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extension of federal property privatization perspective for 2007; completion of pri vatizing companies with government share comprising less than 25% interest by 2005; amending the industry based profile of privatized federal property; introduc ing the mid term financial plan concept into the federal property privatization planning.

The Forecast Plan (Program) of Federal Property Privatization for 2006 and Key Areas of Federal Property Privatization in 20062008 (approved by the RF Government Resolution No.1306 r of August 25, 2005) is even more careful in terms of quantitative indicators. According to this document, the key objectives of government property privatization policy in 20062008 are as follows: privatizing federal property not being used for carrying out government functions (authorities) of the Russian Federation, assuring phased reduction of the number of federal state owned unitary enterprises (FGUPs), accelerating federal property privatiza tion, forming the federal budget revenue basis. In 2006 government owned stock packages not exceeding 50% of the respective JSCs charter capitals were to be offered for privatization. The limitations were related with excluding JSCs included into the strategic businesses list or participating in formation of integrated organi zations, as well as packages of stock to be divested based on the needs of budget revenues planning and on the needs of mid term financial plan for the pe riod until 2008.

In reality the major trends of privatization dynamics continued to be the same 2006 (Tables 1213):

- extremely slow process of selling minority (non controlling) interest still remain ing with the government45;

For details see: Russian Economy in 2005: Trends and Outlook. M., IET, 2006.

The Forecast Plan approved by the RF Government Resolution No.1124 r of August 26, 2004.

According to certain estimates, in 2000 s no more than 10% of the annually offered minority pack ages were sold. The packages which were not sold during one year would be added to the offer of Section Institutional Problems - increasing number of JSCs with 100% government interest resulting from ac celeration of FGUPs incorporation;

- stable decrease of privatization revenues share in the overall structure of reve nues from state property management (in 20032006);

- lack of major privatization deals (even though Privatization Plan for 2006 stipu lated selling stock packages of at least 2 major companies 34% KAMAZ and 100 % SG Trans with approximate value of RUR 23 billion);

- stable growth and domination of revenues from using state property in the over all structure of revenues from state property management (i.e., renewable sources);

- traditionally low rates of privatizing land plots occupied by privatized companies (see Section 5.3).

Table Major Federal Property Entities and Privatization Program of 2000 s 1999* 2000 2001 2002 2003 2004 2005 2006 Overall number 9394 9846 13 786 11 200 9275 8293 7178 of FGUPs ** Privatized FGUPs per year:

forecast 1652 970 1374 1245 1398 actual*** 2 5 102 571 517 741 n/a JSCs with the RF govern 3611 3524 4407 4 222 4 035 3905 3524 3724 ment interest** Including the following shares in charter capital:

100% 382 61 90 99 124 273 413 1136 50100% 470 506 646 589 552 499 474 397 2550% 1601 1211 1401 1 382 1308 1183 1093 885 less than 25% 863 1746 2270 2 152 2051 1950 1544 1063 Golden Share 580 750 958 640 284 259 243 Federal stock packages sold per year:

forecast 1126 1965 1702 566 1350 actual*** 87 125 112 630 655 634 n/a * By the end of each year. 1999 taken as baseline accounting for adoption of State Property Man agement and Privatization Conception (approved by the RF Government Resolution No.1024 of September 9, 1999).

** Without taking into account the special Golden Share Rule. In early 2000 s the overall number of unitary companies made c. 85,000, including c. 20,000 state owned enterprises and c. 65,municipal enterprises. In 1995 government owned at least 15,00017,000 various stock packages, in 1999 about 3,100 fixed packages and 7,0008,000 of non sold packages (in the books of re gional government property funds). In 1995 1004 JSC were qualified for the Golden Share Rule.

the following year. Thus, 2006 year plan stipulated privatization of 885 FGUPs and 422 stock pack ages (participatory interest). With this, according to the methodology used for developing privatiza tion plans, the entities having not been sold during the previous (2005) year also needed to be in cluded into 2006 plan, which meant additional 513 FGUPs and 928 stock packages (participatory interest).

RUSSIAN ECONOMY IN trends and outlooks *** Actual data on annual privatization of both stock packages and FGUPs cannot be interpreted correctly for a number of reasons: 1) lack of regularly supplied data supplied by RF Property Man agement Committee (Rosimuschestvo) and Russian Federal Property Fund; 2) as a rule, from 10 to 50% of deals are closed in different years, and the non sold packages are carried over to the next year; 3) the counter process of FGUPs incorporation and other ways to increase the stock pack ages owned by the government; 4) reorganization going on in energy industry and in communica tions industry, contributing some of the FGUPs assets into charter capitals of some government holdings, formation of integrated organizations in defense industries, in railway sector, etc. Data ob FGUPs privatization are pretty conventional, because official privatization data includes FGUPs about privatization of which the initial decision was made or the ones having undergone the stage of transformation into JSCs. That is why the number of FGUPs may be reported higher than in reality.

Source: data from RF Ministry of Economic Development and Trade, Federal Agency for Federal Property Management.

The share of privatization revenues in the overall budget revenues has been steadily decreasing since 2003. As it is obviously demonstrated in Table 7, in the revenues from privatization deals made RUR 90.6 bln, in 2004 RUR 61.8 bln, in 2005 RUR 29 bln, in 2006 RUR 17.6 bln. That means that annual revenues decrease makes at least 30%. According to the estimates by the Federal Duma Committee for State Property, privatization rates have decreased more than 2.times over the last 2 years.

The reasons for the minority government owned packages of stock not being in big demand are well known: the insiders (the already existing holders of control ling packages) are not interested in buying additional minority packages; for many outside investors it is pretty senseless to purchase a package without acquiring real control; the situations are pretty common when even a 100% package is being offered for auction with the most profitable assets already divested, etc.

As it is known, the major portion of privatization revenues of late 1990 s early 2000 s were generated by 1 or 2 major deals. Lack of such deals in 2006 was not related only with some objective factors. Indeed, the overall favorable situation with budget revenues (inherent for the effective privatization law), possibility to execute deals based on the general economic situation create favorable environ ment for flexible approach to execution of various types of deals. In relation with this the refusal from additional (non renewable privatization) revenues to the fed eral budget looks pretty justified, especially with all these on going discussions about the rational ways to use the growing Stabilization Fund.

At the same time sale of 100% of JSC SG Trans stock (the companys assets are over 400 real estate entities) did not take place because a whole series of real property in the companys books (including some land plots) lacked registered ti tles. In its turn, this has lead to almost 50% decrease` of direct revenues from pri vatization in 2006 RUR 17.6 bln vs. the planned revenue of RUR 31 bln46. In all like lihood, there is yet another important factor an alternative (vs. privatization) Press release by Federal Agency for Federal Property Management On Major Outcomes of Rosimuschestvo Activities in 2006, December 29, 2006; Interview by V.L. Nazarov, Rosimuschestvo Director, On Major Outcomes of Rosimuschestvo Activities in 2006, January 23, 2007, Interfax (www.mgi.ru).

Section Institutional Problems possibility to hand over SG Trans to Transneft company together with Trans nefteproduct.

In a broader context, one of the most fundamental causes for slowdown of privatization process in the Russian Federation over the recent years is the continu ing growth of government involvement into Russian economy. On one hand, one of the key tasks for 20062008 is creation of at least appearance of privatization completion as an element of successful institutionalization reform selling federal stock packages and transforming the state owned unitary enterprises sector. The effectiveness of the process both for the government and for the companies in volved is in this case of a secondary character versus potential political dividend.

On the other hand, the on going property expansion of the government (general economic strategy, a trivial re distribution of property in favor of those close to the government, or opposition of certain ministries stakeholders of the process47), excludes the most valuable or the most profitable and efficient government assets from privatization process. It is pretty demonstrative that in April of 2006 Yu. Pet rov, Russian Federal Property Fund Director, stated that 30 40 major government holdings will be formed in strategic sectors of Russian economy as an outcome of privatization process. The key challenges for RF Ministry of Economic Develop ment and Trade (MEDT) being responsible for privatization strategy starting from 2004 are pretty obvious: divestment of non sellable non liquid assets still re mains the key task, however in the situation when the extracting industries have the strongest positions and budget revenues profile corresponds to this fact, it is rather difficult to justify sale of new highly profitable assets. This becomes even more problematic due to no clear understanding of the key areas of spending the accumulated federal budget revenues.

In the next several years we may expect the following change in the structure of non renewable sources of revenues from state property management: revenues will grow at the expense of favorably located property land plots that are of inter est for the investors. According to the RF Federal Property Fund estimates, cur rently about 70% of the customers of the privatized land plots (including military towns, etc.) are smaller and medium size businesses which are actually investing into the under valued real estate understanding that currently the value of land still isnt being included into the purchasing price of the divested assets, however, new owners of businesses acquire the title for the land as well48. It is obvious enough, According to the available data (Rosbalt, August 4, 2006), in 2006 different agencies were chal lenging the privatization decisions with regards of 448 JSCs and FGUPs already included into plan. Rosavtodor (Federal Agency for Roads protested against privatization of 148 agencies), RF Ministry of Defense (protested against privatization of 81 entities), Rosenergo (Federal Agency for Energy protested against privatization of 52 entities) and RF Ministry of Agriculture (protested against privatization of 46 entities) were the most active ones.

Article Rasprodazha // Rossiyskaya Gazeta newspaper, January 29, 2007. The growing num ber of released military property assets is also directly connected with land lots: 477 entities were divested during the first 2 quarters of 2006, while during the same period of the previous year only 200 similar entities were divested. Overall amount of 2006 revenues from selling military assets ex ceeded the 2005 revenues by almost 3 times making RUR 1.41 bln in 2006 vs. RUR 589 mln in 2005.

RUSSIAN ECONOMY IN trends and outlooks that some significant reserves for privatization revenues growth are available in re lation with optimizing the legal framework of selling land. It is also worth noting that according to some estimates about 70% of real estate still belongs to the govern ment.

In 2005 Rosimuschestvo decided to liquidate 16 FGUPs with over 600 real property sites on their books, including the ones in downtown Moscow. This deci sion caused some very serious doubts with regards to the feasibility of such liquidation mainly because of serious risks of the state losing the most valuable sites without adequate financial compensation (e.g., by applying special schemes under which the most valuable assets are at first divested to other entities, and only empty legal entities are being publicly offered for sale). In October 2006 this de cision was cancelled and 12 FGUPs including the companies managing Moscow real estate are to be merged with some FGUP called Federal Computer Center for Exchange and Information Technology (FT Center), the title itself telling that this organization can be focused on practically any task. FGUP FT Center is to be pri vatized as well, though its privatization has been delayed. Meanwhile, federal real estate shall be functioning within lease agreements.Different from privatization revenues, the renewable revenues sources demonstrate sustainable growth over the whole period of 19992006 (Table 7). According to the official 2006 data by the RF Agency for Federal Property Management, the total amount of federal budget renewable revenues administered by the Agency made RUR 67.3 bln ex ceeding similar revenues of 2005 by RUR 10.7 bln. The aggregated amount of dis tributed dividend made over RUR 23 bln exceeding the respective 2005 amount by 20%. Federal budget revenues from 19 major JSCs with government interest (ex cluding JSC Rosneft) increased by almost 2006 RUR 4.5 bln in 2006. In Rosimustchestvo switched to market based lease rates (for 7507 Federal Property Leasing Agreements). The share of leasing agreements based on the rates calcu lated according to the non market methodology of the former RF Ministry for Federal Property Management has decreased almost 2 times by the end of 2006.

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