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As a reminder, in 2008, following the decisions of the President and the RF Government, Federal Property Management Agency established 26 integrated companies, OJSC Oboronservice and GK RosTechnologies among them; these two companies integrated 440 unitary enterprises and 43 joint-stock companies. Since the Russian Government issued Resolutions on their privatization in November 2008, and these companies were included in the respective program in 4Q 2008, the procedure for their integration was to be completed in 2009.

To implement the 2008 resolutions, the first stage of the establishment of an integrated company OJSC Headquarters for Reproduction of Farm Livestock was completed on the basis of the Center for Artificial Insemination of Farm Livestock; this company integrated 19 farms D. Varaskin, Banks displeased. Vedomosti, June 24, 2009, S. B. 02.

Development Bank extended the loans for one year. : RBK daily, 9 October 2009 ., No 185 (748). p. 2.

RUSSIAN ECONOMY IN trends and outlooks located mainly in the Povolzhie (the river Volga), the Urals and in Siberia (Bashkiria, Mordovia, Idmurtia, Ekaterinburg, Tyumen, Altai, Kemerovo, Novosibirsk, Krasnoyarsk and Krasnodar).

In the previous year under the government property policy, OJSC Agency for Regulation of the Product Market was converted into United Grain Company; its charter capital received the shares of 31 enterprises of cereal products (milling plants, grain elevators, etc.) including 17 control stakes in the form of placement of additional shares.

Likewise the charter capital of the earlier created integrated company called Concern of Radio Engineering Vega will be increased by adding federal stocks of 14 joint-stock companies including 100% minus 1 share of 7 joint-stock companies established as a result of conversion of the earlier FGUPs.

The establishment of Rosgeology Holding is under consideration which charter capital will be formed as a result of establishment of joint-stock companies from FGUPs in exploration and by including the stocks of operating servicing JSC (49 companies altogether)1.

In 2009 inconsistency of the government policy towards state-owned corporations became obvious, the establishment of state-owned corporations has become a new direction in the federal property and structural policies during the last two years.

Early 2009 the government began discussing extensively new plans of creation of stateowned companies (GK) and expansion of businesses of the state-owned companies in operation. Thus the Central Bank had to transfer the funds of National Wealth Fund and the Reserve Fund to a new GK Russian Financial Agency while VEB pension deposits and also the internal and external debts of the country2. Consolidation of communications assets of VEB and integration of 11 air lines in Rosavia under Rosoboronexport was also considered as an alternative3. In the last case the situation changed early 2010: the consolidation now is to begin under the auspices of Airflot; however in terms of general federal government policy, this is not a new trend but a technical correction.

Decisions were taken to transfer GK Rostechnologies as a property contribution of the federal government in addition to a large package of the federal property transferred in 2008 of shares of another 3 joint-stock companies including 18.83% of AVTOVAZ stock that had been in management of FGUP Rosoboronexport; this corporation was to act as a customer in construction of 12 federal medical centers of high technologies under the respective national project. Rostechnologies was expected to receive federal budget allocations (as property input) at the expanse of the respective reduction of the budget allocations to the Russias Ministry of Health and Social Development for construction of the said centers while in future subsidies would be granted to complete the construction and commission these centers. In this light another initiative of Rostechnologies to enter a pharmaceutical market by way of setting a holding with the government stakes of 35 companies looks quite logical.

In summer 2009 the Law on Establishment of the State Company Russian Motor Roads (Avtodor) was passed; Avtofor will be a national operator of the federal motor road network;

simultaneously a new form of legal entitys incorporation oriented at the use of federal prop E. Korytina, The State moved to exploration// RBK daily, October 2, 2009, p. 5; E. Korytina, Sechin helped geologists//RBK daily, October 15, 2009, p. 5.

I. Zinenko. New state corporation will control all financial assets of the government, 13.01.09. http://www.rb.ru.

A. Khazbiev. Indecent proposal, - Expert, 2009 No 11, p. 26-27.

Section Institutional Problems erty by the state-owned company was added to the RF Civil Code and the Law on NonCommercial Organizations.

Avtodor is to render state services and perform other funcitons in the road sector by using federal property under trust management. This company will receive for trust management the federally-owned toll motor roads or the roads in general use and federal significance that have toll areas.

Such format will inevitably cause a lot of questions starting from expediency of the new form of incorporation with a pronounced focus on commercialization of public wealth and ending with obvious restrictions in using the term state-owned company (public company) in the economic and political vocabulary.

The Russian Motor Roads as a non-commercial entity is very close to the state-owned companies established earlier, the only difference being the trust management; however, this form has not been widely used for other types of federal property, e.g. blocks of shares.

On the other hand, criticism of the state-owned companies that has been growing since their establishment ended in development (by summer) by the initiative of the President of Russia of the Concept of development of the legislation on legal entities which contained proposals on changing the legal form of all existing state-owned companies, on refusal from their use in future and on repealing a number of specific provisions of the law that granted these companies special rights.

The Presidents Letter to the Federal Assembly of Russia in November 2009 pointed out that in future state-owned companies should be converted to joint-stock companies under the government control, while those companies that have specified periods of their operation should be liquidated in due time. These include Olimpstroi and Foundation of Assistance to Reform the Utility and Housing Sectors. According to A. Dvorkovich. Aid to the President of Russia, the prospects of transformation of Rosatom and Federal Agency for Deposit Insurance will depend on their long-term results. Most probable candidates for corporarization are VEB, Rosnano and Rostechnologies1. However, there are no specific dates set for such transformation. It is not clear whether the new vision of the state-owned company status applies to Avtodor and Federal Foundation of Assistance to Housing Construction Development.

The first step in this direction may become corporatization of airlines that have been transferred earlier to Rostechnologies and have the status of unitary enterprises, and their further transfer to Airflot this was announced in February 2010. The airlines considered are GKT Russia, Kavminvodyavia, Orenburg airlines and Saratov airlines, Vladivostock airlines and Sakhalin Airlines where Rostechnologies received federal stakes. Thus the Rostechnologies plans to establish a new integrated air company Rosavia2 comparable with Airflot in terms of traffic volume have not been implemented. It is quite possible that Rostechnologies will receive a stake in exchange for the said assets.

As a result of the current financial and economic crisis, opportunities to act on the market of corporate control as actively as in 2004-2007 have been restricted for the majority of companies with the government stake even with account of state support granted to them under the anti-crisis program.

The emergence of this trend may refer to 2008 when in the context of $120 bln worth M&A in Russia there was no major deal with a company having a government stake that www.prime-tass.ru, 12 November Initially participation in Rosavia and Atlant-Soyuz airline controlled bu the Moscow authorities was expected.

RUSSIAN ECONOMY IN trends and outlooks acted as a buyer. Mechanical engineering is worth mentioning with acquisition by the United Avia Engineering Corporation (OAK) of 49.4% of shares of Scientific and Production Corporation Irkut (a major exporter of military and civil aerotechnics) for $420 mln and acquisition of the entire capital of Kriogenmash and 85% of the capital of KHIMMASH (for total $mln) by Gazprombank which also became the owner of 8.3% of the shares of National Telecommunications for $128 mln. Two more deals could be possibly mentioned as having reference to the companies with the government interest but with greater specifics related to external capital markets. Gazpromneft acquired a control stake in Naftna Industrija Srbije (NIS) for $560 mln, while Gazprom expected to receive 49% of CJSC Gerosgaz possessing 2.93% of Gazprom from German company E. ON AG that bought 25% stock minus 1 share in Severneftegazprom 1.

In 2009 communications was the hottest sector. At the beginning of the year a possibility arose for VEB acquisition from investment bank KIT Finance2 of 40% shares in Rostelecom and 25% plus 1 share in Svyazinvest ( a telecommunication holding) from AFK Systema where for many years the sale of the federal control stake (75% minus 1 share) was on the agenda; the state-owned corporation could receive this control stake directly from the federal government.

AFK Systema being the third largest private shareholder of the company since the outrageous sale by the government of the blocking shareholding in 19973, at the end of 2008 proposed that the government buys out its block of shares for $1.9 bln. This amount exceeded by almost 2.8 times the asset value assessed by Ernst & Young in spring 2008; this encouraged the AFK Systema to buy another 25% shares from the government thus increasing its stake in Svyazinvest up to the control stake. Some time later AFK Systema offered the government a counter-deal to exchange the blocking shareholding in Svyazinvest for the write-off of the debt (RUR26 bln) to Sberbank of a Systema daughter company, Komstar-OTS, and the Svyazinvest stake in MGTS (28% of voting shares) where Systema had already a control stake. It goes without saying that if the proposed deal fails, Systema will be able to keep its stake in Svyazinvest and will hope selling it profitably after the crisis is over4.

As for Svyazinvest, this company began considering an opportunity of merging with one of the All-Russia mobile communications operator. Minister of Communications and Mass Media of the Russian Federation I. Shchyogolev addressing the Association of European Business late June 2009 said that one of the aims of the holding restructuring was to become one of the fourth major cellular operators in Russia; this could be achieved by not only getting control in one of Big Three operators (e.g. in Megafon) but also by merging the cellular assets with outside regional cellular operators assets or with one of the second tear majors (Tele2, SMARTS, Motiv and Sky Link)5.

Review of the M&A market in 2008. Ernst & Yong, 2009, p. 8, 22, 24, 32.

90 % of its capital are owned by OJSC RZhD and ALROSA from autumn At that time 25% and 1 share of Svyazinvest were bought by Mustcom of J. Soros and V. Potanin for $1.bln in expectation of further privatization. In 2004 this block of shares was sold Access Industries of L. Blavatnik and his partner V. Vekselberg for $625 mln, and in 2006 it was bought by AFK Systema for a double price registering the acquired asset to Komstar-OTS, its daughter company.

A. Klyuchkin. Back to the wood. www.lenta.ru, 14.05.2009.

A. Bursak. Svyazinvest thinks about an alliance; RBK daily, 24 June 2009, No 108 (671). p. 10.

Section Institutional Problems The merge of the major Russian private companies in metal works and mining sectors (Norilsk Nickel, RUSAL and Metalloinvest) with GK Rostechnologies involvement did not occur though the information about this merge appeared at the end of 20081.

It is reasonable to ask how the processes triggered by the crisis affected the positions of the federal government in the economy as a producer of goods (services and works). Rosstat monitoring results partially confirm the increasing weight of the public sector in the economic performance indicators (Table 6).

Table The weight of the public sector by various indicators in 2006 2009, in % 1H Indicator 2006 2007 Volume of shipped goods (own production), rendered services and performed works (by own efforts):

- production of mineral resources 6.0 12.8 13.5 13.- production of fuel and energy resources 3.9 11.8 13.2 14.- manufacturing sectors 8.2 8.4 8.5 9.- generation and distribution of electric energy, gas and water 10.7 11.4 13.0 10.Construction work scope (by own resources) 4.4 4.0 3.6 3.Passenger traffic (transportation companies) * 68.5 65.9 63.9** 64.Commercial shipments of goods made by transportation companies (with- 67.2 72.9 71.1** 72 out pipelines) Commercial traffic of transportation comp(without pipelines) 93. 9 94.6 94.3** 92.Services of communications*** 9.8 9.8 9.9 11,Internal R&D costs 70,4 72,4 72.6 75.Volume of paid services rendered to the community 17.2 16.4 16.3 16.Investments to main capital from all funding sources **** 18.1/14.4 19.5/15.0 21.5/15.9 18.1/13.Net proceeds from sales of goods, products, services and works (less VAT, 10.2 10.2 9.8 10.excises and other similar payments) Average headcount 26,0 24,9 24,0 24,* without city passenger transportation (electricity) organizations;

** data for January September 2008;

*** Net proceeds from sales of goods, products, works and services (less VAT. Excises and other similar mandatory payments);

**** in numerator: less small businesses Source: Development of the public sector of economy in the Russian Federation in 2005, M, Rosstat, 2006, p..

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