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Sixth, it’s the attempt to reanimate the state holding companies in the strategic branches of the economy (see para 4.5.). To a considerable extent it can be possible only on the basis of redistribution of the ownership shares in large Russian corporations.

And, finally, we may witness a series of mergers and friendly alliances between companies from the crisis-ridden financial groups as a possible adequate reaction to the growing momentum of these processes. At the same time such merger would most probably be aimed at the strengthening of their overall defensive positions or restoration of the past lobbying clout and not at the achievement of the economic efficiency of the involved corporations and production operations. This also explains why all such intentions are very shaky.

The prospects of development of those industrial companies which still remain under the control of problem-ridden banks can be estimated as negative in the same degree. The latter would probably resort to the tools of the corporate control in order to alleviate their own financial situation.

Thus, given the otherwise equal conditions during 1999-2000 we can expect formation of the new large financial entities and, in general, change in the disposition of forces at the financial-industrial Olympus. The consolidation of the financial resources for the election race purposes in 1999-2000 would play an important role in acceleration of these developments. In any case it’s still premature to speak of any stabilization of the ownership structure in the Russian economy.

4.3. Non-payments and the debt restructuring

The problem of the enterprises arrears as regards their payments to the budgets of all levels is one of the key links in the chronic fiscal crisis in Russia. At present out of 2.7 mln enterprises on the list of taxpayers 30% are in arrears. The attempts to restructure these tax arrears which took place in 1996-19983

343 didn’t bring about the desired results. This was explained both by the deficit of the necessary political will and by the insufficiently detailed procedure of restructuring.

This problem is to the same extent valid also as regards the relations between enterprises. According to the data of the Federal Service of Revenue and Taxes (1998) out of the total arrears the share of the commercial banks is 4-6%, more than 50% - the share of the commodity credit and more than 42% - arrears of mandatory payments.

In this situation the different mechanisms of the debt restructuring (its transformation into ownership rights) may be used as an efficient means of strengthening or establishing control in a corporation. Here are several examples.

(1) By the RF President Decree No 1057 of July 20, 1996 On measures to eliminate the companies’ arrears of wages and taxes it was allowed to the enterprises with the state shareholdings of 25% and more to issue new stocks in order to repay their debt to the budget. Correspondingly there was the alternative: either the government share is going to increase after the new stock issue (that is, the shares would be accepted to offset the debt), or the government’s stake is going to be diluted in favor of other shareholders. The first (and apparently the only) experience of that type was when the oil company YUKOS placed the stock issue for the amount of 499 bln roubles among the shareholders and through an open subscription (but among friendly entities). By the time of issue the Menatep group owned 33% of the company’s shares (as the result of an investment tender) and held as collateral 45% of shares. The authorized capital thus increased by more than 30% (by 2.3. bln roubles) and amounted to 8.9 bln roubles. The state shareholding in this company decreased from 45% to 33.3% (and was subsequently bought out by the group).

(2) It’s worth mentioning certain measures of Gazprom taken in order to settle it’s problems of arrears payable to it (RAO Gazprom’s internal order of January 22, 1997 On organization of sale of debtor’s arrears of the consumers for the natural gas delivered by the enterprises of RAO Gazprom). Actually taking into account the amount of debt of different enterprises to RAO Gazprom only this natural monopoly is capable of organizing the independent market of corporate control in Russia. It’s also obvious that these debtor’s arrears are very heterogeneous and there are different kinds of options (apart from the absolutely hopeless ones): keeping the debt in order to subsequently convert it into the ownership rights; to sell it back to the debtor under the threat of potential resale to hostile entities etc.

The Gazprom expansion through the securitization of debts also applies to the privatization plan of Tatenergo (as of July 1998), it’s envisaged that 10% of its shares are to be handed over the Gazprom as repayment of debt.

It was presumed that FDC was going to sell large debtor’ arrears while the smaller chunks would be sold through the regional exchanges. As opposed to Gazprom which prefers to have a debt market of its own another large holder of such debt, RAO UES of Russia, may resort to the FDC services.

(3) The RF Government decision No 254 of March 5, 1997 On the terms and procedure of the restructuring of enterprises debt in respect of their payments to the federal budget, according to some opinions, was drawn up specifically to address some of the needs of the ONEXIMbank group (although in the end it was its competitor, the Menatep group which used it with the maximum effect). The restructuring of the debt was to be effected through the securities issue (controlling shareholding to be used as collateral or bonds secured by the property of the issuer or by guarantees of the third parties).

In accordance with this scheme in October of 1997 the subsidiaries of YUKOS-Yuganskneftegaz and Samaraneftegaz – issued bonds for the amounts of 1.63 trillion roubles and 365 bln roubles, respectively guaranteed by YUKOS). The bonds of these oil companies were of extremely high par value and didn’t conform to a number of criteria applied to securities. Thus only 8 bonds were issued for the total amount of debt with the individual yields and maturities. As a result of obvious unattractiveness of such an issue for the foreign portfolio investors the whole issue offered at the auction organized by the Russian Federal Property Fund was purchased by the insider, YUKOS (actually the sole participant of the auctions) with the discount of about 35%.

By the end of 1997 only 6 Russian companies obtained permission for the restructuring according to this scheme: the above-mentioned subsidiaries of YUKOS which used this permission as well as Noyabrskneftegaz, AvtoVAZ, Norilsk mining and metallurgical plant and closed joint-stock company Mezhdurechye. It’s obvious that the minimal interest generated by this scheme was explained both by the fact that the managers didn’t believe that any serious sanctions would be taken against them in connection with the arrears to the budget as well as by the fear to lose the corporate control once this scheme is launched.

(4) Similar fate awaited the procedure of the accelerated bankruptcy which was approved by the RF Government decision No 476 of May 22, 1998 On measures to increase the efficiency of the bankruptcy procedures It was envisaged that on the basis of the debtor’s property an open joint-stock company would be set up and the shares of this new joint-stock company would replace this property in the debtor’s assets. The shares of the new company are to be sold and the proceeds would be used to offset the creditors’ claims.

According to the Federal service of revenues and taxes similar procedures were already used in respect of several dozens of enterprises within the framework of the old bankruptcy law. As the example of how this procedure was used within the framework of the new decision the case of the Volzhsky pipe plant controlled the Rosprom group (bank Menatep) can be described. In May of 1998 in anticipation of the start of the bankruptcy procedure two new entities were set up: AOOT VTZ (the debts of the plant) and PO VTZ (with clean balance sheet). Nevertheless in May 1999 the check-up of the managers’ activity was begun in connection with the premeditated bankruptcy: 5 subsidiaries of AOOT VTZ in April of 1998 (before the bankruptcy) bought up 80% of the plants’ assets paying for them in unsecured drafts of an unknown company. Subsequently those assets were used as a contribution to the authorized capital during the setting up of these companies (c, 1999). We would also point out that the scheme with the bills of exchange was also used by the bank Menatep during paying up of its investments into VTZ after the privatization investment tender (loans against the drafts of VTZ as a collateral).

In general the restructuring of the debt through establishment of the subsidiaries with the clean balance-sheet is a widely-used method. In such cases the problem arises when the major objective of such restructuring is a very trivial move: to hand over the liabilities to the creditors while the assets would go to the subsidiaries or new companies.

(5) In general the restructuring of debt in 1998 could proceed on the basis of the RF Government decision No 395 of April 14,1998 On the procedure of the restructuring of the legal persons arrears to the federal budget in 1998 (for more details see: , 1998). The issue and pledge of the securities (for which the decision of the general meeting of shareholders was necessary) were not envisaged by this decision and the use of the property as collateral (for which a decision of the general manager or the board of directors was sufficient) or the bank guarantee were to serve as a security under this scheme. It should be mentioned in this connection that the threat of loosing the corporate control became less valid however the possibility of securing the restructuring with non-liquid assets remained very relevant. This increased the chances of the practical use of this scheme.

The case of Purneftegaz, one of the largest oil producing companies of Russia, a subsidiary of the oil company Posneft, may serve to illustrate the use of the bills of exchanges and sales of the debtor’s assets in order to take over the control. The shares of Purneftegaz (38% of its authorized capital or 51% of the voting stock) were arrested on June 1, 1998, under the summary enforcement order to repay the debts of the parent company Rosneft to several banks and companies including some liabilities under the bills of exchange. The shares could be sold at any time, however, the sole shareholder of Rosneft, the RF Ministry of State Property, didn’t do anything the prevent this transactions from taking place. After that in August of 1998 an amicable settlement was reached with the creditors (the enforcement order was recalled and the agreement on the restructuring of the accumulated debt reached).

Nevertheless on September 11, 1998 in accordance with the decision of the Moscow arbitration court the authorized bank of court bailiffs, Dialog-Optim, sold the controlling interest in equal shares to 4 small companies for 10 mln dollars. Actually, the annual turnover of the company is estimated to be around 600 mln dollars, the value of the controlling interest (according to the RF Audit and Control Chamber) is between 680-760 mln dollars. The sale was effected within the framework of the federal law On executive procedure (which means outside of the bankruptcy procedure). Although the final buyer remained in the shadows until the end among the potential parties which might have initiated this procedure LUKoil, SIDANKO and some others are mentioned. In November and December of 1998 under the lawsuit initiated by the Procurator’s office of Moscow all 4 transactions were deemed to be invalid and the controlling interest was returned to Rosneft.3

354

But the problems of Purneftegaz were not over yet: in December of 1998 the Arbitration Court of the Yamalo-Nenetsky autonomous district instituted the position of the provisional manager of the company in anticipation of the bankruptcy (the debt of the company was 2 bln roubles). The bankruptcy procedure was initiated by the autonomous district administration which intended to establish its full control over the company. In February of 1999, after the compromise was reached between the administration of the district and the management of Rosneft the creditor’s council aborted the bankruptcy procedure and extended the period of debt repayment. Nevertheless if the balance of power between all the interested parties shifts the new aggravation of the corporate conflicts around Purneftegaz is unavoidable.

There was another case when the shares of the oil company Komineft and its subsidiary Komiarcticoil were arrested and subsequently sold to repay the debts. This was initiated by the administration of the Nenetsky autonomous district and the buyers were the Baltic financial and industrial group and oil company Rosseverneft. In this case there was a problem with the chosen method of defense: in 1999 Komineft after a long delay produced the loan contract with EBRD signed in 1996 according to which the arrested shares were used as a security.

In March of 1999 the shares of Mosenergo (actually amounting to the controlling interest) were arrested in connection with its debts (even at the time of arrest the value of controlling interest was estimated about 750 mln dollars. Before this shareholding belonging to the RAO UES of Russia was used as a collateral for a loan.

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