principle of free market economy. In doing so, intervention by the government has an adverse effect rather than positive one. The government intends to keep asset holders in fear instead of fostering enlargement of output 54, said V. Reznik, Chairman of the Com mittee for Credit Organizations and Financial Markets of the RF State Duma.

The period between the beginning of the 90 and the 2000 was distinguished by a relatively developed economy legislation, while the law enforcement system was in critical state. The situation seemed to be changed in the mid 2000: though the diseases of the Reznik V. A Threat of Administrative Assaults Impending Over All Business Entities // Kommersant. February 2, 2005.

Section 4.

Institutional and Macroeconomic Challenges Russian law enforcement system remained uncured55, there was a certain advance in the economy legislation (and its interpretation) which, on the one hand, enhanced substan tially uncertainty of the effects of economic decisions related to the business community in terms of retaliatory measures by the government, and, on the other hand, made more rig orous relationships between the government and private businesses. The problems re lated to the law enforcement system in Russia, as being reinforced by the move towards reestablishment of rigorous legislative regulations, are notably enlarging the range of risks in terms of ownership rights. Consequently, the only way to avoid a dead end and provide a distinct picture of the governments intentions is to revise the legislation of the Russian Federation in order to remove ambiguous interpretations in terms of rights of private own ership, refrain from reestablishing the punitive regulations removed as early as the post communist period, and refrain from replacing civilized law enforcement actions with forc ing tactics.

Annex Selling JSC YUGANSKNEFTEGAZ: legislative aspects As is well known, in May 2004, the RF Federal Tax Service won a legal action against NK YUKOS for recovery of RUR99,4 billion ($3,4 billion), which according to the RF Federal Tax Service were illegally received by using tax evasion schemes in 2000. In July, the RF Federal Tax Service made tax claims against YUKOS for the period of 2001 to the amount of RUR98 billion (of which tax arrears accounted for RUR50,8 billion, penalties RUR20,billion, fines RUR27,2 billion). By the end of December 2004, tax claims against YUKOS and its subsidiaries exceeded $23 billion, of which $8,6 billion was due by YUGANSKNEFTEGAZ. Later on, the legal office service levied a distrainment upon 76.79% of YUGANSKNEFTEGAZs shares held by YUKOS with a view to sell them as discharge of tax arrears. The transaction was prepared according to the timing follows56 :

On October 12, 2004, the RF Ministry of Justice made a decision on sale of NK YUKOS in order to discharge debts of its primary subsidiary YUGANSKNEFTEGAZ. The ini tial price was $10,4 billion which figured as minimum on the basis of the assessment per formed by Dresdner Kleinwort Wasserstein bank.

On October 17, the RF Ministry of Justice forwarded to the Russian Federal Property Fund an order of sale of YUGANSKNEFTEGAZs shares and a draft agreement specifying terms and conditions of the sale.

On November 19, the Russian Federal Property Fund announced an auction of sale of the arrested YUGANSKNEFTEGAZs shares accounting for 76.79% of the authorized capital, as based on the decision of legal officers. The auction was set on December 19.

On November 30, S. Bogdanchikov, Director of GAZPROMNEFT, announced that his company would take part at the auction.

On December 5, the International Energy Agency (IEA) announced that purchase of YUGANSKNEFTEGAZ by GAZPROM would cause jeopardize the energy security of Europe.

Typical assessments of the judicial system (except for the opinions of official government representatives of the judicial power in Russia) are basically varying from inefficient and corrupted (in regard to the entire system) to judicial service market and close to catastrophe. The same was stated by senior public officials representing various government agen cies in Russia. In particular, the system related corruption was mentioned by V. Zorkin, Chairman of the RF Constitutional Court (2004), while catastrophic and threatening situation in the judicial system was announced D. Kozak, a representative of RF President in the South Federal District (2005), who used to supervise the judicial system in the pervious periods.

These materials were obtained from Kommersant Publishing House (www.kommersant.ru, December 2004 February 2005) and Russian information agencies in the period between 2004 and 2005.

RUSSIAN ECONOMY in trends and outlooks On December 7, Reuters announced that a group of six western banks headed by Deutsche Bank had prepared a syndicated loan of up to $10 billion to JSC GAZPROM to take part in the auction.

On December 7, the RF President issued an order excluding JSC NK ROSNEFT from the list of strategic enterprises and joint stock companies and including JSC ROS NEFTEGAZ into the list, as well as decreed to adopt the proposal of the RF Government on making a contribution f 100% shares of JSC NK ROSNEFT held by the government to the authorized capital of JSC ROSNEFTEGAZ.

On December 8, the Board of Directors GAZPROM approved participation of GAZ PROMNEFT at the auction.

On December 10, the Federal Antimonopoly Service reported receipt of three appli cations for taking control over YUGANSKNEFTEGAZ: from GAZPROMNEFT, LLC Pervaya Venchurnaya Kompaniya and CJSC INTERCOM.

On December 13, MENATEP Group announced that it would initiate legal proceed ings not only against purchasers of YUGANSKNEFTEGAZs shares but also those who would extend a loan to the winner at the auction.

On December 15, YUKOS filed an application to the Houston Court for Bankruptcies (USA) with the request to suspend all transactions with assets of the company and cancel the auction.

On December 16, the group of banks rejected to sigh a loan agreement with GAZ PROMNEFT until the decision of the Houston Court for Bankruptcies was made.

On December 16, LLC BAIKALFINACEGROUP submitted its application for participa tion at the auction.

On December 17, GAZPROMNEFT submitted its application for participation at the auction. At the same day the Houston Court for Bankruptcies made a legal decision to prohibit all transactions with YUKOSs assets, including the UGANSKNEFTEGAZ auction.

On December 18, the group of banks made a final decision to refuse to extend the syndicated loan to GAZPROM. 100% participation of LLC GAZPROMNEFT was sold to un known entities not affiliated with GAZPROM OJSC.

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