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That said, over 115 thousand of private individual investors subscribed for Rosneft shares ($700m). Some analysts66 are pretty ambitiously connecting this event with the beginning of the third wave of citizens financial activity over the 15 year period of market oriented reforms (after financial pyramid schemes of the early 1990 s and investing into commercial banks during the period preceding 1998 crisis). What is meant here, is that relatively big groups of citizens in the envi ronment of US Dollar rates going down, relatively low interest rates on bank depos its, inaccessibility and high risks of real estate investment (including participatory construction of housing) are ready to convert their accumulated savings into sec ondary market securities. These citizens are usually oriented towards long term possession of such securities and prefer lower proceeds with higher level of guar antees, which may be achieved due to direct ownership of shares (without any in termediaries or joint investment schemes). They also prefer shares of companies with high level of government participation viewing it as an additional guarantee se curing their investment. On the other hand, the companies with a big number of pri vate individual investors (citizens) due to additional issues of securities acquire the opportunity to use this fact as the grounds for government aid in case of various fi nancial cataclysms.

Such attitude creates certain prospects for additional issues by Russian com panies in future. The proceeds from government controlled Sberbank IPO (3.5 mln shares) scheduled for early 2007 are estimated on the level of $11.9 bln. Accord ing to the RF government Resolution the RF Central Bank is entitled for the pref erential right to acquire 892 601 shares (making c. $3 bln or RUR 80 bln), which will mean reducing its share down to 55.34%. At the same time the IPO amount (and the estimated price per share) is such, that potentially the share of individual private investors will not exceed the quota of Rosneft individual private investors (c. $750 mln).

One can already notice certain consequences of Sberbanks shares place ment. First of all, such a significant amount will have a negative impact on the other IPO issuers. As per some estimates, IPOs of Cytronix and Polymetal companies (the last one with some very good estimated IPO potential) that took place in Feb ruary 2007 did not find adequate demand on behalf of investors, which were at that time awaiting for Sberbank IPO and were withdrawing from other market segments.

In the short term, the deficit of financial resources caused by Sberbank IPO can impact IPO of electric power company OGK 3 (March of 2007) and of state owned V. Sednev, Peoples Capital and exchange markets. www.opec.ru, November 28, RUSSIAN ECONOMY IN trends and outlooks Vneshtorgbank (May 2007), which would require concentration of investors funds at the expense of less attractive assets. Secondly, organizations closely associated with the government are increasing their activity in revising oil and gas portfolios in favor of Sberbank. According to certain estimates, RF Central Bank bought out c.

$8 bln at the exchange in February 2007, of which a significant portion was offered by Gazprombank67. One may assume that the eventual (post IPO) structure of Sberbanks assets will not be significantly different from the current one with re gards to direct or indirect domination of the government or government controlled organizations.

As it has already been mentioned above, the first IPO of other key financial in stitutions of Russia Vneshtorgbank (with 99.9% federal government interest) is scheduled for May 2007. The participation of this bank in current expansion of the governments ownership (besides issuing loans or direct participation in transac tions with ALROSA shares and in acquisitions by Rosoboronexport) is directly linked to the governments effort to increase its presence in the banking sector, e.

g., acquisition of Promstroybank (St. Petersburg).

It is assumed that during Phase 1 Vneshtorgbank will be offering about one fourth of its charter capital (2223%) within the limit of RUR 90 120 bln. The ration between domestic and foreign market should be based on parity principle (50 to 50%), and the share of individual private investors (RF citizens) may make up to 15% of the overall IPO amount. Additional issue is planned for 2010 in the amount between RUR 210 RUR 250 bln, which will reduce the governments share down to just controlling interest (50% + 1 share). Similar to Sberbank, the optimistic es timate of Russian individual private investors is up to $700m, but it will be possible to say that Vneshtorgbank IPO is for the people only in case ideological objectives are set. It is especially difficult to forecast the situation after 2008 (considering the politics and business cycle).

A new aspect of electric power sector reform is currently being implemented by RAO EES (Energy Systems of Russia) related to new issue of shares by a num ber of power generating companies. In the fall of 2006 the management of RAO EES Holding announced significant success of the first additional issue of shares 14.4% shares of generating company OGK 568 were placed at the market allowing for raising $459m for investment purposes. At the same time the Holding is not re jecting other sources for capital investment: company revenues, loans, direct pri vate investment including those based on the outcomes of divesting a number of power generating companies69.

Because the additional issue of shares by the companies having emerged due to reorganization means much more smooth and moderate option of admitting pri vate capital into this sector, the issue of future distribution of subsidiaries and af See: Kommersant, January 31 and February 9, 2007.

Main body of OGK 5 are Konakovskaya (Tver oblast)< Nevinomysskaya (Stavropol krai), Reftinskaya and Sredneuralskaya (Sverdlovsk oblast) hydro electric power stations.

Thus, in October 2006 12 percent of shares of Petersburg generating company, which belongs to Lenenergo were sold.

Section Institutional Problems filiated companies capital upon additional issues of shares remains very important and still controversial, as well as the issue of maintaining the level of participation by RAO EES and its shareholders (one of them being the RF government). In rela tion with this its worth reminding that according to initial sector restructuring plans (upon RAO liquidation), the government wanted to keep packages of 75% interest + 1 share both in Federal Distribution Company and in the System Operating Com pany, as well as controlling interest in generating company created on the basis of hydropower industry assets. In order to bring the governments share in the above mentioned companies up to the planned level, direct budget investment or contri bution of other assets will be required.

The RF government decision (made in November 2007) about gradual raise of gas and electric power prices in Russia over the next several years will have a sig nificant impact over financial and economic situations of both Gazprom and RAO EES in the mid term perspective. The forecast approved by the government stipu lates price increase for gas by 15% in 2007, by 14% in 2008 and by 13% in 2009.

The dynamics of energy tariffs growth will respectively be 10%, 9% and 8%.

Given these assumptions alongside with the global energy prices dynamics will in many aspects define the potential activities of state owned corporations in fuel and energy sector at the M&A market. In 2006 some Russian media marked the interest of Rosneft towards Surgutneftegas,, of Gazprom towards TNK BP, subsidiaries of RAO EES and Svyazinvest. Gazprom has already undertaken some limited participation in buy out of the above mentioned issue of OGK 5 shares. At the same time it was announced that Gazprom was to buy additional issue of Mo senergo shares for the amount exceeding $2 bln, scheduled to be completed in the spring of 2007.70 We need to add here that Gazprom is already the holder of the blocking interest in Mosenergo.

Critical situation emerged at the alcohol market upon enactment of the RF Law On Government Regulation of Distribution of Alcohol Beverages and Alcohol Containing Products due to temporary shut downs of many manufacturers caused by the deficit in excise duty stamps and by the consequences of launching the Uni form State Automated Information System. Under these circumstances the issue of government monopoly was raised again which may require setting up of State Al cohol Company (SAC).

FGUP Rosspirtprom has made a decision to manufacture the so called vodka for the people. The Rosspirtprom branded vodka is to be sold at the price nit exceeding RUR 60 per half litre bottle. The factory price will nit exceed RUR at the factory gate which according to the company representatives will include just taxes and production cost. However, Rosspirtprom has even greater ambitions.

They decided to improve the vodka for the people slate by introducing such popular brands as Khlebnaya, Pshenichnaya, Rzhanaya, Kedrovaya, Solo A. Podymov, Plus Gasification of the Whole Country // Finansovy Kontrol, December 2006, No.(61), pp. 144145.

RUSSIAN ECONOMY IN trends and outlooks dovaya. According to some experts, this may result in restructuring of this market segment as many manufacturers are weakened by the previously described crisis71.

Let us remember here that FGUP Rosspirtprom having been established back in 2000 currently administers the stock packages of more than 200 spirit making and liquor factories (as of the beginning of 2003 118 entities). FGUP controlled factories account for over 1/3 of all legal alcohol manufacturers in the country and control over 45% of spirit production and 26% of vodka/liquor produc tion in Russia. The annual turnover of FGUP Rosspirtprom is estimated to make over $2 bln. Its business activity during the recent years was recognized as very in efficient (in particular, very high volumes of illegal alcohol products at the market may be regarded as a proof), government introduced fiscal claims against this FGUP (including those for non payment of dividend), FGUP lost a number of valu able assets and some of entities controlled by it were put under bankruptcy pro ceedings.

The course towards forming integrated organizations continued by way of merging different government assets. After quite lengthy discussions on the mat ter, the Presidential Decree No.140 of February 20, 2006, initiated the set up of United Aviation Corporation (UAC) which will integrate manufacturers of both de fense and civil aircrafts. The government will have at least 75% interest in this newly established JSC. Start of the new company management operations was an nounced in November. Similar to many already existing corporations of national scale (Gazprom, Rosneft, RZhD [Russian Railways]), UAC Board of Directors will be headed by some top level government officials (S. B. Ivanov, Vice Prime Minister and Minister of Defense), and the managers of integrated assets will be engaged in daily operations of UAC. The former Director and co owner of Irkut company A.

Fedorov was appointed UAC President.

Prior to being integrated into UAC Irkut (the former Irkutsk aviation produc ing association) used to be the biggest non government corporation72 in Russian defense industry specializing throughout the most recent years on exporting SU family aircrafts to Asian countries. It was able to acquire controlling interest in Ta ganrog aviation research and production complex named after Beriev, and in Yakovlev OKB (pilot design bureau) being specialized on exporting military air crafts. There is a lot of evidence that Irkut together with Sukhoy aviation com plex (with 100% government interest) are to become the most valuable UAC as sets.

Deloitte & Touche SNG performed the assessment of Irkut assets result ing in $940m only), while Sukhoy corporation was evaluated on the level of $2.bln. This assessment outcome is far more modest than it was expected to be, meaning that Irkut cannot claim more than 20% interest in UAC. Presumably in the spring of 2007 Irkut shareholders may be offered to exchange their shares with those of the newly created UAC or buy them out at some fixed price. Deloitte & What Will Vodka For the People Lead To // www.rian.ru, November 22, 2006.

The government does not directly belong to Irkut shareholders, one of the minority shareholders of Irkut is state owned Sukhoy aviation complex.

Section Institutional Problems Touche assessment results will most likely serve as the basis for defining the buy out price. And in the light of all this appointment of A. Fedorov to the top executive position of UAC may be regarded as a compromise required for integrating Irkut into this new corporation73.

Overall in the context of this aviation industry assets integration the govern ment allocated additional funding to this sector in the amount of RUR 36 bln, be cause the current assets value (RUR 60 bln) was recognized as insufficient. The published UAC assets valuation made then $96 bln.

Setting up UAC is scheduled for completion in the spring of 2007. It is also worth noting that adjacent enterprises manufacturing engines, equipment, etc. are not planned for integration with UAC. That is why we should recognize as most likely future creation of core integrated companies such as Avionika Group on the basis of existing research and production center Technocomplex (developing airborne equipment for defense and civil aviation, ground control systems to sup port operation of such complexes).

Currently the government has much less capacity for integrating companies with mixed capital compared to the period of 19921994, when it owned a signifi cant (and in some sectors the main) bulk of assets and the share capital profile was undergoing its formation stage. Currently the government is either a minority shareholder in many of such companies or owns a blocking package, which signifi cantly decreases its control and management capabilities. Thus, out of total 9 avia tion JSCs federally owned packages of which are to be contributed to UAC charter capital, only in 4 cases we can speak about packages exceeding 51% (including Sukhoy bureau 100% shares of which belong to the federal level74), in 2 compa nies, however, the federal share makes 38%, and in other 2 companies 25.5%.

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