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There already have been some precedents of transferring regional airports to regional governments. Back in late 1990 s the blocking package of International Samara airport (25.5%) was among the sold packages. And in 2003 60.88% shares of Vnukovo airport (the 4th biggest in the country from the passenger traffic flow point of view after Domodedovo, Sheremetyevo and Pulkovo), became the prop erty of the city of Moscow to compensate for the capital functions costs. Such transaction launched the airport development program funded both from the city budget and from external alternative sources.

In relation with including airports into 2007 privatization program it is also worth mentioning that one of the biggest recent privatization deals was acquisition of 100% package of Sochi airport at an auction in November 2007. The acquisition was made in the name of Strategiya Yug LLC for the amount of RUR 5.503 bln (the starting price being RUR 3.504 bln). Strategiya Yug LLC is believed to be an affili ated entity of Bazovy Element company which controls Southern Airports Holding through Russian Asian Investment Company. This Holding already owns a whole series of core assets: Kuban Airlines, Krasnodar International Airport (having been previously divested from Kuban Airlines), Kuban Territorial Air Communication Agency, and Yugairstroy. In addition, Southern Airports Holding controls Anapa air port52 and is operating construction of a new airport in Gelendgik.

Acquisition of Sochi airport is quite streamlined with the increasing business activity of Bazovy Element in Southern Russia, in particular, it is associated with the estimated increase of passenger traffic to the Black Sea Coast and with Russia submitting an application for 2014 Winter Olympics to be held in Sochi. This event requires completion of Sochi airport reconstruction (frozen up back in 1989), which in its turn will require investment of circa $100m scale.53.

Bazovy Element is not the only company seeking acquisitions in airport business. For example, Renova company owns 45% stock of Koltsovo airport (Yekaterinburg), and Moscow River Navigation Company (through Eurasian airport company) owns 42% stock of Tolmachyovo airport (Novosibirsk) and 48% stock of Altai Aviation Company. Just like Anapa airport, Koltsovo and Tolmachyovo airports belong to the list of strategic JSCs. However, in Koltsovo the government share (34.56%) is less than that of private shareholders, but in Tolmachyovo the govern ment is a majority shareholder (51%). Similar interest is reported towards Kha barovsk airport on behalf of Alliance Group, as well as the project to merge Yemely anovo and Cheremshanka airports (Krasnoyarsk Krai) into a single transportation hub (this last one being initiated by AirUnion Holding created on the basis of KrasAir Time to Build Airports // SNiP (Construction Norms and Specifications). Construction. Real Estate.

Investments. Projects, N 02 (02), December 2006, pp. 1822.

Anapa airport was included into the list of strategic JSCs (government share in charter capital con stitutes 25.5%).

A. Dmitriev Targeting the Olympics // SNiP (Construction Norms and Specifications). Construc tion. Real Estate. Investments. Projects, N 02 (02), December 2006, pp. 28 30.

RUSSIAN ECONOMY IN trends and outlooks company, 55% shares of which will belong to private investors, and 45% to the government).

According to some estimates, the reason for such growing interest on behalf of Russian business towards investing into major airports (with the hub capabili ties) during the recent several years54 is competition for the budget money planned to be allocated for their up grading and construction (primarily, of their airfield component, such as in Koltsovo, Sochi, Gelendgik)55.

However, private business participation in developing airports is not limited just to buying their stock. There may be an alternative of renting the respective as set. In this relation another important event needs to be mentioned: amicable agreement between East Line Group and Rosimuschestvo about Domodedovo air port lease was settled in October 2006. This was a resolution of three year conflict having grown into litigation proceedings. The achieved settlement confirms the previously agreed lease term (75 years starting from 1998 the year when the Lease Agreement was executed), under the condition of over 30 times increase of the annual rent (from RUR 3m up to RUR 92m) and the option of reviewing this amount every 5 years.

In the context of successful Domodedovo airport development (in which pri vate investment plays a very significant role) the situation with construction of a new (Third) terminal at Sheremetyevo airport appears far less satisfactory. This project is managed by JSC Terminal, which used to be fully owned by Aeroflot un til very recently. Meanwhile government representatives (RF Ministry of Transportation) in the company management were consistently against Aeroflot implementing this construction project. However, in 2005 the company was able to raise funds in the amount of $150m loan, 2/3 of which was allocated for Sheremetyevo III construction. Then due to the change in Aeroflot management and disagreement of government representatives this project was frozen up. In the summer of 2006 Vneshtorgbank became the owner of the blocking package (25% + 1 share) of JSC "Terminal", another package of 20% (minus 2) was acquired by Vnesheconombank, which allowed to open two more credit lines for the project.

After the expected sale of yet another blocking package of shares to Sheremetyevo International Airport Aeroflot will no longer be the majority shareholder of JSC Terminal. However, the deal between Aeroflot and Sheremetyevo International Airport has not yet been closed, even though the majority shareholding of the biggest Russian airline and 100% package of Sheremetyevo airport both belong to the government56.

International understanding of a hub is that of new airport with a significant amount of interna tional and domestic airlines, providing immediate connections for the passengers and operating in compliance with up to date standards infrastructure and ground service standards.

The owners of airports plan to invest hundreds of millions USD into their modernization // SNiP (Construction Norms and Specifications). Construction. Real Estate. Investments. Projects, N (02), December 2006, pp. 24 27.

In early 2004 Alfa Sheremetyevo was selected as the managing company for Sheremetyevo air port based on the tender outcomes, despite the fact that Inter Terminal LLC set up by Aeroflot and its private shareholder (National Reserve Bank) participated in that tender.

Section Institutional Problems 5.2.3. Major Government Corporations Activities The most significant event of 2006 with regards to major government corpora tions activities at the merges and acquisitions market57 was FGUP Rosoboronoex port purchase of 66% stock of the leading titanium (30% of global production) and magnesium manufacturer JSC VSMPO Avisma58 (transaction value making $700m). The fact of Oboronprom (subsidiary of Rosoboronexport) acquiring con trol over electric engineering plant LEPSE (city of Kirov), the latter being one of the biggest Russian manufacturers of electrical equipment for defense and automotive industries, stayed in the shade of the VSMPO Avisma deal.

Further Rosoboronexport expansion plans may be related with metallurgy, and not just Russian metallurgy. In the summer of 2006 Rosoboronexport man agement raised an issue about the feasibility of setting up a state owned holding a monopolist in the field of alloy steel manufacturing. In early 2007 the grandchild of Rosoboronexport Russpetzstal LLC acquired 00% of JSC Metallurgic Plant Krasny Octyabr (city of Volgograd). The following assets are named among its possible future acquisitions: Chelyabinsk metallurgical plant (JSC Mechel), Zaporozhye titanium and magnesium plant (Ukraine), Volnogorsk and Irshansk mining and processing integrated plants (Ukraine), such metallurgic plants as Electrostal (city of Electrostal in Moscow region), Serp i Molot (Moscow), which manufacture special alloyed steel for defense industry59.

Such activities of Rosoboronexport as accumulation of controlled assets, di versification of its sector profile due to different types of activities of the acquired enterprises (helicopter industry, metallurgy, automotive and defense industries) may provide incentives for possible reorganization of Rosoboronexport itself, which may take the form of setting up a 100% state owned managing company. Then the controlled assets including Rosoboronexport (being an organization with the mo nopoly rights for foreign cooperation in defense and technology) may become the subsidiaries of this newly established managing company. Some of the subsidiaries in future may issue additional stocks60.

At the same time a number of serious events relating to state owned fuel and energy companies need to be mentioned. At the end of 2006 JSC Gazprom an nounced its plans to develop Shtockman gas field in the Barents Sea independently (without participation of foreign capital) and acquired 50% + 1 shares of Sakhalin Energy being the operator of Sakhalin 2 project for $7.45 bln. With this the interest of other project participants is being decreased almost two times: for Shell from See also paragraph about major corporate events of 2006 in Section 2.4.3 hereof.

In 1998 the controlling interest in JSC Avisma (city of Berezniki, Perm region) was acquired by Verkhne Saldinsky metallurgic production association based in Sverdlovsk Region, upon which the two companies practically integrated.

K. Friskin. Chebol Russian Style // Kompaniya, No.4849 (444445), December 25, 2006, pp. 2231.

www.lenta.ru, January 26, RUSSIAN ECONOMY IN trends and outlooks 55% down to 27.5%, for Mitsui from 25% down to12.5%, for Mitsubishi from 20% down to10%61.

Rosneft performed IPO in 2006 which was recognized as pretty successful one (being the major IPO in Russia and the 5th biggest globally as of the moment of issue). Maintaining the governments qualified governments controlling interest of 75% (through JSC Rosneftegas) Rosneft distributed about 15% shares for the overall amount of $10.4 bln at the selling price very close to the highest ceiling ($7.55)62. Based on IP {O outcomes Rosnefts capitalization ($80 bln) has now turned it into the biggest petroleum company in Russia.

Nevertheless, the key (and a very special one) success factor was the fact of major investors counting on Rosnefts production capacity increase at the expense of YUKOS assets (YUKOS being engaged into bankruptcy procedure in 2006)63. Due to its administration resource Rosneft is assumed to become the main beneficiary when the key YUKOS assets are being distributed (and it might get at the under estimated price). The political element in the success of Rosnefts IPO provided for the fact that contrary to many other companies64 Rosneftss quotations did not go down significantly. According to some sources, underwrites supported Ros nefts shares after IPO.

This special proximity of Rosneft to Russian power authorities provides for certain potential prospects. At the end of January 2007 V. L. Nazarov, Director of the RF Agency for Federal Property Management spoke about the possibility for yet another distribution of 25% package (c. $20 bln worth)65, however, this statement was almost immediately disowned by the RF Minister for Economic Development and Trade G. O. Gref (who supervises the RF Agency for Federal Property Man agement). At the same time, according to some experts, such controversy con firms the fact of increasing the efforts aimed at turning the maximum possible share of government interest in Rosneft into private property before March with future legalization beneficial for a pretty limited number of individuals.

Based on 2006 IPO outcomes the following foreign petroleum companies be came Rosnefts minority shareholders: Petronas (Malaysia, $1.1 bln), BP (UK, $ E. Samedova., O. Gavshina: Gazprom will divide Sakhalin by 50% // Gazeta, December 2224, 2006, p. 1.

The IPO proceeds my not be regarded as privatization revenues because the formal Rosneft priva tization was performed in 2005 when the RF Agency for Federal Property Management contributed 100% 1 share of Rosneft into the charter capital of JSC Rosneftegas. Accordingly, the proceeds may be allocated to redeem the loan received by Rosneftegas to pay for the acquisition of Gazprom shares (10.74%).

According to Bank of Moscow estimations, the fair price for Rosneft shares considering its finan cials and OGIP in place profitability index should be at the level of $5.7 per share (if future pre mium acquiring YKOS assets is not taken into account). One also needs to pay attention to a major debt still incurred by Rosneft and lack of investors confidence in Rosneft being capable of quickly implement its plans of increasing own production up to 100 and more mln tons. See: A. Vinkov, I.

Rubanov. Insider among the insiders // Expert, 2006, No.28, pp. 2022.

By the end of 2006 shares of 10 Russian companies (out of total 34 companies having performed IPO) were sold below the placing price.

Interview to Intefax on January 23, 2007, www.mgi.ru Section Institutional Problems bln), CNPC (China, $500m). According to certain estimates, companies either con trolled by the RF government or very close (loyal) to the government contributed at least $3.54 bln (Sberbank, Gazprombank, Millhouse Capital and others viewed as long term strategic investors). On the contrary, institutional investors (investment trusts, mutual funds, etc.) are oriented towards primarily high returns so they did not participate in the buy out. Contrary to strategic investors for the institutional ones over estimated shares, corporate governance problems and the level of gov ernment control were the key negative factors.

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