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According to the privatization program for2002 approved by the RF government on August 2, 2001, the sales ofSlavneft’s shareswas deferred to 2002 (with the control block to remain in the governmentproperty). The struggle for this stock package has been already underway since2001. First, pursuant to the claim brought by Ost-West Handelsbank AG, yet inAugust 2001 Slavneft’s assets worth a total of USD 2.6 mln. were arrested. The claimis related to Slavneft’s refusal to repay to the bank a credit extended to its daughtercompany against Slavneft’s guarantees. Interestingly, the control block in the German bankbelongs to the Bank of Russia. This case can result either in a lower startingprice, or in postponement of the term of privatization. Secondly, thegovernmental ruling on the sale of the holding’s stock package automaticallyeliminates the problem of transition of the holding towards single share whichcould have ended up not earlier than in 2003 and, according to some estimates,lead to 3-4 fold rise in its capitalization. Apparently, this appearsprofitable both to the government (acceleration of the sale in the conditionsof uncertain prospects for oil prices) and to the holding’s management, as the latterstruggles for control over the company with TNK. The transition towards singleshare would allow TNK (with account of its 12.5 per cent share in Slavneft plusblocking stakes in its two daughter companies ) to get 33 per cent of shares ofthe united company and then, in the course of privatization, to buy othershares to ensure a control block, which would obviously imply lowering thegovernment share in that.

RFFI has prolonged the auction on sellingshares of VNK (with the starting price of USD 225 mln.) announced in December2001 until February 14, 2002. It is YUKOS, whose general strategy is a maximalconsolidation of its assets that appears a real pretender for the shares.However, the fact that YUKOS is in possession of another 54 per cent of sharesof VNK allows questioning whether the sale of the stake is profitable for thegovernment. As well, TNK has also declared its intention to take part in theauction yet in December 2001,- however, from the perspective of corporatestruggle, its decision notably discredits unofficial statement issued by theAccounting Chamber of RF regarding YUKOS stripping off VNK’s assets (Achinsky Oil Refineryand Tomskneft). According to the data as of January 2002, the deal will not beaccomplished until the clarification of the issue.

Although there have been no plans toprivatize Transneft as yet, it is worth mentioning that it was, in fact,forced to pay dividends (Rb. 1.6 billion) for year 2002 to minorityshareholders owning 25 per cent of preferred stocks (75 per cent of ordinarystocks are owned by the state). It allowed to preserve the present structure ofcorporate control favoring the state and the company’s management.

As noted above, the privatization programfor 2002 (a mandatory component of the passing of the budget) was approved bythe government yet on August 2, 2001. The quantitative side of that is given inTable 2. It is the sales of 19.68 per cent of Slavneft’s shares, 17.77 per cent ofshares of Magnitogorsky metallurgical Plant and 85 per cent of NORSI-Oil thatmay become the biggest deals. The government also approved the RFFI propositionto sell blocks of shares in the Murmansk, Taganrog, and Tuapse sea ports in2002. The actual initiators of this proposition and most likely pretenders forthe purchase may be largest groups involved in coal, metal, and oil exports,which have already become owners of a number of ports. Roughly as many as 40per cent of enterprises planned for privatization in 2002 fall within the fueland energy sector that formed the favorite source for fulfillment the annualprivatization plan.

For the first time in the course of Russianprivatization there was introduced a law setting the legal framework for thereturn of actually sold assets. According to Federal law No. 194 FZ of December31, 2001 On the Federal Budget for Year 2002 (Article 79), the RF governmentaiming to release shares in JSC Novoship and Severo Zapadnoye Parokhodstvo,which were put up as collateral under certain credit agreements concluded inaccordance with the RF President’s decree No. 889 of August 31, 1995, On the Procedure Governingthe Transfer of Federally Owned Shares as Collateral in 1995, assumed theobligations set by these agreements. The agreements were amended to the effectthat the credits would be repaid at the expense of the federal budget in year2002. At the same time, the agreements under which these shares were put up ascollateral were cancelled.

The original forecast of revenues fromproperty sales with account of necessary organizational measures and favorablestate of affairs envisaged some Rb. 18 bln., but then it was increased up toRb. 35 bln. According to 2002 budget law No. 194-FZ of December 31, 2001, thebudget task on revenues from the use of public property (dividends and rentalpayments) and enterprises’ operations (joint ventures’ incomes, contributions fromthe federal state owned unitary enterprises - FSUE) for 2002 made up Rb. 29bln., upon adjustment introduced by the RF Ministry of State Property inDecember 2001 – 36bln., including: rental payments 4 (once adjusted –6), dividends 7.6 (10), rentalpayments for land –4.4 (6), deductions from profits of federal unitary enterprises – 0.5 (1.2), joint ventureVietsovpetro – 12.4(12.4).

It is the prevailing focus on delegatinggovernment representatives to boards of directors of joint – stock companies rather thanmanaging state unitary enterprises that constitutes a relatively new approachpracticed by the RF Ministry of State Property. Accordingly as long as themedium-term period is concerned, it is envisaged to proceed with incorporationand gradual sales of shares of an absolute majority of FSUEs, with not morethan 1-2 thousand of them retain in government ownership. As usual, there arediscussions as to whether the government should "get rid of the burden ofowning an absolute majority of minority stakes that do not allow theauthorities to exercise management functions but require certain costs.

In addition to privatization ofincorporated FSUEs and traditional sales of minority stakes, it is likely that2002 would witness a sharp contraction in the list of strategic enterpriseswhose privatization was prohibited. As a result, the RF government should ownshares of not more that 1-2 per cent of the most significant JSCs.

Table 2

The RF Property, as of 2001

The RF government property, total

As % of the total number of registered in RF

Due for privatization in 2002, as units

State unitaryenterprises

9718

12

152

Joint-stock companies whose stock packages are owned by the RFgovernment

3949

0,91

365

Including the respective governmentshare in their authorized capital accounting for:

- 100 %

- over 50 %

- 25-50 %

- under 25 %

- Golden share

88

625

1393

1843

542

-

-

-

-

4

26

118

217

Source: data from the draft privatizationprogram for 2002 submitted to the RF Government by the RF Ministry of Propertyin August 2001. According to the data from the register of the Ministry, as ofSept. 1, 2001, the figures are slightly different: 9,855 FUEs, 34, 868 publicinstitutions, 4,308 stock packages in AOs, 3,317 incomplete constructionobjects. According to some other estimates, the AOs with the government shareoutnumber 6,000, while the register of FUEs is far from completion. In 1999,the Ministry argued there were roughly 14,000 FUEs, which, considering thecurrent reorganization and privatization rates, does not allow trustworthinessof the official data for 2001 as well.

In addition to a considerable number ofstatutes passed between 2000 to 2001 pursuant to the 1999 Concept formanagement of public property, the government envisages crucial innovations for2002. First, to raise budget revenues through profits of FSUEs, the governmentneeds a strict formulation of principles of deduction of their profits to thefederal budget. There are several approaches to this problem in existence byJanuary 2002. Specifically, the Accounting Chamber of RF suggests a uniform 95per cent deduction rate for all such enterprises, while the RF Ministry forEconomic Development and Trade suggests computation of individual rates foreach enterprise. Finally, according to government Resolution of February 3,2000, No. 104 (amended on February 16, 2001) On Strengthening Control overOperations of the State Owned Unitary Enterprises and Shares of Open-End JointStock Companies in Federal Ownership it is necessary to carry out a sectoralcomputation of indicators of FSUEs’ economic efficiency and amount(share) of profits due to be transferred to the federal budget. The respectiveexecutive body of RF is responsible for ensuring such a computation incoordination with the RF Ministry for Economic Development.

Another important innovation may becomeadoption of the Regulation of Protection of Rights of the Russian Federationas an Owner which provides the transfer of the institution of governmentrepresentatives to the professional grounds. There are two obvious componentsof such a transfer: tightening requirements to pretenders for such a positionin Board of Directors of JSCs and identification of sources of financing oftheir operations. The third component that has not been tackled as yet isdevelopment of a system of responsibility measures. Such a system shouldparticularly include the possibility of introduction of amendments to theCriminal Code of RF concerning protection of the state interests, should thenoted professional representative exercise their duties in an unduly fashion.

As it can be seen from notes to table 2, itis a trivial examination of state assets that remains a necessary condition forfurthering the reform. In addition to a quantitative account, it is necessaryto ensure a clear distinction between levels of power with regard to theirenjoying certain rights for state property. According to the Department for theAccount of State Property of the RF Ministry of State Property, in 2001 therewere over 300 JSCs whose shares are owned by the federal government, howevertheir stockholders’rights are exercised, on behalf of the Russian Federation, regional agenciesmanaging state assets or other entities not granted with the respective legalpowers.

Adoption of a new law on privatizationforms a separate issue3. The final adoption of thelaw was scheduled for 2001 (with the 1st reading held on June 21, 2nd- November 29, 3rd – November 30, and the readingin the Federation Council – on December 5, 2001). However, President Putin postponed thesinging of the bill for 2002. Apart from the procedural collision (the bill hasnot been signed, however, it has not been returned over the term due). There isanother problem: according to some sources, the Presidential Administration isnot satisfied with the list of objects transferred under President’s competence.

At the same time, to a significant extentthe privatization program for 2002 is based on innovations provided by the law.

In order to increase the budget effect fromprivatization, it is envisaged to proceed with the individual strategy ofsales, analysis of the market (effective demand), and application of newprivatization methods. Although the focus on unique large deals on liquidstock packages by means of auctions is retained, should they prove to beineffective, it will be possible to employ such new methods as sales throughpublic offer, with no competition in place or by results of trust. There alsoare two in principle new matters: sales of land sites as an integral part ofthe privatized property (as dictated by the Land Code of RF) and increase incapital assets at the expense of intellectual property rights (which isimportant specifically in the case of privatization of MIC enterprises).

On the whole, there are ten possibleprivatization methods depending on the size of an enterprise, its liquidity, orresults of initial sales:

- shares in enterprises evaluated over 5million of minimum wages shall be sold via auctions, special auctions, oroutside the territory of the Russian Federation;

- all other enterprises shall be sold atopen auctions, special auctions, or tenders;

- in case there are no purchasers, theassets shall be sold via public offer (i.e. via Dutch auction, where theprice may be reduced to the original value);

- in case the sale via public offerfor small and medium-sized businesses fails, there shall be employed the saleof property without the price announcement;

- there may be organized tenders for trustmanagement (blocks of shares from 51 to 100 per cent) giving winners the rightto purchase later the shares at the value registered at the time the contractwas signed.

The privatization methods also include thetransformation of unitary enterprises into JSCs, sales of JSC shares via theorganizer of trade on the stock market, and transfer of property as acontribution to JSCs’ charter capitals. 4

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