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Part 4. Institutional andmicroeconomic
problems

4.1 Privatization

According to the RF PropertyMinistry’s plans, in2001, minimal receipts fromthe sales of public property, which since 1999 have not been included in therevenue part of the federal budget, should have accounted roughly for Rb. 18bln. In compliance with Art. 24 of federal law No. 150-FZ On the federalbudget for 2001, revenues from the property owned by the government or fromrespective operations should make up Rb. 26.8 bln. particularly dividends onshares – 2 bln.,rental payments – 5.6bln., payments (incomes)from public enterprises – 9.4 bln. The latter relates primarily to the Russian-Vietnamesejoint-stock companyVietsovpetro rather than to profits generated by public unitaryenterprises.

Apart from annual conflicts with regard tothe government’spowers and concrete objects considered for privatization, the problem of formation ofthe list of enterprises subject to privatization in 2001 appeared complicateddue to Art. 100 of the federal budget law for 2001. According to the latter, in2001 the shares of those AOs whose capital assets’ value as per balance sheet(considering a consolidated budget with assets of daughter and subsidiary companies) exceeded 50 mln. minimal wage rates, asof January 1, 2000, were not subject to sales in 2001 until the enforcement ofa federal law on state privatization program.

Overall, it was intended to put up for saleabout 700 stakes in year 2001. In the first quarter of 2001 the government failed to abolish Article1001, therefore the Property Ministry has prepared a list of 19enterprises to be privatized in the first half-year, which complied with the law in formalterms (the list comprised Rosgosstrakh, Yuzhuralnickel, Kuzbassugol,Kuznetskugol, Khakasugol, Orenburggeologiya, Slavneft Mezhregionneftegazogeologiya, two Nizhni Vartovskoil companies, three integrated mining enterprises. The government longer-term program includedthe elaboration of a new law on privatization (see below). Therefore, theprivatization process atthe federal level was started only in the spring of 2001. In May, the PropertyMinistry presented the list of 81 enterprises (including Lukoil and about 40 federal state-ownedunitary enterprises - FSUE)to be privatized in the second half of 2001 for the approval of thegovernment. 2001 TheRussian Fund for Federal Property (RFFI) planned to sell blocks of shares in 7joint stock companies in the first half of 2001 and in 32 joint stock companiesin the second half of the year.

As it was noted over the past years, thetraditional budget orientation of the privatization process determinedseasonality of main receipts from privatization deals in 2001. In the 1st quarter, the overall receiptsamounted to Rb. 5.11 bln. (at 1/3 more than envisaged), however, receipts fromsales accounted just for1/7 of the noted amount. The aggregate receipts over 10 months of 2001 made upRb. 28.5 bln., including those from sales of assets and stakes- 8.4bln. (thoughwith account of sales held in the Subjects of RF), 3.9 bln.- rental payments,and another 12 bln.– in income onRussia’s share inVietsovpetro2.

By mid-December 2001 revenues fromprivatization accounted just for Rb. 9.3 bln., or a half of the amount plannedfor 2001 (see Table 1), while the crucial privatization deals, as usual, fellon the fall of the year. It is still unclear if the Property Ministry have metall its privatization targets for year 2001.

After a few years of inert debates, in 2001the government launched privatization of the oldest insurance giant – OAO Rosgosstrakh. It was yetin 1996 when the plan to sell control block of the OAO to thecompany’s topmanagement raised a broadcriticism. At present, the OAO has 80 daughter insurance companies and 2,500subsidiary branches. The company also is licensed to carry out 69 kinds ofinsurance operations and, As Of April 1, 2001, its assets stood at Rb. 850 mln.The privatization strategy underwent several changes, thus, along with thecompany’s informational closeness andproblems of manageability of its regional network, forming a negative factorfor investors. However, in2001 50 per cent minus 1 share was put up for sale in 2001, provided the salewould be carried out in 3stages.

Table 1

Privatization in 1995 through2001

1995

1996

1997

1998

1999

2000

2001 (fact, 10months)

2002 (plan, RFProperty Ministry)

Actual number of privatizedenterprises

6000

5000

3000

2583

595

320

No data

500

Approved budget, Rb.

4,991 trillion

12,3 trillion

6,525 trillion

8,125 billion cd

15 billion.cf(total 18,5)

18 billion cf (total 23,7)

18 billion c(total 44,8 billion)

35 billion (total 64billion)

Actual revenues, Rb.

7,319 trillion

1,532 trillion

18, 654 trillion b

14,005 billion e

8,33 billion c (total17,3)

31,4 billion c (total50,6)

8,4 billion (total 28,5 billion)

-

Actual dividends on blocks of sharesin federal ownership, Rb.

92,8 billion

118 billion

407 billion

574,6 mil. (200JSC)

6,15 billion (600 JSC)

5,6 billion (1050 JSC)

4,1 billion

10 billion

Actual lease revenues, Rb.

116,7 billion

305 billion

540 mil.

2,165 billion

3,4 billion

3,9 billion

6 billion

Actual payments (revenues) from state ownedenterprises, Rb.

-

5 billion

26 billion

660 mil.

-

9,8 billion – Vietsovpetro

12 billion – Vietsovpetro

12,4 billion – Vietsovpetro

1,23 billion– revenues fromSUE

- the approved budget was adjusted inDecember of 1995, 70.8 per cent of the actual revenues were derived at theexpense of loans-for-shares auctions.

b – including $ 1.875 billion forshares in Svyazinvest.

c – only for assetssold.

d – adjusted to Rub. 15 billion inApril of 1998 (at the governmental level).

e – including Rub. 12.5 billion for2.5 per cent of shares in Gazprom.

f – not included in budgetaryrevenues

As a result, in September 2001Troyka-Dialogue, which most likely represented interests of a consortium ofinvestors, acquired a 9 per cent stake of OAO at an auction for Rb. 201 mln.with the starting price of Rb. 153 mln. Consequently, on December 22, Troyka -Dialogue acquired another 39 per cent of shares worth a total of Rb. 1.03 bln.with the starting price being 1 bln., and on December 25 – 1 per cent of shares (25.003mln. with the starting price of 25 mln.) The fall in budget revenues againstthe starting price with every new auction is evident. To acquire the notedshares, Troyka - Dialogue was granted with a technical credit against theOAO’s shares as acollateral. It is intended in the future to increase the stock package owned bythe consortium up to the control one and to get the OAO’s shares to the blue chiplevel. However, the lack of clarity about the consortium members so far doesnot allow an unambiguous identification of the purpose of the acquisition– whether it was astrategic investment or portfolio investment for the purpose of its furthersale once capitalization is increased.

The majority of the privatization deals,both those accomplished in 2001 and deferred to 2002, highlighted corporatecontrol and governance problems as their crucial component.

Privatization practically is over in thealuminum sector. In august 2001, The Russian Fund for Federal Property (RFFI)sold the 14 per cent stake of Novokuznetsk Aluminum Plant to Russky Aluminumfor USD 6.02 mln. As any analogue deal with a residual package, the deal becamepossible only after RA acquired 66 per cent shares of the Plant. The qualifiedcontrol RA gained over the plant allow the company to ignore the remainingminority stockholders (especially after the Supreme ArbitrationCourt’s decisionmade in October 2001- see the Section on corporate governance), howeverproblems with alien creditors (in control of up to 50 per cent of theplant’s debts) andthe former owners (seeking a USD 3 bln. compensation in the court for falsebankruptcy of NAP by structures of Russky Aluminum).

It was the sale of shares of Kuzbassugolholding (the 3rd biggestnational coal producer, 17 coal mines, 3 concentrating mills, 62 back-upfacilities) that appeared the largest deal in 2001. The shares (a 79.73 percent stake) were offered in two lots (39.73 and 40 per cent) at specialauctions, thus complicating the possibility of a non-recurrent consolidation ofcontrol. At the same time, one had to submit his application for participationin the second auction prior to the conclusion of results of the first one. Inthis particular case the RF Ministry of State Property proved to be asuccessful gambler playing on competitors’ interests, which ensuredunquestionably positive results for the budget.

The struggle for the holding’s shares started yet at thestage of discussion of conditions. In early 2001 the Kemerovo oblastauthorities had a stock package directly sold to Belon coal trader, whichallowed an early forecast of the outcome of the deal in favor of members ofRussian steel (Evrazholding and Novoliptesk Metallurgical Plant, or NMP).Nonetheless, by summer the alliance formed by Magnitogorsk Metallurgical Plantand Severstal managed to convince the authorities to introducecompetition-based procedures that suggested a victory through offering thehighest price. After approval of conditions of the deal in June 2001 there werealso some attempts to strip the holding off assets through bankruptcyprocedures At the same time both the auction procedures and the final balanceof forces just intensified the corporate struggle and, most likely, ensured itscontinuation over time. With account of earlier acquired shares, the stockpackage of the holding in possession MMK and Severstal accounted for 52 percent, while another 44 per cent was hold by NMK and Belon (apparentlyaffiliated with NMK). The controlling alliance that put maximal efforts toensure its autonomy and security by buying the holding plans to establish ajoint managing company. At the same time its competitors, apart from 44 percent of the holding’s shares also have control and blocking stakes in a number ofholding’s daughtercompanies. Each alliance holds 5 seats in the holding’s Board of Directors, while the11th one is fixed for theRF Ministry of Energy as the government representative managing the GoldenShare. The Director General (as of December 2001) granted key posts in thecompany to representatives of the former alliance, while the Kemerovo oblastauthorities supporting the latter one appealed to the RF Ministry of StateProperty with a request to delegate them the rights for the Golden Share. Theimmediate effect of the confrontation became series of failures to holdstockholders meetings and the problem with regard to holding a meeting of theBoard of Directors and electing Director General.

The privatization of the national coalsector should be over in 2002 after the possible sale of a 38.41 per cent stakeof Vorkutaugol holding. It is Severstal, the biggest consumer of theholding’s productsand owner of a 15 per cent stake of that that may become a main pretender forthat, however, the repetition of the noted scenario with Kuzbassugol may becomepossible.

It has been noted for several years thatstock packages of Slavneft (19.68 per cent), Vostoschanaya neftyanaya Compania(VNK) - (36.817 per cent), and Svyazinvest (25 per cent minus 2 shares) havebeen in the list of potential objects for privatization, with respective dealsdeferred for the next years. Further privatization of Svyazinvest may becomepossible only after the holding restructuring and its presale preparation.

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