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The development and implementation of necessary standards for valuation activities including the standards for monitoring and supervision functions of the self regulating organisations developed by the National Council of valuation practitioners The development and improvement of the mechanism for discharging the monitoring and supervision functions by self-regulating organizations The implementation of an effective system of ensuring accountability of the self regulating organizations and individual assessors for valuation results The development of methods for large scale real estate valuation Creating the conditions ensuring the high professional qualifications of valuation practitioners The implementation of an effective mechanism for contesting valuation results, including court claims 5. Of equal importance to redressing the pro-creditor bias in the development of bankruptcy legislation is the approval, subject to certain criticisms being addressed, of the draft legislation proposed by the Ministry for Economic Development and aimed at significantly expanding the scope of application of debtor financial rehabilitation procedures in the Russian market. However, provisions regarding the possibility of the financial rehabilitation proSection Institutional Problems cedure being initiated by the debtor bypassing the supervision stage (up to seven months) and lasting up to five years regardless of creditor consent, as well as the approval by the arbitration court of the debtor-appointed arbitration manager, must be amended.

Despite the need to remove the pro-creditor bias in developing bankruptcy legislation, the proposed measure is deemed unacceptable due to the absence of a mechanism for protecting creditor rights that leaves ample room for the abuse of rights and for responsibility avoidance by debtors.

It appears that the interests of creditors and debtors can be balanced by (a) instituting a mechanism enabling administrative manager candidacies proposed by creditors, (b) instituting mandatory annual debt repayments throughout the duration of the financial rehabilitation stage, the amount of which repayments shall be stipulated in the financial rehabilitation plan and shall be no less than that stipulated by law.

It is also necessary to legally stipulate the possibility for creditors will to contest asset valuations for debtors who applied for financial rehabilitation, since the inadequacy of property valuation and the ease of manipulating value in the Russian context may result in the creditors later being deprived of the possibility of recovering outstanding debts.

6. As a possible measure to counterbalance the excessive activity of banks with respect to debtor assets, limitations may be imposed in a timely manner upon banks and companies that are the recipients of state financial support with regards to initiating the quick sale of debtor assets in the bankruptcy process so long as the debtor retains the prospect of restoring solvency. It is also possible to impose limitations on the initiation of debtor bankruptcy procedures whereby threshold indebtedness amounts would be linked to the amounts of state financial support received.

The development of criteria for assessing debtor prospects is a complex but necessary task in this context. As regards the Russian bankruptcy model per se, its pro-creditor bias is evidenced less by the focus on accumulating funds for their further redistribution among creditors than by its ensuring significant creditor influence upon the arbitration manager and his decisions. Given the practices of inadequate valuation of debtor assets and the closed sales of such assets, this is the only available means of ensuring some degree of protecting creditor interests.

7. The demand for special bankruptcy procedures for groups of entities and the increase in the number bankruptcy filings submitted by debtors, as well as large scale payment defaults, point to the need to discuss possible changes to insolvency criteria that would supplement the current criterion of outstanding indebtedness amounting to more than RUR 100,000 for over three months by the criterion of outstanding indebtedness in excess of company assets.

Such a proposal is based on the notion that working capital shortages that arise within the day-to-day business operations, especially given the diminished access to financing, shrinking production and sales volumes of late, may not reflect the true financial condition of the business. Furthermore, many industrial assets are significantly undervalued and demand for such assets is relatively low, which is likely to change in the medium term but does not allow for the timely and effective settlement of indebtedness at present. The issue of managing working capital shortages may be addressed by way of out-of-court debt settlement or financial rehabilitation but does not necessarily constitute insolvency as such. Furthermore, the potential for abuse of bankruptcy procedures by a group of related debtors is sufficiently high to merit special consideration.

RUSSIAN ECONOMY IN trends and outlooks 8. It is also necessary to change the stipulations regarding the right to file bankruptcy claims at arbitration courts: whereas previously the right to make a bankruptcy claim at the arbitration court came into effect 30 days after the date of remittance of the executive order to the court bailiff service, at present such a right comes into effect from the date of the legally binding court decision concerning a monetary claim upon the debtor. Thus it becomes possible to start insolvency procedures prior to ascertaining the impossibility of carrying out the court decision and prior to actual insolvency. This allows for the application of bankruptcy procedures to companies that are neither bankrupt nor even in a state approaching bankruptcy.

Such a situation is once again advantageous for creditors who at present compete among themselves. From a legal point of view such stipulation of a creditors right to file a bankruptcy claim prior to the expiration of the deadline for voluntary execution of a court order by the debtor and prior to the start and end of executive proceedings is illegal as it infringes upon the debtors rights and the subjects the debtor to bankruptcy proceedings that are the last resort measure of protecting creditor rights, without sufficient legal grounds and unjustifiably bypassing the customary process is of protecting creditor rights.

Doubts also arise regarding the stipulation of the right of the competent authorities, primarily a tax authorities, to file a bankruptcy claim. The legal grounds for the stipulation of such rights must undergo a fundamental test of substance, and the procedure must be changed if sufficient grounds exist.

5.4. M&A Market Dynamics (20032009) The period between 2003 and the first half of 2008 saw a considerable and stable increase in activity on the mergers and acquisitions market, with both the number of deals and their amounts growing. The 2008 financial crisis with its stock market collapse, liquidity squeeze, a drop in industrial production, and a sharp fall in some commodity prices resulted in a decrease in the volume of transactions on the global M&A market. The first estimates of this market's prospects for 2009-2010 were rather contradictory. Overall, the size of the market was expected to further shrink in 2009 (to 60% of the 2008 level), however forecasts for trends to dominate the market were varied: from a further squeeze of the market due to problems with working capital and access to external funding to a boost in activity starting from mid-2009 through the acquisition of troubled assets and companies.

This section contains an analysis of M&A transactions in Russia between April 2003 and June 2009. Information on the transactions was collected from open sources1. Many participants in recorded transactions prefer not to disclose detailed information on the sale or purchase of assets, that is why some of the data used in this analysis derive from analysts' and market players' estimates.

For the purposes of analyzing the available data, a classification of companies' characteristics has been introduced. To systematize company owners involved in the M&A process, a typology has been adopted whereby the owner can be either an insider, an outsider or a government structure. Insiders are owners who work at the company in question. Outsiders are individuals who are not employees of the company. For the purposes of this study, this typology has been slightly expanded for the insider group to further break down into managers, rank-and-file employees and managers and employees together, while the outsider group breaks down into financial, non-financial and financial and non-financial outsiders together.

www.mergers.ru; www.ma-journal.ru; www.finam.ru; lenta.ru and several others.

Section Institutional Problems Instances when the owner is a foreign company or a group of owners from different countries have been grouped into a separate category.

Companies' forms of incorporation were classed according to the relevant Russian legislation. In terms of types of economic activity, companies have been classed according to the Russian Classification of Types of Economic Activity (OKVED)1.

Between Q2 2003 and Q4 2007 the overall annual volume of transactions, both in terms of their number and value, was steadily on the rise. However, in 2008 there developed a downward trend. In 2004 the number of transactions grew by 32% year on year; in 2005 the figure was 14%; in 2006, 26%; in 2007, 41%, while in 2008, minus 21%. In terms of the amount of transactions, 2004 saw an increase of 18% year on year; 2005, 42%; 2006, 30%. In 2007 there came a sharp rise both in the number of transactions (43%) and in their amount (188% as compared with 2006). Whereas 2008 brought a fall in the number of transactions (21%) and in their overall amount (36%) as compared with the previous year (Fig. 1). In Q1 2008 the value of transactions grew by 51% against the same period in 2007. In the second quarter transaction amounts fell by 35% compared with the same period in 2007; in the third quarter, by 75%; and in the fourth quarter, by 90%. In Q1-Q2 2009, transaction amounts dropped by 66 and 55% respectively, against the same period of 2008.

No of USD mln transactions 140 120 100 80 60 40 20 0 Q I 2008 Q II 2008 Q III 2008 Q IV 2008 Q I 2009 Q II Amount of transactions Number of transact Fig. 1. Number of transactions on the M&A market and their total annual amount between Q1 2008 and Q2 2009.

Despite the fact that the average transaction amount for 2003 was calculated on the basis of data for just April December, the 2004 figure was 40% higher. In 2005 and 2006 the rate of growth in the average transaction amount somewhat slowed down, to 17% and 4% against the previous year respectively. The growth was the highest in 2007, at 130% compared with Russian Federal Agency for Technical Regulation and Metrology Resolution No 454-st of 6 November "On adopting and implementing OKVED".

RUSSIAN ECONOMY IN trends and outlooks the previous year. In 2008, despite a drop in the number of transactions, their average amount increased by 30% against the previous year. (Fig. 2).

USD mln Q I 2008 Q II 2008 Q III 2008 Q IV 2008 Q I 2009 Q II Fig. 2. Average transaction amount per quarter, from Q1 2008 to Q2 2009.

The increase in transaction amounts in 2007 can be attributed both to a growing number of transactions on which amounts were disclosed and to the number of transactions in the oil and gas sector. This situation can also be attributed to objective positive changes at microeconomic level. Spurred by the economic boom in the country, a considerable rise in direct investment year-on-year, corporate management in Russia began to pay more attention to their reputation, made efforts to increase their asset value.

Between Q2 2003 and Q2 2009, some 119 transactions worth over USD 500 mln were conducted, making up about 6.2% of all transactions for the period (Fig. 3).

Fig. 3. Number of transactions worth over US$ 500 mln.

Q I Q I Q II Q I Q II Q II Q II Q I Q II Q I Q I Q III Q III Q III Q III Q II Q II Q IV Q IV Q IV Q III Q III Q IV Q IV Q IV Section Institutional Problems In the period between Q2 2003 and Q2 2009, in 81% of transactions on the Russian M&A market the buyers were companies registered in the Russian Federation; in 10% of transactions the buyers were companies registered in the European Union. Companies registered in former Soviet Union republics were buyers in 1% of M&A transactions in the given period, with the rest of transactions effected by buyers from other foreign countries.

The biggest number of M&A transactions were carried out between Russian companies:

69% of the total number of transactions. Russian companies' acquisitions dominate domestic transactions, accounting for 83% of their total number. Russian companies' acquisitions in the former Soviet Union make up 6% of the total number of Russian transactions; in the EU, 5% and in other foreign countries, 6% (Table 1, Fig. 4).

Table Transactions statistics between Russian and foreign companies between Q2 2003 and Q2 2009* M&A target registration Statistics of transactions between Russian Amount Other foreign and foreign companies Russia EU FSU countries Russia 1,292 76 91 66 1,EU countries 164 12 8 13 Buyer's place of registration Former Soviet Union republics 20 0 4 0 Other foreign countries 93 12 4 33 Amount 1,569 100 107 112 1,*The total number of transactions may differ from the final statistics for the relevant period due to the lack of data on individual companies.

Fig. 4. M&A transaction amounts breakdown between Russia, FSU, EU and other foreign countries RUSSIAN ECONOMY IN trends and outlooks Fig. 4 indicates that the given period was marked by a trend towards a growing number of buyers from EU countries. Restricted access to information on real company owners that operate under other country jurisdictions makes it difficult to say for sure whether they belong to Russian entities.

In the given period, an average of four transactions per quarter involved targets in former Soviet Union countries. Investors are attracted by reasonable real estate prices and the substantial number of yet unoccupied business niches. Entering FSU markets is often easier than those in EU countries.

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