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The existing situation means that the mass-scale dumping of the remaining shareholdings is going to continue and, maybe, accelerate. In general, according to the Ministry of State Property data it was envisaged to sell during 1998 about 2 thousand of the former state shareholdings now allowed for sale and many of them, apparently, still remain in the government’ hands. The shareholdings of less than 25% would be dumped without any conditions. As the experience of the previous years demonstrated (especially under the conditions of the deepest crisis of financial market) it might be not so much a sale but an actual handing over of these holdings to some private or institutional shareholders.

As a result, the privatization process again goes back to the stage of its spontaneous non-economic development: on the one hand because the government is not interested in organizing standard transactions within the framework of residual privatization, on the other, because of the cheapness of assets and, correspondingly, disappearance of the market criteria for transactions. This means the potential strengthening of the legal nihilism involving the participants of the privatization process which in general leads to the further destabilization of the ownership rights. The destabilizing effect of certain legal decisions in the field of the shareholders rights is of crucial importance in terms of the reestablishment of the overall investment climate.2


Apparently, such an uncertain situation is going to continue in 1999 as well. As of January 1999 the new forecasting list submitted by the Ministry of State Property to the government includes 7 companies: Sviazinvest (25% minus 2 shares, 14 bln rubles), Gazprom (2.5%, 13 bln rubles), LUKoil (9%, 4 bln rubles) as well as holdings in the Balashikhinsky bread products plant, AO Bor, designing bureau for the automatic production lines Rotor, Moselektrofolga. There is another list as well. According to the statement made by the Russian federal property fund it’s envisaged in 1999 to sell the shares of 6 companies: Gazprom, Sviazinvest holding, ONAKO, Sovkomflot, Aeroflot, Moscow river steamship company (they are mentioned in the descriptive memorandum to the budget of 1999 as the source of covering the budget deficit for the amount of 15 bln roubles). Apparently it’s also difficult to expect that in 1999 a comprehensible government concept of the rejuvenation of the privatization policy would appear.

At the same time from the standpoint of the medium-term objectives the first priority should be given to the optimization of the existing ownership structure both at the macro- and micro-levels (accompanied by the clear industrial policy) in the interests of the economic growth. The budgetary goals, given all their political importance, should have subordinate role. At the same time taking into account the current financial and political situation, nearing parliamentary and presidential elections we should hardly have any illusions.

4.2. The crisis of financial-industrial groups

75 financial-industrial groups were registered with the state Register by the end of 1998 (about 1.500 enterprises and organizations, about 100 credit and financial institutions). In real life now in Russia there are about 150 amalgamations of the business units (banking-industrial holdings) which, although not always being the financial industrial groups, officially on the basis of formal criteria might aspire to be called so. Among the major activities according to which the assets are consolidated in such amalgamations the following may be singled out:

- transactions at the secondary corporate securities market;

- transformation of debt into the share ownership;

- acquisition of the assets of enterprises liquidated during the bankruptcy;

- cross ownership of shares;

- system of personal participation in the boards of directors;

- control through the credit policy and keeping of accounts;

- participation in the standard transactions in the course of the residual privatization;

- use of quasi-privatization instrument (loans-for-shares schemes etc.);

access to the management of the state shareholdings (through trust management, government holding companies etc.) etc.

The problem of formation of the Russian financial-industrial groups in 1993-1999 and of their present crisis has many aspects.2

287 According to some researchers the first institutional crisis in the Russian economy was connected with the disappearance of exchanges in the beginning of 1990s, the second institutional crisis – with the sharp decrease of the number of banks in mid-1990s, the third institutional crisis is the crisis of management in the giant financial-industrial groups in 1998-1999 (, , 1998).

At the same time it’s necessary to take into account also the whole set of the macroeconomic problems of 1998-1999, the level of the world prices for raw materials, government regulation, specifics of the corporate relations in Russia. Below we are going to review only those aspects of the crisis of the Russian financial industrial groups which have bearing on the prospect of redistribution of the ownership rights for the industrial sector companies.

It’s well-known that even during the pre-crisis period the corporate governance by banks caused many complaints from the outside shareholders (YUKOS’s transfer prices in the Menatep bank group, transfer of funds from SIDANKO in the group of ONEXIMbank, monopolization of commodity flows in the subsidiaries by the owner-banks-Incombank and others).2


The banking crisis of 1998 sharply aggravated the problems of liquidity and insolvency in connection with the default on GKOs, forward contracts, debt under the eurobonds; foreign loans etc. At the time of default the holdings of GKO-OFZ in the Russian banks’ assets were about 40 bln roubles (without the RF Sberbank (Savings bank). The losses of the Russian banks which were hedging the exchange rate risks of the foreign investors as a result of the downfall of the rouble amounted, according to different estimates, between 6 and 22 bln dollars. The debt of the 17 largest borrowers against the foreign commercial loans was about 1.3 bln dollars. This crisis brought forth the clear tendency towards the contraction of the share ownership of a number of largest formal and informal groups at the core of which were the commercial banks. The following trends should be singled out in this connection:

- enforced sale of shares of those enterprises which traditionally formed the core of the group’s investment portfolio (for the group of the Rossiysky Kredit shares of the mining and reduction plants, for the Incombank group – shares of the confectionery, metallurgical and defense companies2


- attempts to get rid of the non-liquid and non-profitable assets purchased earlier within the framework of larger corporate entities or grabbed in the process of privatization or spontaneous post-privatization redistribution (for example, the ONEXIMbank suggested to the government to transfer the shares of the Angarsk petrochemical company to the state free of charge which is still better than the bankruptcy of this company);

- proposals concerning the nationalization of the part of group’s assets as a way of temporary protection against corporate raiders while retaining a part of shares, managers and control over the financial flows (see para. 4.5.);

- voluntary settlements using the shows of industrial companies to pay back the debt (according to some data, for example, in the end of 1998 there was a proposal to settle for the part of debt of the ONEXIMbank to the oil company Surgutneftegaz using the shares of the RAO Norilsky Nickel3

310, this possibility was also discussed during the negotiations between the committee of foreign creditors and ONEXIMbank in 1998);

- at present many banks are unable to pay back the loans they’ve taken using as collateral the shares of different enterprises (thus, according to the available data 30% of shares of the oil company YUKOS and 24% (before 34%) of the oil company SIDANKO were used as collateral for loans; The National reserve bank used the previously purchased at a special money auction 8.5% of the RAO UES of Russia shares as a collateral in order to obtain foreign loans and in the autumn of 1998, according to the available data, 7% of the shares were transferred to repay the debt);

- arrest of shareholdings because of debts or sale of the individual stakes within the framework of official bankruptcy procedures (see para. 4.3).

At the same time it should be pointed out that some of the Russian banks which didn’t actively participate in the corporate expansion by March 1999 reached an understanding with the Western creditors concerning the restructuring of their debts (without the forward contracts). Among them are such banks as Avtobank, Konversbank, National Reserve Bank, Poseximbank, Promstroibank-St.Petersburg (this last one with the debt under the forward contracts).

In general the situation in 1998-1999 has the following specific features. First, as early as in the beginning of 1998 the leaders of the largest Russian financial groups which actively participated in the redistribution of property during 1990s declared that their groups were entering the stage of putting their business in order and efficient management of the assets they acquired. Now the conditions have changed and we can only speak about the transition from the stage of grabbing the property to the stage of the assets dumping and survival tactics under the crisis thus bypassing the strategy of the group’s corporate reorganization in order to increase the overall corporate efficiency.

Second, the weakening of the former leaders means an increasing possibility of aggression from their smaller but better off competitors as well as from the regional authorities which previously could not afford to engage in a tug of war with the Muscovite financial groups. This creates potential grounds for a new spectrum of corporate conflicts.

Third, the reorganization of the large business in 1999-2000 would be also connected with the fact that the financial-industrial groups to a considerable degree lost the opportunity to work with the government money and would have to enter the market of the private capital in order to look for the new sources of financing).3

321 This, in particular, would lead to the new redistribution of ownership in exchange for the financial resources.

Fourth, it’s quite reasonable that against the background of the crisis of many largest banks and financial groups there would be an increase of power of the federal natural monopolies and those autonomous empires which congealed around large corporations and were initially oriented towards self-sufficiency and didn’t suffer so much in the course of the financial crisis. Of course this strengthening may to a considerable degree proceed at the expense of the assets and influence of the former rivals.

In the end of 1998 RAO Gazprom considered different options for setting up the new metallurgical holding Gazmetall which would include purchased from the Rossiysky Kredit group controlling stakes in Lebedinsky, Mikhailovsky and Stoilensky mining and reduction plants as well as the shareholdings in the Oskolsky electrical-metallurgical plant and, probably, Novolipetsky metallurgical plant. This may signify the simultaneous end of a few scandal-ridden corporate wars of many years of duration (struggle for the Lebedinsky, Novolipetsky plants, etc.).

Among the 12 vertically-integrated oil companies probably LUKoil and Surgutneftegaz are in the best shape and during1998-1999 they considered different options of expansion. Apparently we should include into this example also the attempts of the Tyumen oil company (TOC) from the Alpha Group to establish control over the enterprises of oil company SIDANKO (Chernogorneft and Kondpetroleum) through the start up of the bankruptcy proceedings (external management); these attempts were stepped up in 1998-1999. Such method was already tested by the group of raiders during the takeover of the Achinsk bauxite plant or West Siberian metallurgical plant. In case of SIDANKO the bankruptcy was initiated by the company itself (which may be recognized as fictitious) and it was done as response to the corporate raider by the major creditor and owner – the group of ONEXIMbank.

Fifth, the growing regionalization of the ownership redistribution is the natural trend:

- establishment of regional holding entities under the protection of the local authorities (in Bashkortostan – the Bashkirian fuel and energy company was set up; in Vladimir oblast – 4 holdings in the glass-making, linen, cotton and defense industries, in Moscow – the Central Fuel Company, etc.);

- attempts to revise the results of the privatization transactions where the representatives of the Center (all-federal groups), other regions or foreign investors have won (for example in 1999 Philips under pressure from the Voronezh region authorities sold 89% of shares in the Voronezh TV tube company for the price of 1 rouble to the financial-industrial group Rossiyskaya electronica, in 1998 there was a conflict between the German company Knaub which purchased the Kuban cement plant and the local authorities and managers which, nevertheless, was resolved in favor of investors, etc.);

- withdrawal of shareholdings in the regional companies previously transferred into the trust management (Tatarstan – the decision of 1998 to withdraw 9 shareholdings in large companies from the management of the Moscow-based investment company Tatinvest-Ross);

- attempts to cancel the new stock issues which resulted in the change of the ownership of the regional corporation in favor of the aliens (Moscow, Samara) etc.3


The active attempts to establish regional control (often together with the victim competitors) in 1998 were actively begun by the authorities of the oil-producing regions. Among them were the conflicts between the Irkutsk regional authorities and SIDANKO over the ANHK, demand to transfer under the control of the Samara region authorities the local enterprises of YUKOS, conflict between the Yamalo-Nenetsky autonomous district and Rosneft over Purneftegaz, conflict between the Nenetsky autonomousdistrict and Komineft,etc.

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