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RUSSIAN ECONOMY IN trends and outlooks On the whole, the fact of including the list of cases to which the norm about defining the assets value is applicable and the description of value agreeing mechanism is positive because it sets the subjects of the arising legal relations, as well the rights of both parties and ways of their exercising within the agreeing proc ess. However, the novelty relates only to such JSCs in which state/municipality owns from 2% to 50% of the voting shares.

The List of strategic JSCs and enterprises was changed significantly in 2006.

First of all, it is necessary to state that due to setting up UAC 2 FGUPs and JSCs were excluded from the respective sections of the List. Further on 15 unitary enterprises and 2 JSCs operating in mechanical engineering and defense industry were excluded from the List as they were viewed as candidates for integration. In addition, Sochi airport was also excluded from the List, as its full package was, as has been stated earlier, sold in the end of 2006.

At the same time 2 FGUPs were added to the List (TV Technical Center Ostankino and Railway Transportation in house security) together with 3 integrated companies in JSC format (including united industrial corporation Oboronprom76 in charge of consolidation of Russian helicopter industry77) and Novorossiysk Marine commercial port [with government interest of only 20%]).

At the end of December 2006 the RF Government Resolution No.782 intro duced changes into the Charter of Russian Federal Property Fund, the limitation of its autonomy being the major change. Now its is directly stated that the RF Gov ernment is the constituent of the Fund, the RF Ministry for Economic Development and Trade assures coordination and control of the Funds activities, and the Fed eral Agency for Federal Property Management performs the functions of the owner of all the assets being in operation management by the Fund as per the order and limits defined by federal laws, Presidential Decrees and acts by the RF government and the President of the Russian Federation.

With regards of performing the shareholders authorities on behalf of the Gov ernment Russian Federal Property Fund is limited only by selling the shares of companies owned by the federal government and included into the forecast plan (program) for federal property privatization. Accordingly, this situation was re flected in the Regulations on managing the federally owned shares of JSCs and us ing the special right of the Russian Federation in managing JSCs (the Golden Share).

Russian Federal Property Fund keeps the right of exercising business activi ties, however, all the respective proceeds should be stored at the account of the Fund with the Federal Treasury and the Fund may spend it only according to the revenues/expenditures estimate approved within the process defined by the Main Manager of Budget Funds within the limits of available balance at the Fund personal account. Previously Russian Federal Property Fund had the right to place temporarily available extra budgetary funds at deposit accounts. The data about In addition to the government which directly owns the controlling interest in Oboronprom, Rosobo ronexpport is another major shareholder.

Thus, in 2007 the deal for buying out more than 20% of Kazan helicopter plant shares is scheduled to be closed.

Section Institutional Problems rarily available extra budgetary funds at deposit accounts. The data about the as sets Russian Federal Property Fund purchases at the expense of its business pro ceeds should be provided to the RF Agency for Federal Property Management within one month period.

Previously the federal budget was the key funding source for Russian Federal Property Fund. The budgetary funds were allocated with the purpose of organizing and carrying out privatization of federal property, they were broken by established types of expenditures and the amount was set by the Government. However, the new version talks just about funds from the federal budget without any detail. The revenues/expenditures estimate of Russian Federal Property Fund is to be submit ted to the RF Ministry for Economic Development and Trade.

Russian Federal Property Fund was deprived of another funding source. It used to be formed from charges on the value of sold goods distrained based on the resolution of either court or another agency empowered to decide about imposing a lien, and revenues from selling property confiscated based on effected court/judges judgments or on the resolutions by the customs agencies and duly recognized as ownerless, as well as from selling property seized by appropriate federal executive authorities according to the norms and types of expenditures set by the RF government.

Thus, we may state that the conflict between the Federal Agency for Federal Property Management and Russian Federal Property Fund having emerged during Administration Reform and having received publicity in 2005 was resolved mainly within the framework of the proposals by the Agency, as amendments to the Char ter of Russian Federal Property Fund have significantly limited its autonomy.

Certain novelties appeared in the second tier normative acts about manag ing federal unitary enterprises. The key novelties are represented by the following:

List of the grounds for termination of FGUP Directors Employment Contract included into the RF Government Resolution No.234 of March 16, 2000, On the order of executing employment contracts and certification of directors of state owned federal unitary enterprises was supplemented by the following important items:

- Director does not assure that FGUPs assets are used for the objectives estab lished according with the areas of business activities set in the Charter of the enterprise, nor does assure that FGUPs assets are used for the established ob jectives within 3 months;

- FGUP Director violates Russian Federation legislation and FGUP Charter with regards to disclosure of data about related parties in the transactions, including those among the affiliated entities;

- FGUP Director violates Russian Federation legislation and employment contract provisions with regards to banning certain types of business activities.

It is also stated that the decision about terminating the employment contract with FGUP Director according to item 2 of Article 278 of the RF Labor Code shall be finalized only upon it is approved by the Certification Commission.

RUSSIAN ECONOMY IN trends and outlooks The tender commission for selecting candidates for FGUP Director position may from now on include the authorized representative of the President of the RF in the respective Federal District with the full right to vote. When candidates for Direc tors of defense FGUPs positions are reviewed, the commission shall also include a representative of the RF Ministry of Defense with the full right to vote, and a perma nent member of Defense Industrial Commission with the RF Government appointed to the position of federal civil service under a special contract.

Similarly, when performing certification of defense related FGUPs Directors, the Certification Commission shall include a permanent member of Defense Indus trial Commission with the RF Government appointed to the position of federal civil service under a special contract with the full right to vote.

The Certification Commission shall also be entitled to approve draft resolution of the authorized federal executive body about termination of employment contract with FGUP Director in accordance with item 2 of Article 278 of the RF Labor Code.

The Resolution of the RF Government No.333 of June 6, 2003, On Exercising Federal Executive Bodies Property Rights with regards to State Federal Unitary En terprises Assets was supplemented with the provision about the need to agree transactions performed by the enterprise with regards to leasing real estate attrib uted to them on the basis of economic control rights and of value exceeding RUR 150m with the RF Agency for Federal Property Management taking into account the position of respective federal executive body on the matter.

Other amendments and supplements to legal acts were more of an editorial nature.

* * * Overall, the year of 2006 in the property relations sphere demonstrated con tinuation of the preceding two years trends, though in a slightly weakened format.

The number of FGUPs was decreasing and to a lesser extent the same happened to JSC with federal government interest. The abrupt increase of JSCs with 100% fed eral government interest was witnessed. In general, the federal governments packages profile (as per the share of government in JSCs charter capital) as of mid 2006 was more or less corresponding to the 2003 estimates of the RF Ministry for Property Management with regards to privatization outcomes. The same is true with relation to the absolute number of JSCs with federally owned packages.

The current situation with property relations in Russian economy is character ized by simultaneous implementation and co existence of two trends.

On one hand, one may speak about continuation of privatization. The RF gov ernment annually sets forecast plans (programs) for federal property privatization for the next year, which include many hundreds of FGUPs and stock packages (shares) of companies operating in various industries and sectors of economy.

However, the following needs to be taken into account:

Firstly, the planned privatization of FGUPs is performed (with some very few exceptions) by way of incorporation, i. e. at first a unitary enterprise is converted Section Institutional Problems into a JSC, and only after that (as a rule, beyond the current fiscal year) its shares are sold (probably not 100%).

Secondly, up till very recently minority and blocking packages of mid size companies were main subjects of sales. Such companies do not play any signifi cant role in Russian economy, which lowers their attractiveness and level of interest towards them on behalf of investors. The approved privatization program stipulates abrupt shift of the focus towards selling complete (100%) packages, which many experts regard as a disputable and problematic decision. Inclusion of major com panies into privatization program (similar to those privatized in 1990 s and early 2000 s) is not likely earlier than in 20082009, when a new political and business cycle is about to start in Russia. The most explicit candidate for privatization is a state owned package of Svyazinvest, a telecommunications holding, selling of which was deferred a number of times during the previous years.

Thirdly, the actual scale of FGUPs incorporation and federal packages privati zation is evidently behind the scheduled ones. This may be explained by low attrac tiveness of the offered packages due to their sizes and industry based profile, by very long time required for incorporation of unitary enterprises, by challenges of controlling this process (resistance on behalf of the management, inter departmental friction, parallel creation of integrated organizations, etc.).

On the other hand, increasing impact of the already existing major state owned corporations on the process of establishing new holdings to integrate gov ernment assets is pretty evident, just like their growing activity at the M&A market (including privatization).

Thus, with the government sector appearing to be shrinking (which is re flected in the decreasing the number of FGUPs and JSCs with government inter est), in reality it is expanding and deepening at the expense of the increased scale of business and via an expanded network of subsidiaries and affiliates. The state owned companies performance is difficult to assess (just like performance of other holding organizations), because their subsidiaries, affiliated and controlled assets are not permanently fixed and often change, providing for significant impact over the activities of the Group as a whole. Another difficult task is accounting for the level of consolidation of assets with a holding (e. g., it is difficult to account for the contribution of enterprises and organization with participation of companies which are controlled by the holding not in direct, but rather in indirect manner, i. e.

through a network of subsidiaries and affiliates). All this impedes evaluation of the overall scale of the government sector, its share in separate industries and in GDP as a whole.

With a big level of probability one may speak about continuation of the above described trends in 2007. With that certain adjustments need to be made based on oil prices fall and the beginning of the new political and business cycle.

RUSSIAN ECONOMY IN trends and outlooks 5.3. Issues associated with buying out and leasing land plots of business entities The problem of acquiring property rights (title) for the land plots owned by ei ther state or municipal authorities and carrying buildings, structures and facilities owned by either business entities or individuals, has for the first time come up back in 1990 s due to starting the privatization process. The Presidential Decree No.of March 25, 1992, On Selling Land Plots to Individuals and Legal Entities during Privatization of State and Municipal Enterprises proclaimed that employees of the privatized entities were entitled to buy out the land plots carrying these entities as sets. In reality the process of transferring land to private property did not start at that time, but the general principles for buying out land were established. The Situation changes upon enactment of the Presidential Decree No.1535 of July 22, 1994, On Key Principles of Government Program for Privatization of State and Municipal Enterprises in the RF after July 1, 1994. Additional incentive for privati zation process enhancement was significant decrease of the price for land plots to be bought out: it used to make 200 times land tax rate per area unit, but due to en actment of the Presidential Decree No.485 of May 11, 1995, On Measures to As sure Privatization Revenues into the RF Budget (item 7) it was brought down to times tax rate. In May 1997 the price was again brought down to constitute 5 times land tax rate (item 4 of the Presidential Decree No.485 of May 16, 1997 On Guar antees for Real property Owners about Them Being Able to Buy Out land Occupied by this Property) lost effect starting from March 29, 03, 2003).

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