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Third, only few large businesses havestarted the transition from clear and direct policy of privatization of theadministrative resource to emphasized loyalty to the federal authorities anddemonstration of social responsibility. Some companies (for instance, SUALholding, second largest in the Russia’s aluminum industry) makeagreements on social partnership with regional authorities, other initiateincreases in the state-owned shares or surrender control over certain assets tothe state (for instance, group Interros transferred some assets tostate-controlled Permski Tsentr Dvigatelestroyeniya in the process ofreorganization of Permskiye Motory).

A number of large companies foundthemselves involved in court proceedings, which, although formally>

In its turn, the state itself (as represented by itsexecutive branch) intensifies its expansion into economy more and more whateverthe motive. This process is developing along six key interrelated avenues:

- changes in the management of largestnatural monopolies and strategic companies partially owned by the state(Gazprom, Railroad Ministry, MIC, Atomic Energy Ministry, subsidiaries ofRosspirtprom, the State Investment Corporation, etc.);

- reorganization (primarily mergers) ofexisting and creation of new holding companies in strategic sectors(consolidation of regional communication monopolists in sever interregionalcompanies of Svyazinvest holding (for seven federal okrugs), five integratedstructures in aircraft industry, open JSC Promyshlennaya Kompaniya KontsernAntei, etc.);

- return of previously withdrawn(privatized, pledged) assets (former assets of Gazprom – enterprises of SIBUR,Itera group, etc., pledged blocks of shares in open JSC NovorossiyskoyeMorskoye Parokhodstvo and Severo Zapadnoye Parokhodstvo, etc.);

- transfer of certain segments ofstate-owned property in jurisdiction of the President’s administration (creation of aFSUE to manage Russia’s property abroad, etc.);

- attempts to change the rules governingthe delimitation of ownership levels and RF shares in capital established yetin 1992 (ALROSA);

- setting of control over major financialflows and concentration of financial flows in state banks. As a substitute forde-privatization of industrial assets there is used nationalization offinancial flows. RF Sberbank and Vneshtorgbank, which have exclusive access tothe largest and cheapest financial resources – household savings andresources of the Bank of Russia respectively, issue credits to largestRussia’scompanies16. An illustrative evidence of this is the discussion on theprivatization of Vneshtorgbank, which took place in 2001 and 2002.

The tough political struggle in 2000 and2001 related to reorganization of largest natural monopolies (RAO Gazprom,RAO UES of Russia, Railroad Ministry) brought comparatively modest results:

- the problems of further privatization offederal natural monopolies were transferred (in a draft new law onprivatization) to the State Duma;

- there were approved concepts ofprivatization for RAO UES of Russia and Railroad Ministry;

- there were carried out changes in themanagement of RAO Gazprom (resignation of R. Vyakhirev in May of 2001,replacement of financial managers, initiation of criminal cases concerning theexcess of power in January of 2002, etc.) and Railroad Ministry (initiation ofa criminal case against ex-minister N. Aksenenko, who was accused of excess ofpower, and his resignation in January of 2002).

The latter result seems to be quitesufficient in the framework of restructuring of both sectors. There is stillno real plans for restructuring of Gazprom, although such plans similar inideological terms to the design applied to restructure RAO UES of Russia havebeen discussed more than two years. According to the latest statements by A.Miller (January of 2002) the restructuring is not needed at all. In August of2001, there was discussed only the issue of liberalization of stock market. Itseems, that the issue of restructuring as the process of creation of severalcompeting natural gas companies (not merely sale of auxiliary assets) isclosed. A certain argument supporting such a decision may be the immediatenecessity to return assets to RAO and to settle the problem of financial flows(regardless of non-economic tasks of the new management).

The restructuring program for RailroadMinistry, as approved by the government in the summer of 2001, envisages thecreation of open JSC Rossiyskiye Zheleznye Dorogi (Russia’s Railroads) (this projectexisted yet in 1993) and transfer of economic functions from the Ministry. JSCRussia’sRailroads shall comprise major railroad capacities, including theinfrastructure (electric power distribution lines, railroad network,embankments, etc., i.e. 90 per cent of the sector’s assets). At the same time, inJanuary of 2002 FSS objected the plan insisting that the railroadinfrastructure was a strategic object and should be reorganized as anindependent FSUE. In January of 2002, the draft law on privatization ofrailroad sector was recalled from the State Duma.

The practical implementation of the plansto reorganize RAO UES of Russia started only in year 2002. According to theapproved program, the major goal of reorganization is the attraction ofinvestment resources to the industry. In institutional terms, the system shallbe split in the monopoly part (power grids, dispatching services) andcompetitive part (generation of electric power, marketing, servicing) before2010. It is also envisaged to create the wholesale market of electric power andimplement market mechanism of tariffing of heat and electric power17. Byend-2001 (currently as an experiment) there was established the Administratorof trade system (electric power exchange for sales at market prices), throughwhich generating companies shall sell up to 15 per cent of their output. Inyear 2002, the Board of Directors of RAO established the Federal NetworkCompany (Rb. 121 billion of authorized capital). There is also planned tocreate the Federal Company of System Operator (Dispatcher). The reform ofgenerating companies (JSC-energo) is directly linked to the problems ofcorporate governance.

First, to make 72 JSC-energos manageable,the holding shall considerably redistribute assets and enlarge generatingstructures. Reorganization (merger, takeover, or division of existingJSC-energos will result in a significant intensification of the market ofcorporate governance and more serious corporate conflicts at large.

Apart from effective procedures aimed toprotect the rights of shareholders in the course of takeovers (which arevirtually absent in the current Russian legislation), there arises acomplicated complex of problems in the framework of achievement of generalbalance of interests – shareholders of all types, managers, regional authorities. Inthe framework of the reform of RAO, there appears yet another subject– managingcompanies (and, respectively, a broad range of unsettled problems related totrust management).

Second, there exists an obvious problem ofreal strategic importance. Purchase of energy producing capacity is the nextlogical step for new vertically integrated groups (with metallurgic core).The sale of power generating companies in the framework of the restructuring ofUES of Russia will apparently result in metallurgic groups buying them upthus obtaining unlimited influence on the national economy. It is also ofimportance that a single center exercising ownership control over thewhole complex power engineering – coal – metallurgy permits to effectively direct financial flows fromall links to exports and optimize tax policy.

The regional reactions to the expansion ofthe federal center certainly are of mixed nature; however, there is observed ageneral trend towards the demonstration of loyalty to the federal authority.Below, there are cited only two examples of many.

On the one hand, many regional leaders hadto adequately react to the federal center’s demand to unify federal andregional legislative acts. For instance, in the spring of 2001, M. Shaimiyev,the Tatarstan President, revoked the moratorium (in effect over nine years) forsale of shares in 21 enterprises strategically important for theTatarstan’seconomy. This moratorium was related to the special privatization procedures inthe Republic, where privatization vouchers were complimented with registeredprivatization deposits for the population of Tatarstan. These deposits couldbe exchanged for shares in local enterprises. At the same time, there wasprohibited to sell shares purchased by employees, for which they paid withlocal vouchers. However, in 2001, this unification was purely formal, since defact the prohibition was easily circumvented (via agent agreements withauthorized Republican agencies, commandite companies run by issuers, andvarious gray schemes). The Republican commission for securities explained therevoking of the moratorium was caused by due to the necessity to equalize therights of holders of same tranches, what, however, was obvious from the start.

On the other hand, regional authorities(similarly to a number of private groups, what often is the same)regarded the property expansion of the federal center rather negatively andstrove to bring under their control key financial flows. A striking example isthe reaction of M. Nikolayev (Ex-President of Yakutia) to the attempts of thefederal center to put under property and financial control theRussia’s diamondmonopoly closed JSC ALROSA.

At present the shares in the ALROSAauthorized capital are distributed as follows: RF - 32 per cent, Yakutia– 32 per cent,employees – 23 percent, local administrations – 8 per cent, the Fund of Social Guarantees for Servicemen underthe RF Government –5 per cent. According to the available data, the federal center planned toincrease its share to obtain the controlling interest in ALROSA and totransfer leasing payments from local to the federal budget (in particular, viatransfer of assets of the former NPO Yakutalmaz to the federal ownership inorder to subsequently lease them without participation of Yakutia). As acounter measure, Yakutia planned to transfer blocks of shares in the Republicanownership (including the block of shares in ALROSA) to Sakhainvest fund(the formal number of shareholders at 200000) for trust management, what wouldcreate a considerable obstacle for the federal expansion. After the Decemberelections in the Republic, it is unlikely that these plans will succeed,especially taking into account the fact that V. Shtyrov (Ex-President ofALROSA), who replaced M. Nikolayev as the Yakutia President, is rather loyal tothe plans of the federal center.

In its turn, the federal center moreactively interferes in regional ownership disputes via its representatives infederal okrugs. For instance, in January of 2001, the representative of thePresident in the Ural federal okrug made a statement that the RF subjects inthe Ural region inefficiently managed state-owned property and 50 per cent ofSUEs in the okrug operated at a loss. He proposed to considerably limitproperty rights of regional administrations. For instance, there was proposedto deprive regional executive agencies of the territorial functions of theProperty Ministry, apply more strict requirements to state representatives atJSCs, introduction of a legislation governing the withdrawal of excessivereal estate from under the operative control, introduction of the institutionof professional trust management of state-owned blocks of shares, replacementof representatives of regional administrations in registers withrepresentatives of the Property Ministry.

In July of 2001, there were announced evenmore radical proposals. For instance, the office of the President’s representative in the Uralokrug proposed to transfer a part of shares in closed JSC Karabashmed to thestate ownership as a way to settle the conflict related to JSC KarabashskiMedeplavilny Kombinat and closed JSC Karabashmed.

In the context of facts described above(it concerns both federal natural monopolies and reorganization of privategroups), it shall be noted that legislative innovations in the area ofreorganization, mergers, and takeovers gather in importance. The problem ofimprovement of legislation on insolvency still remains an urgent problem.

In particular, it is necessary to developfurther the sphere of regulation of corporate takeovers. While corporategovernance at large may accept the OECD Principles of Corporate Governance as acertain guideline, the protection of shareholders’ rights in the course oftakeover requires the study of the broad EU experience related to thesupranational regulation of mergers and takeovers, which was formalized in theCode On Corporate Takeovers (the draft was approved on June 6, 2001 and shallprobably come into effect in 2006). The most important part of the Codeideology is the shift from the interests of aggressors (these interests areeasy to satisfy because many EU countries do not set significant constraints ontakeovers) to the interests of companies being taken over and theirshareholders. According to the Code, minor shareholders of such companies shallhave the right to block a number of decisions in case their interests areinfringed upon. The continental orientation towards social partnership wasresponsible for stipulations requiring preventive notification of employees ofthe companies being taken over.

The urgent problem of the degree ofregulation (control) of economic concentration (in terms of the anti-monopolylegislation) and operations of owners (and their managers) actually controllingtheir companies in order to protect other groups of shareholders from potentialdamage (dividends, transfer price formation, too low export prices, withdrawalof assets, taxes, export of capitals, etc.) remains unsettled.

The trend towards property expansion andputting under control key financial flows in the Russian economy (in more broadterms, the attempt to make business dependent on state institutions andimplementation of the state capitalism model in spite of decisions aimed topromote deregulation and further privatization) demonstrated by the authoritiesin 2001 and 2002 makes even more urgent the problem of protection of ownershiprights, court reform, and efficient law enforcement.

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