The necessity of correcting the respective time – terms to complete the privatization process of the federal property, as provided for in the “Forecast plan (Program) for privat izing the federal property for the year of 2004 and the main directions of the federal prop erty privatization up to the year of 2006 “, was determined by the problems mentioned above. According to the “Forecast plan (Program) for privatizing the federal property for the year of 2005 and for the period of up to the year of 2007”7, the following corrections are The project for the years of 2005 – 2007 was considered at the meeting of the RF Government on July 29, 2004, “The fore cast plan for the year of 2005” to be then officially approved by the Decision of the RF Government, dated August 26, 2004, No. 1124 p.
RUSSIAN ECONOMY in trends and outlooks provided for in the main directions of the respective privatization process of the federal property for the medium – term period (2005 – 2007):
• prolonging the perspectives of the federal property privatization through the year of 2007;
• completing the privatization process for the federally owned packages of the respec tive JSS shares comprising less than 25 % of the authorized capital, in the year of 2005;
• changing the structure of the federal property branch wise privatized;
• introducing such notion as a “perspective financial plan” in the planning concept of the federal property privatization.
The working assumption here also is that decision taking in accordance with the di rections of the state policies in the sphere of privatization currently under consideration, will make it quite possible, already in 2007, to set fully in motion the plan providing for the maximum liberalization of the economy from the state through privatizing the whole federal property which actually is not quite necessary for ensuring the respective functions of the state.
De facto failure of the plan to sell the remaining minority packages of shares en masse in the 2000s actually determined the need in searching for additional (to the current law on privatization, 2002) solutions – these possibly include modernization of the privati zation infrastructure, lifting off a number of limitations imposed on the privatization process of strategic enterprises, modification of procedures for conducting special auctions and the system of sales on the whole, empowering the FAFPA with the rights of control over the deals and the right to fire the managerial personnel of the respective enterprises, etc. A separate task consists in reducing the list of strategic enterprises (see below) as well as in revising of any other legislative limitations on privatization.Failures with the sales of the remaining packages of shares resulted also in certain reconsidering of the respective accents – e.g., growing attention to the FPUE reform. In terms of quantity (data as of October 2004), the number of the FPUEs retained, should comprise in the perspective about 1000, the number of the respective federal bodies – about 10 000, that is ½of the currently existing ones (about 5500 of them are to be privat ized or liquidated, about 4000 of them are to be passed over to the respective regions). In terms of quality, reanimated again are the ideas as to introducing the institute of private management for the state unitary enterprises which proved to be inefficient in the period from the 90s to the 2000s. Obviously much greater interest of the RF Ministry of Economic Development to such an institution can probably be connected with the failure (in 2004) to drastically cut down the number of the PUEs still remaining in the respective strategic lists.
Yet, this decision does seem quite disputable. Firstly, there is certain substitution of no tions (the PUE problem consists not so much in the efficiency level but rather in the falla ciousness of the very legal structure for the right to carry out economic activities. Sec ondly, certain difficulties arise when trying to solve problems connected with payments for the private management and for the attendant control over such. To practically organize the latter is not at all any easier than to control activities of the state functionaries.
A real novelty (as compared against the 2003 “Concept”) was the suggestion to start transforming the respective unitary enterprises in three main directions: open joint stock societies, public enterprises (provided they do perform state functions) and non commercial organizations. Rejection of the compulsory transforming of the said PUEs into JSSs with 100 per cent participation of the state (which takes, on average, from nine  months to two  years) and selling the PUEs unchanged, that is prior to any transforma Materials to the meeting of the RF Government on July 29, 2004.
Institutional and Macroeconomic Challenges tions (just as a property complex calculated per one buyer) can become one of the possi ble methods aimed at speeding up the privatization process. The RF Ministry of Economic Development is now planning to prepare and then to practically introduce the Law “On Non Commercial State Organizations” (i.e. establishing new legislative frame works for the re spective state bodies), further modification of the respective legislation on the estimating activities (to specify procedures for transferring the intellectual property rights), liquidation of such odious institution as the right for economic management of the federal PUEs. The newly raised question of establishing a qualitatively better Federal Property Register (in cluding the relevant information on the balances and efficiency indicators) graphically illus trates the true state of affairs in this particular sphere of activity.
The plan for incomes in the year of 2004, in spite of all the current problems and limi tations, was nevertheless significantly overfulfilled. However, there is not any contradiction here as to the cited above thesis on the inertia and spontaneity character of the state ac tivities in the sphere of privatization during the year of 2004. Firstly, similar to the preceding years, a triumphant report about “the fact exceeding the plan” was ensured by the so called one time large deals. Secondly, the amount of monies planned for the year of (about 35 to 40 bln roubles), was traditionally and intentionally understated in view of pos sible breakdown of the expected sales and/or creation of favorable conditions for the next “overfulfilment” of the plan for incomes.
If proceeded from the viewpoint of the budget incomes, then the positive trends of 2000 – 2003 as connected with greater share of incomes obtainable from using the state property (that is renewable returns), retained their positive values in 2004 as well. Accord ing to the respective data of FAFPA, the total returns to the federal budget from privatiza tion and practical use of the respective state property for the year of 2004 comprised bln roubles (preliminary estimations with no account taken of the profits from selling the shares of the Magnitogorsk Metallurgy Plant which are to be directed to the budget of 2005).
Winner of the auction in selling the last state package of the “LookOil” oil company (7.59%, the starting price was 1. 928 bln USD) had in all probability secured the a priory approval of the respective state authorities and, accordingly, was known well beforehand.
One of such, on September 29, 2004, became the “ConocoPhillips” company (USA) which paid the said 1. 988 bln US dollars necessary for bringing its share up to 10% of the au thorized capital. The latter, fully in accordance with the terms and conditions of the respec tive agreement, enables ConocoPhillips to obtain the rights of the “blocking shareholder” as well as one vote in the Board of Directors. Certain limitations were also set up – 4 year ban on selling shares and a limited (20%) participation in the company’s shareholding capital.
Another large deal in the year of 2004, traditionally put off for the end of the year, was the auction in one lot selling of 17.82% shares of the largest steel mill of Russia – the Mag nitogorsk Metallurgy Plant (MMP) which was, in fact, the last large asset of the state in this particular industry. As different from the deal with the shares of “LookOil”, there were sev eral competing groups there – contenders for the package, and the end result of this com petitive race remained quite unclear up to the very closing time of the said auction. Privati zation of this particular package was in such or other way under discussion since the year of 1997. During several more recent years, the said package was simultaneously present both in the “strategic” and the “privatization” lists while the most acute struggle between several large metallurgy groups eventually came down to the question of blocking such sales. Accordingly, in August of 2004, the said enterprise was excluded from the said stra tegic list and the struggle logically turned into another phase with the situation becoming RUSSIAN ECONOMY in trends and outlooks further complicated due to a very amorphous structure of the respective property and rele vant control.
According to some estimations, such acuteness of the competition was to a consid erable extent caused by the very fact that selling the package of the MMP shares was the first absolutely open tender in the history of the Russian privatization which had ever been carried out in the raw materials industry.9 Some “methods” should nevertheless be men tioned here which were used in the process of such contending struggle. In November 2004, the RF Ministry of Federal Property (RF MFP) demanded that the MMP pay the in termediary dividends for the nine (9) months for the package under privatization. This de cision is primarily to the advantage of the MMP management which can use these monies to finance the deal itself (either directly or for purposes of repaying the respective credit).
After the auction which the management did, no doubt, win, a decision was taken not to pay the said intermediary dividends (the formal grounds being absence of such clause in the Charter). Accordingly, two versions of the investment strategy for the year of were prepared by the management but the choice between them was to be made already after the auction. The optimistic version (in case the management wins) assumed invest ments of about 800 mln US dollars in development of the raw materials and certain coal projects. The pessimistic version (victory of “Mechel”) assumed directing of up to 70% of free monies to paying the dividends and, probably, other ways of taking MMP’s profits out.10(10) In December, a search was conducted in the offices of “Mechel” even though no official charges against the Group were brought. Almost simultaneously, the MMP man agement initiated a massive PR campaign, including also organization of visits of the RF President (the formal grounds being the World Championship in Judo) and of R. Juliani, ex mayor of New York (the formal grounds being the Road Show in connection with the is sue of the ADR). The necessary psychological pressure instruments can include unofficial information on readiness of the MMP management to pay the sum of up to 2.5 bln US dol lars for the said package. Obviously, the administrative and financial positions of the MMP management turned out to be really the strongest therefore participation of the “Mechel” Group in the auction was interpreted, inter alia, not so much as a desire to acquire the said package but rather as a wish to try to maximally undermine the MMP’s financial resources in other competing projects. According to the available data, the “Mechel” Group finally gave up and at the junction of the years of 2004 – 2005, sold its package to the structures which were affiliated with the MMP management.
The expected returns from the sale of the said package was to comprise something about 0.5 – 0.6 bln US dollars and the final scheme provided for selling the whole package as a single lot at an open auction on December 22, 2004, at the starting price of 790.mln US dollars (the net profit normative price of the package for the three years was set in the amount of 320 mln US dollars). Although the deal was completed already in the year of 2004, the incomes from it will be entered in the budget no later than the year of which, like in the case with a number of big deals of the past years, makes it possible to use “double” accounting for the privatization results for the current year.
But it was not only the triumphant victory of the said management with the MMP Di rector General in the head, that became the qualitative result of this auction. In February 2005, respective information appeared that V. Rashnikov, the virtual owner of the MMP as well as its beneficiary, even though having brought the control over almost 100% of the shares, is nevertheless planning to resign his post while reserving for himself a vote in the Aggravation of the pre auctionary competition // Expert. 2004. No 47. p. 8.
Molina M. Magnitka Will Leave No Money to the Competitors// Commersant, 2004, December Section 4.
Institutional and Macroeconomic Challenges Board of Directors and thus concentrating his efforts on the raw materials projects which still remain a weak link in the MMP chain.
This situation is indicative from the viewpoint of real prerequisites for respective divi sion of property and management with regard to the Russian experience in corporate management.
The expected returns to the federal budget from privatization must comprise in the year of 2005 not less than 42.7 bln roubles. Not relying on any financial illusions with re gard to sales of the overwhelming majority of the packages of shares, the government nevertheless expects to get the said amount primarily from selling shares of the “Sviazin vest” holding.