4.2. Concentration of Property and Integration in the Corporate Sector: Specifics of year 2000
The Corporate Sector in Year 2000: Some General Characteristics
In year 2000 largest Russian companies demonstrated positive changes across practically all indicators1. Aggregate returns and undivided profits of 50 largest companies increased by 15 per cent on the average, while the growth of owned capital made over 6 per cent. The enterprises in the oil and natural gas sector still account for the major share of the total returns and profits, what reflects the sectoral structure of revenues in the national economy. The amount of sales carried out by oil companies made 71.5 per cent of total returns as compared with 64.4 per cent in the previous year. Largest metallurgical enterprises were at the second place (their share in the total returns increased from 12.7 to 15.2 per cent), while other industries lagged behind.
The aggregate amount of profits shown by 50 largest enterprises over the period from 01.10.99 till 30.09.00 made US $ 12.9 billion as compared with US $ 11 billion over four previous quarters. Profitability of these companies increased from 20.8 to 21.6 per cent that being an evidence that financial and economic activities of enterprises became more effective. At the same time, profitability growth rate decelerated. The aggregate owned capital of 50 largest companies made US $ 67.2 billion, or about 65.4 per cent of assets. This ratio remained practically at the same level (in the previous year the share of owned capital in assets was at 65 per cent, while the amount of owned capital made US $ 63.3 billion). Capitalization of 50 largest companies made US $ 50 billion: the oil and natural gas industry increased its weight from 68 per cent to 89 per cent, power engineering – from 16 per cent to 18 per cent, while capitalization of communications enterprises remained at the same level (8 per cent).
In year 2000 about 15 large Russian corporations announced their plans to issue depositary receipts. It is also important to note that the majority of Russian corporate borrowers on the eurobond market strove to timely meet their current liabilities. The revival of interest to the market of corporate bonds became a characteristic feature in 1999 through 2000.
While before and in the course of the crisis of 1998 “capital flight” from Russia was of total character, in 1999 and 2000 there was observed a certain growth of capital reinvestment. This process resulted from growth of profitability and the effectiveness of investment in Russian enterprises after the Ruble devaluation, since the rate of profit in some industries was much higher than currently available anywhere abroad. However, it does not mean that the “capital flight” problem2 becomes less urgent, since this fact just reflects an increasing inflow of previously exported capitals in the form of pseudo-foreign credits and other forms.
Changes in the ownership structure of medium-sized and large Russian JSCs in 1994 through 2000, % of the authorized capital *
* The data contained in the table are only to illustrate the most important qualitative trends (based on surveys by IET and other organizations) and can not be utilized for precise empirical evaluation. The table does not take into account the largest JSCs (holdings), strategically important enterprises (with blocks of shares fixed at the ownership of the state), differences across industries. The real share of insiders (managers) may be somewhat higher in case affiliated structures (attributed to outsiders) are taken into account.
The available data for year 2000 show a considerable change in the structure of share capital of Russia’s enterprises (see Table 1)3. The qualitative turning-point occurred in 1998. A sharp downfall of insiders’ (employees) share and growing share of outsiders reflect, first, the post-crisis processes of ownership concentration (including those related to a sharp drop in the value of shares), second, a decrease in officially registered share of managers (on average, from 12 - 16 per cent in 1996 to 7 - 8 per cent at present4. The latter fact may be attributed either to direct sales of shares to outsiders (sales or offset against debts), or to more broad application of informal control on the part of managers (transfer of shares owned by managers to affiliated structures or purchase of shares on their behalf).
Ownership Rights and Corporate Conflicts
It may be noted that after the corporate legislation was effected in the late 1990s the ownership rights somewhat stabilized and the struggle continued in terms of law. Although the factor of corrupt courts and state institutions somewhat “corrects” the results of such struggle, rivals mostly resort to quasi-legal methods or use “gaps” in the legislation. However, occurrences of legal nihilism, when usurpers of management of corporations ignored the real structure of their share capital and nuances of management procedures, were also characteristic of year 2000.
The most important corporate conflicts in year 2000 were related to reorganization of companies, or processes of expansion of large enterprises or industrial groups. On the whole, there was registered a shift from intra-corporate conflicts to hostile takeovers from outside.
First of all, it is necessary to note infringements upon shareholders’ rights related to reorganizations of joint-stock companies. Undoubtedly, motives behind reorganizations differed considerably.
The problem of mergers and takeovers became especially urgent in year 2000 (see below). This process was most noticeable in metallurgy and oil and natural gas sectors. On the average, the Ministry for Anti-Monopoly Policy (MAMP) permits about 94 per cent of transactions, 5 per cent are permitted on certain conditions, 1 per cent of applications is rejected. A key issue in this process is the beneficiary ownership and general structure of the forming group.
The most important transaction in the aluminum industry (consolidation of 70 per cent of assets in the framework of “Russki Alumini”) obviously required special attention on the part of MAMP. According to available data, JSC “Russki Alumini” was registered in the town of Omsk in the summer of year 2000, however, blocks of shares in aluminum and aluminum oxide enterprises remained in the ownership of offshore companies. Accordingly, the transaction was outside MAMP competence, since it was “just redistribution of capitals within joint-stock companies… Some offshore companies sold to other offshore companies blocks of shares they owned.” 5 However, the official point of view expressed by MAMP was that such structures as “Russki Alumini” have the right to exist due to their orientation toward export, while the existence of three holdings in the industry (“Russki Alumini,” “SUAL,” and “Severo-Zapad”) assure sufficient domestic competition.
A typical example of MAMP potential in this sphere is the alleged purchase of natural gas distribution pipelines by “Mezhregiongaz” company. MAMP has no information that “Mezhregiongas” is buying up pipelines, since takeovers are carried out by companies founded by “Mezhregiongaz” where the share of the founder is formally not large.
However, in year 2000 RF MAMP was granted the right to request information on sources and amounts of funds used to carry out such transactions6, what may permit to find out real connections between formally independent transactions. MAMP has the right to investigate the matter until the end-beneficiary is disclosed. In 2001 it is planned to simplify the system of approval of applications for mergers and takeovers and to introduce new rules governing such transactions.
It seems that the problem of beneficiary identification shall be settled along three key guidelines:
toughening of legislation concerning the transparency of the ownership structure (including end-beneficiaries) aimed to find out the goals and interested parties of such transactions;
liberalization of threshold indicators defined by the legislation as requiring the approval by state agencies;
defining of owners’ or managers’ (in case it is impossible to identify owners) responsibility for submitting misguiding information, potential damage to parties of transactions and participants in corporate relations, etc.).
There were also registered attempts to squeeze certain shareholders out to new companies experiencing financial problems, or, to the contrary, to transfer assets to structures not controlled by outsiders. An illustrative example is the attempt to “reorganize” the shareholding structure of AVVA company (an infamous financial pyramid of the early 1990s). The company managed to keep certain assets and to exchange its pseudo-shares (so called shares deposit certificates, SDC) for “AvtoVAZ” shares being at its disposal (the control interest in “AvtoVAZ” was pledged to the government in the course of restructuring debts to the budget). However, a large number of outside shareholders refused to participate in the exchange. In year 2000, AVVA beneficiaries applied to the Federal Commission for Securities (FCS) aiming to squeeze stubborn outsiders (SDC owners) out to a new JSC (probably possessing less assets).
Largest Russian companies objectively need to carry out reorganizations for further long-term development. However, according to the estimates of the Institute for Corporate Law and Corporate Governance these processes differ in terms of transparency of operations for small shareholders. Three types of reorganization may be singled out: consolidation of “Norilsk Nickel” and “Surgutneftegaz” (small shareholders were presented with a fait accompli); restructuring of “UES Russia” (small shareholders were informed, but not invited to participate in drafting the program); communications companies (small shareholders were informed and invited to participate in designing of programs).
It shall be noted that many problems faced in the process of reorganization of largest holdings are related to the process of their creation and privatization. A widely publicized conflict between the management and small shareholders of “UES Russia,” which took place in year 2000, is rooted in the company’s ownership structure formed yet in the mid-1990s. It is a well-known fact that the government has a controlling interest in “UES Russia” (the government pursues long-term goals with a strong social factor, however, it understands the need of a radical technical and technological reconstruction), while minority shareholders have short-term interests related to the dynamics of stock prices, and shareholders from the number of employees are specifically interested in stability of jobs and wages. Although conflicts related to the latter group will be of importance somewhat later7, they affect the relations between the UES and regional authorities (social interests and control over regional energy structures). While the non-optimized ownership structure is a generator of potential conflicts, a certain compromise may be achieved via working out still lacking principles of corporate governance.
The representatives of minority shareholders in “Gazprom” raised the question about “Gazprom” relations with “Itera” company (more precise, a group composed by about 100 companies) and “Stroitrasgaz.” Although no serious allegations were voiced, the key addressed problem was the lack of transparency with regard to the most important decisions concerning the assets and transfer of “Gazprom” assets to companies affiliated with its management, what resulted in its under-capitalization. In February of 2001 the situation remained unclear, however, the “Gazprom” management had less opportunities to promote its own interests (since June of 2000 the Board of Directors consists of 5 representatives of the government, 4 representatives of the management, and 2 representatives of the minority shareholders). The possible resignation of R. Vyakhirev (in the summer of 2001) may even further strengthen the position of the state in the company.
The reorganization of “Gazprom” similarly to the case of “UES Russia” will be directly related to changes in the JSC’s ownership structure and affect all types of shareholders. In 1999 seventeen “Gazprom” subsidiaries were reorganized as JSCs with independent accounting and had to get rid of structures not involved in their basic activities. The governmental recommendations for “Gazprom” (worked out by December of 2000 and in many respects similar to those concerning “UES Russia”) envisage the separation of “Gazprom” monopolistic structures (pipelines as compared to “UES Russia” power grids and dispatcher controls) from companies involved in competitive operations (extraction and sales as compared to generating capacities and sales at “UES Russia”).