14Section 4. Institutional and Macroeconomic Challenges
4.1. Contradictory institutional background
The year of 2005 demonstrated several positive trends which explicitly or otherwise permit to make conclusions, though quite formally so far, on certain favorable shifts already appearing in the Russian economy. Among them were: significant capitalization growth of the leading Russian companies which exceeded all forecasts of the stock market dynamics; lower share of foreign trading space to deal in Russian securities; euphoria of initial public offering (IPO); some reviving (after the de facto 2003-2004 moratorium) in the sphere of the corporate management innovations at the company level; further development of the legalization of capital process; lower activity on the market of "uncivilized" hostile absorptions; positive (for the first time since 1994) capital account balance, etc.
In the recent years, some of the above phenomena really encountered with objective economic prerequisites, others were influenced by such or other situational, political and psychological factors. Thus, irrepressible growth of the Russian stock market in the context of slower growth rates, governmentalization and strengthening of its raw materials orientation these all make us consider the risks of the "soap bubble" effect. According to the available estimations, influence of the liquidity factor as well as of the situation in the global financial markets on the growth of the Russian stock market is at present much more significant as compared against the internal macroeconomic situation which also tells on the objective possibilities for regulating the national market (see section 4.6).
The positive capital account balance was determined in 2005 through intensive borrowing of the state companies used in order to pay for the private assets take over, yet, since in view of the obligations already accumulated, their further any significant growth seems hardly possible, therefore, already in 2006, the most probable result will be net flow out in the capital account. Renewal of the private sector initiatives in the sphere of corporate management (see section 4.5) lies mainly in the quantitative innovations sphere (volumes of information revealed, boards of directors composition) which is respectively connected with the IPO procedures and the regulator requirements. Involvement of the qualitative aspects (risk minimization, violating the rights of minority shareholders, dividend policies, relationships with daughter companies, beneficiary owners, etc.), on the contrary, still remains minimal.
In 2003-2005, at least 65 public corporate conflicts were registered in Russia for the sum (if estimated by assets involved) of more than 4 bln US dollars.
Nevertheless, the year of 2005 was typical for lower number of business deals which can be referred to the hostile take over category. The dynamics of official appeals as concerns the said corporate conflicts, for instance, to the Moscow government (other data are usually unavailable) were as follows: 2002 - 460 cases, 2003 - 151 cases, 2004 - 177 cases, 2005 - 97 cases. This is connected not only with tougher administrative control on the part of the state and regional authorities which, using the slogans of struggling against hostile take over, but only put up additional barriers putting obstacles to entering the regional property complex. In 2004-2005, according to the available estimations, political authorization for the process of acquiring such or the significant assets becomes a necessary condition for successful conclusion of such deals (see section 4.7).
At the legislative level, however, regulating the whole complex of questions as connected with the hostile take overs, is still in its early stages. Quite indicative in this sense are such innovations which were under way in 2005. The scaled changes in the corporate legislation (prepared by the RF Ministry of economic development) - Development Con-
cept of the Corporate Legislation for the Period of up to 2008 - were discussed in the Government in February 2006 although a number of quite radical and useful innovations (introducing the notion of "corporate disputes", their full dependence on the respective arbitrage courts, group claims in the interests of shareholders, harder recognition of non-validity securities' emission, etc) may very well remain no more than just wishful thinking.
The only noteworthy decision adopted in the end of 2004 and outside the framework of the Concept's practical implementation, were amendments to the "On Joint Stock Societies" Federal Law aimed against corporate blackmail of minority shareholders and providing the majority shareholder - owner of 95 % and more shares with the unconditional right to redeem the rest. The procedure of forcing minority shareholders out after a certain threshold of control has been reached, is accepted in the legislation on companies in many countries; in terms of Russia, its role can also include ensuring favorable legal possibilities for transforming many pseudo open joint stock societies into the closed ones. Nevertheless, in the context of the growing state activity on the market of corporate take overs this innovation may be also quite useful for 100 % share capital consolidation in the existing and future state companies while the wide range of measure, as provided for in the Concept and intended to protect the rights of property and interests of all respective parties, will be but limiting possibilities for expansion. In this sense, practical implementation of the Concept's innovations can be viewed as a certain indicator of how much the state itself is actually interested in the absence of strict enough rules of the game in the sphere of property relationships.
Notwithstanding the formal progress in the sphere of privatization in 2003-2005 (with regard to the quantity of packages of shares for sale and the decision on transforming unitary enterprises), the real situation is quite close to critical. At least 50 % of deals are annually put off due to the absence of demand while the quality of managing the state property differs but little from that at the level of the 90s. In all probability, the situation in this sphere is directly connected with the modification of views with regard to the role of the state sector in the economy of Russia (see sections 4.2 and 4.3).
On the one hand, creation of at least an impression that privatization has been completed as a component of the institutional reforms - practical implementation of the federal packages of shares as well as transforming the state management sector - is one of the 2006-2008 practical tasks. Efficiency of the process both for the state and the enterprises concerned is deemed, in this particular case, as secondary with regard to possible political dividends.
On the other hand, rapidly accelerating property expansion of the state, whether the general economic strategy, a trivial property redistribution in favor of clans close to the mighty of the world or resistance of those ministries interested, is objectively taking out of the privatization process its most significant or profitable assets still remaining in the state ownership. As G.O. Gref, the minister of RF economic development and trade, said in 2005, "... liquid enterprises are not given to us for privatization. One hundred and fifty reasons are found to leave them in the state ownership. They agree to include in the privatization plan only what can be called "trash". But this is not interesting for the market so we sell and resell such enterprises 4-5 times. So more and more enterprises are put on sale but fewer and fewer of them are sold. Moreover, with the time, the ration of those put for sale and those enterprises really sold will only be falling"1. Complexity of the RF Ministry of Economic Development and Trade's situation, as the body directly responsible for the privatization program since 2004, is obvious although the situation itself seems to be even more
1 Merges and Take Overs, 2005, No. 11, p. 8; Kommersant, 2005, August 5.
328
contradictory: getting rid of the unsold "non-liquids" nevertheless does remain a priority although, in the context of the present situation with raw materials and the respective budget incomes, it is no less difficult to find arguments in favor of selling new and highly profitable assets. This is the more problematic due to the lack of sufficiently coherent ideas as concerns the directions in which the incomes accumulated in the federal budget are to be spent.
The legalization of capital processes which have already begun, are determined not only by adaptation of the big business to the "after YUKOS" situation but by more applied motives as well. In 2005, on the one hand, more evident became deals as caused by some majority shareholders (partners) leaving business (selling their shares). This is connected not only with reorientation of interests towards new spheres of investing or departing from the operative management/control but also with a sort of a certain defensive strategy -transforming property (at that displaced abroad) into liquidity obviously makes it quite hard to nationalize. On the other hand, there is a definite trend towards further expansion of the largest companies' shareholding basis through selling part of the shares by the largest shareholders on the open market (through the IPO, inclusive). Legalizing the respective finance is accompanied with legalization of the shares remaining under control (in ownership) in the respective companies.
The late 90s - early 2000s were characterized by the situation when relatively developed economic legislation was already formed in the country with enforcement being its most critical sphere. In the middle of 2000s, the accents, in all probability, changed: although weak points in the Russian enforcement system do remain quite acute2 a certain shift is taking place within the economic legislation framework (as well as its interpretations) significantly increasing the uncertainty degree of possible consequences of such or other economic decisions for business as regards reciprocal actions of the state, on the one hand, and obviously tougher regime of interrelations between the state and private business, on the other hand. Problems of Russia's law enforcement system, as complemented with the trend towards returning to more tough legislative norms, do significantly expand the risk zone in the s property rights sphere.
One of the most significant elements for favorable institutional environment - overall stability of the existing property structures and rules of appropriating long term investments for the whole period of functioning - still "does not work". Before the early 2000s, it was primarily connected with the quality level of the institutes of state governing as well as with the regulative activity of the state - vulnerability of the property rights, the tax sphere, licensing, natural monopolies tariffs, administrative barriers, corruption, gaps in different areas of the law, inefficient law enforcement, etc. In the middle of the first 2000 decade, risks brought about into the entrepreneurship (its legal kinds and forms, indeed) by the respective institutes and regulative activities of the state, were not less significant yet there appeared a new and much more significant factor - the state is ever more and more vividly restoring its direct interference in the national economy.
It was even as far back as in 2003-2004 that discussion of the state's property expansion problems and, in a broader sense, the state capitalism, as factors significant for the overall economic development of Russia caused, in a number of cases, quite a strong rejection of some researchers even though the said processes started their initial devel-
2 Typical evaluations of the judiciary system's state basically vary in the range from "inefficient and corrupt" to "market of judicial services" and "catastrophic". This is not infrequently confirmed by top functionaries in different branches of the Russian power bodies. In particular, V. Zorkin, Chairman of the RF Constitutional Court (2004) spoke about system corruption, D. Kozak, Representative of the RF President in the Southern region (2005) who had earlier been responsible for the judicial system reform, spoke about the catastrophic and threatening situation in the judicial system.
opment beginning from the year of 2000. In our opinion, the year of 2005 became the turning point - at the present time, it makes sense to speak not just about simple expansion of the state's direct presence in the national economy but rather about a stable trend towards dominant position of the state in a number of leading industries of the Russian economy. Possible consequences of the property expansion of the state and of the state (pro-state) companies can be quite negative both for large private companies (groups) and the national economy as a whole.
4.2. Policy in the Sphere of Property Relations
Limitations and dynamics. The crucial milestone in this sphere was the year 1999, which manifested the onset of the realization, with certain later modifications of the specific approaches, of the Concept for the Management of State Property and Privatization, adopted by the Government's decision in 1999. The next Concept was approved at the RF Government's meeting on 6 February 2003; however, unlike the 1999 Concept, it has never acquired the status of an official document3. In 2005, the RF Ministry of Economic Development, in its report to the RF Government, emphasized the necessity to develop "a new model for managing the remaining state property, to be based on the principles of strict correspondence of the composition of state property to the functions of the State, and on guarantees of an efficient property use, while maintaining the state expenditures on management at an optimum level"4.
At the same time, the problems pertaining to the privatization and management of federal property have become, by now, of a chronic nature. The whole period of 19992005 was characterized by the following major limitations:
• the demand for most of the objects being privatized (first of all, the minority blocks of shares) was extremely low, mainly due to the already achieved level of concentration of corporate property (or of corporate control) and to the high costs of acquiring the residual property, whereas the number of the remaining unsold objects, being carried forward from year to year, was constantly on the rise5;
• the high probability of repeated adjustments in the lists of blocks of shares and unitary enterprises, caused by both objective and subjective factors;
• the existence of a serious conflict between the organizational capacities of the managerial bodies responsible for undertaking a rapid reforming of the public sector, and the qualitative limitations imposed on this reforming by its own scale;
• the absence of any clear ideas (either conceptual and formalized in established norms) concerning "a new model for managing the remaining state property";
• the demand for new mechanisms for the realization of unattractive minority blocks of shares (public offer, sales without publishing the price, the determination of a starting price by the nominal value of shares being sold, etc.) did not display any significant growth;
• the resistance of branch ministries - first of all, with regard to the reforming of state unitary enterprises (SUEs) (for financial and administrative reasons);
3 For more details, see: Radygin A., Mal'ginov G. Privatizatsiia i upravlenie federal'nym imushchestvom / Rossiiskaia eko-nomika v 2003 godu. Tendentsii i perspektivy. M., IEPP, 2004, p. 327-339 (The privatization and management of federal property / The Russian economy in the year 2003. Trends and prospects. M., IET. 2004. P. 327-339).
4 The data used hereinafter are taken from the report "On the measures aimed at increasing the efficiency of federal property management". The materials prepared for the meeting of the RF Government on 17 March 2005; The report on the privatization of federal property in the year 2005. Moscow, FAFPM, 2006.
5 The amount of 62% of the blocks of shares earmarked for privatization in the year 2005 was less than the "blocking" one; of this amount, 48% were blocks of shares smaller than 5% of charter capital. In a considerable percentage of joint-stock companies, the controlling block of shares had already become property of one person or a group of affiliated persons.
• a dramatic reduction in the number of unitary enterprises of all levels, with prospects for their reorganization into open-end joint-stock companies (OJSC) considerably increased the burden imposed on state administration bodies, which were far from being efficient in their role of state representatives, even without this additional load;
• the creation, on the basis of the property owned by state unitary enterprises, of a noticeable sector of treasury enterprises, functioning on the basis of the right of operative management, entails increased financial risks being borne by the State, because of the subsidiary responsibility for the obligations of these enterprises;
• the non-transparency and weakness of unbiased control on the part of the State over the realization of privatization procedures in respect to unitary enterprises frequently results in a situation when, at the stage of selling, only an empty "juridical shell" is present, devoid of any assets (or the bankruptcy procedure is used as a tool for spontaneous privatization);
• the still acute problem associated with the need to formalize the solid property rights of enterprises to land plots (the excessive cost of redemption and lease; the methods for the cadastre assessment and determination of market prices, administrative barriers, the restrictive regional policy, etc);
• the existence of general, rather difficult, problems pertaining to the normative-legal backing, including for the division of property between the RF, subjects of the Federation, and municipalities;
• the measures implemented in the course of the administrative reform undertaken in the year 20046 predetermined the necessity of a relatively long period of adaptation, both during the process of reorganization and thereafter, with the result that in the years 2004-5 the State's activity in the sphere of state property management was characterized, to a great extent, by inertia and spontaneity;
• the growing complexity of the administrative structure in this sphere aggravated both the coordination problems and the departmental conflicts (the creation of the FAFPM and its subordination to the RF Ministry of Economic Development, with vesting the latter with the norm-creating functions in the sphere of privatization, while preserving the Russian Fund for Federal Property (RFFP), although the latter, by now, has reduced its functions to those of a seller).
As regards federal state unitary enterprises (FSUEs), the reforming of this sector is
also hindered by the following problems, whose applied character is more explicit (the
data are for the year 2005):
• the negative value of the book cost of an enterprise's assets, which can prevent it from either being reorganized into a joint-stock company, or privatized by being sold at a tender as a property complex, because the normative price becomes a negative value as a result of calculations;
• the actual financial and economic crisis faced by the enterprises included in the privatization program (765 FSUEs had losses, or no net profit, as is seen by the results of the year 2004);
• no economic activity is being carried out (74 FSUEs);
• failure of the director of an enterprise to implement the established rules concerning the preparation to privatization (information, timelines, etc.);
• the absence of both the documents recording the industrial statistics and the documents consolidating the right to federal property objects, including land plots (all FSUEs);
6 Edict of the RF President, No. 314, of 09.03.2004, "On the System and Structure of Federal Executive Authorities".
• ongoing court proceedings concerning the issues of ownership;
• the absence of money resources necessary for the enterprises to be able to formalize the appropriate documents as to their right of ownership and the documents of technical inventory (200 FSUEs);
• the implementation of insolvency proceedings (146 FSUEs);
• multiple instances when either the reorganization of an enterprise, by way of merging subsidiaries with a parent enterprise, has not been completed, or an enterprise is undergoing the procedure of its liquidation (15 and 68 FSUEs, respectively).
It should be noted that already in the first three-year Prognostic Plan (Program) for the Privatization of Federal Property and in the Main Directions of Federal Property Privatization up to the Year 2006 (approved by Regulation of the RF Government, No. 1165-r, of 15 August 2003), the following algorithm of actions has been envisaged: the year 2003 -the privatization of state-owned blocks of shares, amounting to up to 2 % of charter capital; the year 2004 - the withdrawal of the State from all joint-stock companies where the share of the State is less than 25 %; the year 2005 - the withdrawal of the State from all joint-stock companies where the share of the State is between 25 % and 50 %; the year 2006 - the discontinuation of State participation in the non-strategic companies where the share of the State exceeds 50 %; the year 2008 - the completion of the privatization of the federal property which is not being used in the implementation of RF state functions. In accordance with this scenario, by the end of the year 2008, the State will be keeping in its ownership no more than 2,000 FSUEs and 500 various blocks of shares.
Certain alterations have already been introduced in the Prognostic Plan (Program) for the Privatization of Federal Property for the Year 2005 and for the Period up to the Year 20077:
- the extension of the prospects for the privatization of federal property into the year 2007;
- the completion, in the year 2005, of the privatization of the federally-owned blocks of shares in joint-stock companies amounting to less than 25% of charter capital;
- the alteration of the branch-based structure of federal property being privatized;
- and the introduction of the notion of a "prospective financial plan" in the planning of federal property privatization.
The Prognostic Plan (Program) for the Privatization of Federal Property for the Year 2006 and the Main Directions of the Privatization of Federal Property in the Years 20062008 (approved by Regulation of the RF Government, No. 1306-r, of 25 August 2005) is even more cautious in terms of quantitative indicators. According to this document, the major goals of the state policy in the sphere of federal property privatization are as follows: the privatization of the state property which is not being used for ensuring the implementation of the state functions (or powers) of the Russian Federation; the guaranteeing of a step-by-step reduction in the number of federal state unitary enterprises; an increased rate of federal property privatization; and the formation of the federal budget's revenues. In 2006, it is planned to offer for privatization those blocks of shares whose amount does not exceed 50% of the charter capital of the joint-stock companies, except for the blocks of shares in the joint-stock companies included in the lists of strategic companies or the companies participating in the formation of integrated structures (in the framework of the realization of the Federal Target Program "The Reforming and Development of the Military-Industrial Complex (the Years 2002-2006)", and for those blocks of shares which will be
7 The draft plan for the years 2005-7 was considered at the RF Government's meeting on 29 June 2004; the Prognostic Plan for the Year 2005 was approved by Regulation of the RF Government, No. 1124-r, of 26 August 2004.
sold in compliance with the needs of forming the revenue side of the federal budget in the year 2006 and for the period up to the year 2008, in accordance with the prospective financial plan.
Nevertheless, the unrealistic nature of the established timelines is still evident, even after all the adjustments are taken into account, as the practice of the years 2004-5 has already proved (Table 1). The quantitative parameters of privatization calculated for the year 2006 have become more balanced; but, just as in the previous years, it is very likely that insufficiently justified (from the economic and organizational points of view) upward adjustments of purely administrative nature will be introduced once again.
Table 1
Major Objects in Federal Ownership and Privatization Program of 2000s
1999* 2000 2001 2002 2003 2004 2005 2006
Total number of FSUEs** 13 786 11 200 9394 9846 9275 8820 8293 -
Number of FSUEs
privatized during one
year:
- Forecasts - - - 1652 970 1374 1245 885
- Actual number*** - 2 5 102 571 517 741 -
Joint-stock compa-
nies whose blocks of shares are owned by 3611 3524 4407 4 222 4 035 3905 3524 -
RF**
Including by share in
charter capital
- 100 % 382 61 90 99 124 273 413 -
- 50-100 % 470 506 646 589 552 499 474 -
- 25-50 % 1601 1211 1401 1 382 1308 1183 1093 -
- less than 25 % 863 1746 2270 2 152 2051 1950 1544 -
- "golden share" 580 - 750 958 640 284 259 -
Federal blocks of
shares sold during
year:
- Forecasts - - - 1126 1965 1702 383
- Actual number*** - 87 125 112 630 565 566 -
* As of the end of each year. The year 1999 is taken as the baseline, due to the adoption of "The Concept for the Managing of State Property and Privatization in the Russian Federation" (approved by Decree of the RF Government, No 1024, of 9 September 1999).
** Without taking into consideration the special right - the "golden share". In the early 2000s, the total number of unitary enterprises was about 85,000, including approximately 20,000 state enterprises and approximately 65,000 municipal enterprises. In 1995, the State owned no less than 15,000-17,000 blocks of shares of various sizes, while in 1999 - approximately 3,100 "consolidated" blocks of shares and 7,000-8,000 unsold blocks of shares (registered as part of the fixed assets of regional property funds). In 1995, 1,004 joint companies had a "golden share".
*** The actual data concerning the annual privatization of blocks of shares and FSUEs cannot accurately be interpreted for a number of reasons: 1) the absence of any regular information from the RF FAFPM and the RFFP; 2) as a rule, between 10% and 50% of transactions actually take place each year, while the unsold blocks of shares are "carried forward" to the next year; 3) the ongoing "counter-process" of FSUEs being privatized, as well as other methods for increasing the number of blocks of shares owned by the State; 4) the reorganization processes going on in the electronic industry and in the sphere of communications, the inclusion of the property complexes, owned by a number of FSUEs, into the charter capital of state holdings, and the formation of integrated structures in the military-industrial complex, in the railway sector, etc. As regards FSUEs, the data
on their privatization are rather imprecise, because the official data on privatization also cover a number of FSUEs, in respect to which only a preliminary decision has been taken, and also those FSUEs which have passed only the stage of being reorganized into joint-stock companies. At the same time, the very number of FSUEs may increase (as a result of separation, creation of new enterprises, etc). In January 2005, the Ministry of Economic Development proposed to additionally include 42 FSUEs and 63 open-end joint-stock companies in the privatization plan for the year 2005; in March 2005, the proposed numbers were 547 and 947, respectively.
Source: data of the RF Ministry of Economic Development and the FAFPM.
One of the typical trends observed in 2004-5 was the growing attention toward the liquidation of the institution of FSUEs, predetermined both by some external factors (criticism aimed at the Ministry of Economic Development and the FAFPM; failures in the realization of residual blocks of shares) and by this sector's overall economic and financial inefficiency ( clearly demonstrated by the comparison of various types of income from the use of federal property). Nevertheless, out of the 1,245 FSUEs earmarked for reorganization in the year 2005, only 22 FSUEs underwent the procedure of reorganization into joint-stock companies in the first six months of 2005 and actually became ready for privatization. By the year's results, certain decisions were taken in regard to 405 of FSUEs (741 enterprises, including the 39 enterprises sold at auctions as property complexes, and 702 reorganized into corporations). Accordingly, an absolute majority of these enterprises will embark on actual reorganization no earlier than in the year 2006, at best.
Despite the apparent discrepancy between the current practice of reforming the sector and the declared targets (as a minimum, to reduce the number of FSUEs to 1,000 only, and as a maximum, to liquidate this form altogether by the year 2008), the decision to gradually liquidate this organizational and legal form has been, undoubtedly, a positive development. This has been admitted by the FAFPM itself: "Practice shows that the preservation of enterprises in the form of FSUEs only results in the conservation and aggravation of their existing problems". During the period when "the extremely inefficient form of a state enterprise "based on the right of economic management" was in existence, many FSUEs became not only incapable of performing their state functions, but also lost their property potential and intellectual potential8.
The emphasis on reorganizing the FSUE sector has directly influenced the results of privatization. The specific feature of the year 2005 was the absence of any major privatization transactions. Naturally, it was caused by a whole range of factors of both objective and subjective character - apart from the reorientation of departmental efforts toward the FSUE sector, it was the generally favorable situation with budget revenues, the fact that the existing law on privatization provided for the possibility of a flexible approach to the realization of transactions in accordance with the market situation, the presence of competing interests (both departmental and private) with regard to a number of the most interesting objects, etc. Initially, the list of the major objects earmarked for privatization included the FSUE "Rosspirtprom" and the sale of its shares (200 enterprises, 80% of the Russian market), the "Domodedovo Airlines" (25% of shares), the Novorossiisk and Tuapse cargo sea ports (approximately 20% of shares), the "Rosgosstrakh" (25% plus one share), etc. However, for the year 2005, the following major transactions are worth mentioning: with the shares in the OJSC "Polief" (100% of shares - 3.38 billion roubles); with the shares in the OJSC "Galogen" (50.8% of shares - 830 million roubles); with the shares in the OJSC "Morskoi Port "Sankt Peterburg" (20% of shares - 0.8 billion roubles); and with the shares in the OJSC "Slava" (37.6% of shares - 657 million roubles).
8 The official statement (press-release) of the RF Federal Agency for Federal Property concerning the results of privatization and the management of federal property in 2005, of 23 January 2006.
The year 2005 witnessed the continuation of the practice of selling shares owned by the RF in one lot with shares owned by subjects of the RF. As an example, one may point out the consolidated sale of the federally-owned block of shares in the OJSC ' Morskoi Port "Sankt-Peterburg"' (the said block of shares was not big enough for the Russian Federation to make any managerial decisions, or even to block the decisions made by other shareholders). The sale of the federal block of shares in the OJSC 'Morskoi Port "Sankt-Peterburg"' was carried out in one lot with the shares owned by the city of St. Petersburg. Thus, a joint block of shares, in the amount of 48.79% of the charter capital of the said company, was put up for auction.
The sale of the block of shares in the telecommunications holding "Sviazinvest" had been on the agenda for a number of years, therefore the inclusion of this object in the list of entities earmarked for privatization in the year 2005 by no means implied that the final decision had been actually adopted. Firstly, any further privatization will be directly dependent on the completion of the reorganization processes going on inside the holding, on the tariff reform, on certain solutions being found to the problems associated with the social burden imposed on regional companies and the necessity to provide communication services to the power structures in the amount of more than 600 thousand telephone numbers, while the amount of arrears of payments due to the holding is very significant - about 600 million of roubles as of 1 July 2005). Secondly, bearing in mind the growing attractiveness of telecommunication shares, any prompt sale of the holding's securities would make little sense. Nevertheless, there also exists an opposite trend. According to the RF Ministry of Economic Development, despite the fact that the holding owns the controlling and blocking blocks of shares in the regional operators of wire communications, they are no longer being managed as efficiently as before. Thirdly, any specific sale option will have to be properly elaborated in detail.
As is known, as early as 1995 the State intended to put up, for a commercial auction with investment terms, 49% of the holding's shares. In 1997, 25% plus one share was acquired by the off-shore company "Mustcom Limited" (1.87 billion USD, G. Soros' interests), which was later, in May 2005, bought by a number of companies representing the interests of L. Blavatnik. In 2001-3, the standard procedure was to offer for privatization the amount of 25% minus 2 shares. In 2004, a number of sale scenarios were discussed, including the sale, at an auction, of some blocks of shares in the holding's regional companies (at least 4 interregional subsidiaries were included in the 2004 list). In 2004, the FAFPM was considering 3 major sales scenarios: 25%, 50%, and 75% minus one share. Nevertheless, a simultaneous sale of the subsidiaries' blocks of shares (with all the resulting consequences typical of the "double" privatization of the oil sector in the 1990s) cannot be ruled out, either. The terms of selling the holding will also depend on the number of bidders, on their relations with the authorities, and on the intensity of their competition (by the end of 2005, the ranks of potential bidders included the Joint-Stock Financial Corporations "Sistema", "Telekominvest", and "Alpha-group", as well as L. Blavatnik's companies).
From the point of view of the RF Ministry of Economic Development, the most rational scenario will be the simultaneous privatization of the whole state-owned block of shares (75% minus one share), which was being discussed in 2005 concurrently with the preparation of the President's edict concerning the exclusion of the holding from the list of strategic objects. At the same time, in the course of the year 2005, the terms of sale were continually discussed with the power agencies. In October 2005, major alterations were introduced in the draft edict on the initiative of the President's state-legal board, which envisaged the necessity to legislatively formalize the guarantees to be secured to the power agencies before the inclusion of the holding in the program of privatization. This means
that, most likely, the holding will not be privatized in the year 2006, either. In late 2005, the head of the holding, V. Yashin, announced that the sale of the state-owned block of shares would be possible either before 1 July 2006 or as late as after the 2008 presidential election.
In general, the history of the privatization of the holding "Sviazinvest" (and of the plans for its privatization) deserves a separate study, because it clearly reflects almost all the specific features of the Russian privatization in the period after the mass-privatization phase was completed: the "Oligarch War" of 1997, the non-transparency of the sales of the first blocks of shares, the active use of the administrative resource both in 1997 and 2005, the risks of "double" privatization (of the holding and its subsidiaries) typical of the oil sector in the 1990s, a wide range of social and regional problems, the limitations of strategic nature (national security) and the involvement of the power agencies, the problems associated with the reorganization of the corporate structure, the hidden struggle going on between various power-holding and financial groups in the 2000s, and a number of other features.
Budget revenue. From the point of view of budget revenue, the positive trends of the years 2001-4, resulting from the increase in the share of revenues from the use of state property (i.e., renewable revenues), were equally significant in the year 2005 as well (see Table 2).
In 2005, the expected budget revenue from privatization was to amount to no less than 42.7 billion roubles (with taking into account a number of blocks of shares in those large enterprises which were included in the list of strategic enterprises in the autumn of 2005). In fact, the revenue from privatization in 2005 amounted to approximately 13 billion roubles (if the receipts from the 2004 transaction with the shares in the Magnitogorsk Metallurgical Combine are not taken into account).
Moreover, starting from the year 2003, a stable trend towards an absolute decrease in the privatization receipts proper has been observed: in 2004 - by one third on the results of 2003, in 2005 - by nearly two-fold on the results of 2004. On the whole, in the period of 2003-5, the receipts from privatization declined nearly three-fold in absolute terms. The benchmark for the year 2006 is set at 31 billion roubles (or slightly lower than the actual results of the year 2005), but it will be possible to achieve this value only through implementing one or two major privatization projects (those involving "Sviazinvest", "Aeroflot", "Rosneft" or some other projects, which is still rather doubtful). In the summer of 2005, the prognostic plan for the year 2006 was extended, to include several major assets (34% of shares in the "KamAZ", 100% of shares in the "SG-Trans", 86% of shares in the corporation "Iliushin", 70% of shares in the All-Russian Exhibition Center, 100% of shares in the Russian Bank for Development (RBD), and some other assets). However, already in early 2006 the plan regarding the block of shares in the "KamAZ" was changed (it is now being claimed by the FSUE "Rosoboroneksport"). The sale of shares in "SG-Trans" will now require special authorization by the RF Government. The inclusion of "Iliushin"'s shares in the privatization plan is unlikely to result in the actual privatization of this asset, while the blocks of shares in the All-Russian Exhibition Center and the RBD were already excluded from the list in August 2005.
On the contrary, after the year 2000, the renewable sources of the federal budget's revenue related to property management have been clearly demonstrating a trend towards their dominance. According to the FAFPM, the aggregate federal budget receipts from privatization and the use of state property in the year 2005 amounted to 97 billion roubles (preliminary data). The receipts from the use of federal property accounted for more than a half of the aggregate revenue, or to 53 billion roubles, including 14.2 billion roubles from 336
the leasing out of federal property, 16.6 billion roubles in dividends from shares in federal ownership, 17.5 billion roubles from the RF's participation in the "Vietsovpetro", 2.4 billion roubles allocated as a part of the profit of federal state unitary enterprises, and 522 million roubles from the realization of property owned by state unitary enterprises (or establishments) and military property. During the period of 2000-5, the annual revenue from renewable sources increased by three times. Nevertheless, the amount built in the 2006 federal budget is practically identical to that of the actual receipts of the year 2005.
Table 2
The Dynamics of Revenues from Privatization and Usage of Federal Property,
in Millions of Roubles
1999* 2000 2001 2002 2003 2004 2005 2006 forecasts
1. Non-renewable sources, total 8 547,4 31 367,1 10 110,6 14 700,7 95 237,3 65 777 34 882 31 600
1.1. Privatization 31 367.1 (320) 9 990.6 (170)
(number of enterprises) 1.2. Realization of 8 547.4 12 703.8 90 660** 61 856.8 29079.2** 31 000
FSUEs' property - - - - 585 662.7 522 600
and military property 1.3. Sales of land and intangible assets - - 120.0 1 996.9 3 992.3 3257.5 5280.8 N.d.
2. Renewable sources, total 8 720.5 18 790.1 29 122.6 36 762.2 41 143.2 53 710.3 54 404 53 052
2.1. Dividends (number of enterprises) 848.1 (600) 3 675.1 (1050) 6 478.0 (782) 10 402.3 (747) 12 395.2 17 222.0 (319) 18 610 20 500
2.2. Lease of property 2.3. Lease of land 2 191.4 3 427.2 4 896.1 7 657.9 9 573.9 11 928.8 14 170 16 700
- - 3 917.0 4 400.0 197.3*** 901.7 1 748 2 000
2.4. Part of FSUEs' profit (number of enterprises) 2.4. SJV "Vietsovpetro" Total 5 675.0 11 687.3 209.6 (131) 13 621.9 914.2 (809) 13 388.8 2 387.6 16 200 2 538.1 17 199.5 2 386 17 490 2 500 11 352
17 261. 9 50 157.2 39 233.2 51 462.9 136 380.8 119 487.2 89 286 84 652
* For the dynamics during 1995-2002, see: Rossiiskaia ekonomika v 2002 godu. Tendentsii I perspektivy. (The Russian economy in the year 2002. Trends and prospects). M. IEPP. 2003. P. 367.
** The receipts from the 2002 sale of 74.95% of shares in the JSC "Slavneft", in the amount of 59,161.95 million roubles, are included in the revenue of the year 2003 (i.e., more than 60% of the received revenue). The receipts from the 2004 sale of 17.8% of shares in the JSC "Magnitogorskii Metallurgicheskii Kombinat", in the amount of 21,928.2 million roubles, are included in the revenue of the year 2005 - i.e., more than 60% of the received revenue).
*** The rent payment for land in federal ownership, after the delimitation. In the following years, the line "Rent payments and the receipts from the sale of the right to conclude lease contracts in respect to land in federal ownership".
Source: The RF Ministry of Economic Development, the RF Federal Agency for Federal Property Management (FAFPM), the Federal Law "On the 2006 Federal Budget", the authors' calculations.
On the one hand, a reduction in this group of revenues in the medium-term perspective should be considered as an objective process, predetermined by the plans for the withdrawal of the State from most of the joint-stock companies and for the liquidation of the FSUE sector, as declared by the government. On the other hand, the real timelines for any considerable reduction in the size of the mixed sector will, undoubtedly, be set beyond the medium-term perspective (i.e., 2006-8), and therefore the preservation of the 2005 level of revenues from renewable sources, even for the year 2006, can be considered as an actual admission of the presence of a management crisis in the mixed sector.
At the same time, it should be noted that the major renewable sources will not only retain their importance in the year 2006, but will also ensure, due to the global situation in respect to the prices of mined material, a significant growth in budget revenues (with all
other conditions being equal - for example, if the "special" role of the "Gazprom" and "Rosneft" in the activities of the Russian authorities is not taken into consideration, etc.).
Thus, dividends on state-owned blocks of shares are considered by the government to be the most important renewable source of budget revenues. The dynamic changes observed during recent years are indicative of a considerable growth in the payments of this type, which have been ranking first among the renewable assets since the year 2000 (see Table 2). As is shown by the data of the years 2004-5, approximately 75% of the dividend payments to the federal budget were accounted for by 5 companies - "Gazprom" (about 50% of all receipts came from this source of revenues), "Transneft", "Vneshtorgbank", "Rosneft", and "LUKoil" (before its last block of shares was sold in 2004). The share of 15 largest payers accounts for 84% of the total amount of dividend receipts. As in the previous years, "Gazprom" still remains the largest payer of dividends on state-owned blocks of shares. On 28 October 2005, the company made the transfer of 10 billion 37 million and 600 thousand roubles to the Federal Treasury on the results of the year 2004, which amounted to 60.6% of all the dividend payments transferred to the federal budget.
The privatization of the majority of the aforesaid enterprises and banks is not planned for the nearest future; on the contrary, the experience of the years 2004-5 clearly demonstrates a growing property expansion within the state structures (see Section 4.3), and, correspondingly, an extension of the dividend base.
It is worth noting in this respect that, given the existing concentration of dividend payments, the mass-scale work with enterprises, which was declared to be one of the characteristic components of the administrative approach being practiced in the 2000s, is losing its former significance. On the one hand, the number of such enterprises displays an objective decline (see Table 1) - in 2000-04 it diminished by three times. On the other hand, if a company is capable of paying dividends, the receipts from the sale of its block of shares are likely to be larger than the expected dividend incomings; it is also important that in this case the issue of the various administrative costs related to dividend payments will no more be relevant.
The necessary measures to be implemented. As is shown by the experience accumulated since the year 2000, the medium-term strategic task, to be faced by the State in the sphere under consideration, should be the final settlement of those three issues that have constantly been on the agenda for the past ten years, with no tangible solution ever found:
- the formation of a very precisely elaborated list of strategic objects (or enterprises, or stakes), which are to remain in state ownership in the medium-term perspective, to be selected on the basis of a certain number of justified, transparent, and legislatively consolidated criteria relating to state security and the actual state needs, provided that the State will be able to efficiently manage them, from the quantitative point of view;
- the elaboration and normative-legal formalization of a transparent management model, to be applied to the aforesaid strategic objects (at the same time, the whole bulk of property, which is temporarily to remain in state ownership under various control regimes, is not to be taken into account in this model);
- the optimization of the existing methods of privatization, and the accelerated "deliverance" of the State from any non-liquid assets, without taking into consideration the "budget targets" for the extraction of non-renewable revenues.
The available proposals and innovations, that have been put forth by the State9, are quite justified (especially if we abstract them away from the problems associated with the general institutional background of the suggested transformations (corruption, private interests, rent-oriented behavior, the expansion of the public sector, etc.):
- the simplification of the procedure for the privatization of some of the SUEs and MUEs, by abolishing the mandatory reorganization of enterprises into joint-stock companies (selling without reorganization, as a property complex per one buyer);
- the modernization of the privatization infrastructure, and of the sales system in general;
- the simplification of the procedure for selling single shares in joint-stock companies (with taking into account the fact that the evaluation costs and the cost of organizing the tender can exceed the proceeds from the shares being sold);
- the introduction of competition-based schemes for choosing the sellers (the discontinuation of the monopolistic status of the Russian Fund for Federal Property as a specialized state establishment);
- the abolition of "the normative price" institution in the privatization procedure (or of the lower threshold of the possible value of the initial price of a piece of federal property, currently to be set by the FAFPM);
- the simplification of the procedure for the creation of an open-end joint-stock company during the process of privatization (the possibility to abstain from the issuance and registration of a securities issue prospectus during privatization, the possibility to create a provisional board of directors composed of state representatives, which will function until the moment of sale);
- the elimination of a number of limitations currently imposed on the privatization of strategic enterprises, and the revision of other legislative limitations on privatization;
- the vesting of the FAFPM with the right to control the transactions carried out by the enterprises, the right to dismiss their managers, etc.
In our opinion, some more radical innovations are also worth considering - for example, a reduction of the size of charter capital by the amount of the State's stake in those joint-stock companies where several successive attempts at realizing the state-owned block of shares have failed, while any prospects of further management of such blocks are not promising from the point of view of financial, managerial, or strategic benefits. However, this step will require serious legislative backing. A positive incentive for potential purchasers can be created, for example, by the consolidation of the residual state-owned and municipal (or state-owned and private) blocks of shares for their simultaneous sale.
Another novelty introduced in the year 2005 - the idea of an auction sale of the shares issued by some large companies - was found to be rather controversial10. In September 2005, the government made public its plans for the initial public offering, at the London Stock Exchange, of at least three state-owned blocks of shares: in "Rosneft" (no more than 49%, with taking into account that 10-12% could be used for covering a certain part of the 22-billion debt, and another 7-8% - for exchange with minority shareholders of the company's subsidiaries in the course of a switchover to a single share), "KamAZ" (34.01%), and the OJSC "Dalnevostochnoe Morskoe Parokhodstvo" ("The Far-Eastern Maritime Steamship Company") (19.8%).
9 O merakh po povysheniiu effektivnosti upravleniia federal'noi sobstvennost'iu. Materialy k zasedaniiu Pravitel'stva RF 17 marta 2005 g. (On the measures designed to improve the efficiency of federal property management. Materials prepared for the RF Government's meeting on 17 March 2005). M. 2005.
10 See: Gosudarstvo vyvodit aktivy v London. (The State transfers its assets to London) / "Kommersant". 2005. 14 September.
As regards the internal market, certain experience has already been accumulated in this respect. An analysis of the sales, though a public offering, of predominantly noncontrolling blocks of shares (the data of the year 2004) has indicated that 47% of the blocks of shares offered for sale (out of 525) did not find any buyers. At the same time, 62% of the blocks of shares sold in this way were realized at the minimum price achievable under this method - the cutoff price amounting to Sof the initial price announced at a failed auction. The number of objects sold at the maximum achievable price (the price of an offer, which is equal to the initial price announced at a failed auction) amounted to 17%. In the nomenclature of the RF Ministry of Economic Development and the FAFPM, the said method of privatization falls into the category of "secondary" methods (with regard to auctions and special auctions), aimed at realizing sticky assets by lowering their price in the course of a sale. This method is intrinsically self-contradictory, because public offering, as a rule, is used in respect of quickest assets.
As regards the placement of shares on foreign markets, the aforesaid method was used only once (the IPO of 5.9% of shares in "LUKoil" in December 2002). This transaction was considered to be rather successful (although the monies in payment for the block of shares in "LUKoil", sold on 4 December 2002, were transferred to the budget only as late as 8 May 2003, and the identity of the receiver of the income from the use of the said monies during this interval (presumably amounting to tens of millions of dollars) remains unknown. This method, if applied at a greater scale, will bring some noticeable benefits, alongside certain indisputable limitations.
For one thing, according to the existing estimates, the placement of a noncontrolling block of shares on foreign markets under favorable market conditions can increase the State's revenues by 20-50% (the market price plus a bonus of 5-10%), while an internal sale by means of an auction can be carried out at a discount of 20-40%, depending on the size of the block of shares and on the size of the company itself. After this, the sale of the controlling block of shares can be carried out, in its turn, its price established by a truly market-based evaluation in the process of the IPO. For another thing, the possibilities of such an offering are limited by a broad range of various factors:
- the high costs of the procedure for the placement of a block of shares (the costs of obtaining the listing in the amount of 1-2 million USD; the commissions paid to the banks-underwriters, totaling 2-5% of the amount offered; the need for the approval of the company's shareholders);
- the necessity to achieve a much higher level of transparency of the companies in question (thus far, neither "Rosneft", nor "KamAZ" can be placed in the category of transparent companies);
- legislative restrictions (previously, under the 1997 Law on Privatization, a block of shares could be transferred only to an entirely state-owned company, which was the initiator of the offering (the case of "LUKoil"), whereas after the adoption of the 2001 Law on Privatization, a block of shares can be transferred only to a company included in the list of strategic open-end joint-stock companies, which requires the implementation of a number of bureaucratic and corporate procedures);
- the absence of the practice of privatization sales with the usage of ADR or GDR instruments, which, however, is envisaged in privatization legislation;
- market fluctuations, which can influence the price of offering and considerably delay the sale;
- the existence, inside the RF, of certain property interests, which may hinder the implementation of these transactions.
By early February 2006, it were some of the afore-listed restrictions that became the decisive factors. The offering of shares in "Rosneft", initially planned for the end of 2006, is likely to be indefinitely postponed because of a disruption of the negotiations with the investment banks that were the initiators of the offering, which may, however, be referred to as a purely formal reason. In October 2005, instead of being offered on the London Stock Exchange, "KamAZ" and its three subsidiaries were included, by a regulation issued by the RF Government, in the list of strategic enterprises; according to the data as of February 2006, 34.01% of shares in "KamAZ" can be transferred to the FSUE "Rosoboroneksport", which has submitted a request to this effect to the FAFPM. As regards the OJSC "Dal'nevostochnoe Morskoe Parokhodstvo", no decisions as to either the possible timelines, or the conditions of an IPO, have been made as yet, even tentatively.
In November 2005, the idea of an IPO for some of the large state-owned enterprises and banks (including "Rosneft", "Sviazinvest", and Vneshtorbank) was put forward in the framework of the anti-inflation set of measures proposed by the RF Central Bank, the RF Ministry of Economic Development, and the RF Ministry of Finance. As the existing RF legislation does authorize the implementation of an IPO in the process of privatization of state-owned blocks of shares on foreign stock exchanges, it will be necessary to introduce some alterations in the Law on Privatization, if IPOs are to be organized on Russian trading floors. The entry of state-owned enterprises onto the financial market for the purpose of carrying out an IPO can be facilitated by lifting the ban on the State's share in charter capital being reduced in the process of emission (nevertheless, each of those decisions can, apparently, be made on a strictly individual basis, and, as such, will require a rather complex coordination procedure). An intermediate solution can be provided by the Ministry of Economic Development's proposal to carry out the privatization of some shares in "Rosneft" by selling them to the population via the retail chain of the RF Savings Bank; however, this proposal still remains a declaration of intentions only.
Although no clear idea has emerged so far concerning the principles on which the organization of such sales to juridical and physical persons can be based, their potential positive effect (primarily in terms of increasing the liquidity of the Russian stock market) can be very substantial.
Equally important has become the issue relating to the possibility to buy out the land plots on which the privatized enterprises are located. The alienation of such land plots must be carried out in accordance with the RF Land Code and Federal Law, No. 178-FZ, of 21.12.2001, "On the Privatization of State and Municipal Property"; these documents have determined the declarative character of the procedure for the privatization of land plots.
As is known, the norms adopted in land legislation (the 2001 Land Code) envisaged that any uncompensated in-perpetuity use of land plots occupied by privatized enterprises was to be discontinued as from 1 January 2004. The unsoundness of such an archaic term as "in-perpetuity use" is evident. On the one hand, a land plot could not be seized from an enterprise, while on the other, the enterprise had no right to sell it. In this situation, the State was entitled to a certain small income in the form of the tax imposed on land plots. From the point of view of market turnover, there existed, in fact, a defective real-estate object, where a land plot represented a "deadened" component.
The case in point is that both solutions, as they currently exist ( the purchase and the lease), are very disadvantageous for entrepreneurs. As early as the summer of 2003, the RF Ministry of Economic Development demanded that the deadline be postponed by several years, so as to give the entrepreneurs enough time to make their choice between purchase and lease, as the most adequate form of land use. It should also be taken into consideration that the process of the delimitation of State ownership in land is far from being
over. In December 2003, the RF President signed a law (concerning the introduction of alterations in the Law "On Introduction into Operation of the Land Code of the Russian Federation"), thereby moving the timeline for the mandatory reformalization of the right of use of land plots occupied by privatized enterprises into the right of ownership or lease from 1 January 2004 to 1 January 2006. As regards the methods of payment for land plots, no definite decision was made in 2004-5, while the discussion of the projects in question was going on.
In 2005, the RF Federal Agency for Federal Property and its territorial agencies received 4.4 thousand applications for the privatization of land plots and adopted 2.8 thousand decisions on the privatization of land plots; 2.2 thousand purchase contracts were concluded with regard to 2.2 thousand land plots with the total area of 7.6 thousand hectares. The target figures, for the year 2005, concerning the income from the privatization of land plots amounted to 6 billion roubles; the federal budget's actual revenue from the privatization of land plots amounted to 5.2 billion roubles, which exceeded the results of the year 2004 by 62%. At the same time, this process was hampered by a number of factors, which were as follows:
- the absence of the State cadastre for the recording of land plots being purchased. The conducting of land tenure work and the state cadastre recording of land plots are time consuming and so expensive that the associated costs are frequently equal to the costs of purchasing the plot;
- the absence of any rights to real-estate objects that are properly formalized in accordance with existing legislation;
- the obstruction of the privatization process by regional and local authorities;
- legislation contains a number of unjustified limitations to the privatization of land plots;
- there still exists some uncertainty as regards the issue of the redemption price of land plots.
However, some positive developments did take place in the year 2005. On 24 March 2005, the Plenum of the RF Supreme Court of Arbitration adopted the Decree "On Some Issues Concerning the Application of Land Legislation", which limited the powers of authorities of different levels (first of all, the case in point is Moscow) to obstruct the sales, on easy terms, of land plots occupied by privatized objects. In May 2005, the RF President signed the Federal Law "On the Introduction of Alterations in Article 5 of the Federal Law "On the Privatization of State and Municipal Property", which eliminated the considerable contradictions formerly existing between the RF Land Code and the Law " On the Privatization of State and Municipal Property". In accordance with the adopted alterations, the ban on the participation in the privatization of those joint-stock companies, where the State's or a municipal formation's share in the charter capital exceeds 25%, must not be extended to owners of the real-estate objects, the construction of which has been properly authorized and which are located on plots of land owned by the State or municipal formations, in instances when the said owners are purchasing the said plots from the State or municipal formations. In other words, a considerable number of joint-stock companies with the State's share exceeding 25% have also been granted the right to purchase or lease land plots, which was previously denied to them. At the very end of 2005, the immensity of the problem once again made it necessary to shift the deadline for the reformalization of rights to land: by Federal Law, No. 192-FZ, of 27.12.2005, "On the Introduction of Alterations in Article 3 of the Federal Law "On Introduction into Operation of the Land Code of the Russian Federation" this deadline was shifted to 1 January 2008.
4. 3. Public Sector: Size, Regulatory Innovations, Factors behind the Dynamics
4.3.1. Size, Components and Major Characteristics of the Public Sector
The general quantitative characteristics of the public sector starting from year 2003 can be found in the annual Estimated Plans of Privatization of Federal Property subject to the approval of RF Government Resolutions. These documents present the data on the number of unitary enterprises being in the federal property (FSUE) and joint stock companies, in capitals of which the Russian Federation has its share. Below, the quantitative dynamics of entities of the said organizational and legal forms as broken down by each of the public sector's sub-sectors observed over the recent years will be discussed in more detail.
Federal State-Owned Unitary Enterprises
Below, there is presented the dynamics and sectoral structure of FSUE in 2003 through 2005 (see Table 3).
Table 3
Federal State-Owned Unitary Enterprises: Dynamics and Sectoral Structure in 2003 through 2005
As on June 1, 2003 As on June 1, 2004_As on June 1, 2005
Sector units % units % units % In % of units as on June 1,2003
Nonproductive sphere 4357 44.2 4069 44.1 3617 43.6 83.0
Industry, including: 2224 22.6 2064 22.4 1870 22.55 84.1
mechanical engineering 908 9.2 827 8.95 734 8.85 80.8
light industry 193 2.0 193 2.1 194 2.3 100.5
industry of construction mate-
rials 81 0.8 80 0.9 68 0.8 84.0
food industry 60 0.6 61 0.65 55 0.7 91.7
metallurgy 49 0.5 37 0.4 34 0.4 69.4
chemical industry 46 0.5 43 0.5 39 0.5 84.8
other industries 887 9.0 823 8.9 746 9.0 84.1
Agriculture 1329 1 3.5 1237 1 3.4 1111 13.4 83.6
Construction 1035 10.5 978 10.6 903 10.9 87.2
Transport and communications
851 8.6 809 8.8 725 8.75 85.2
Forestry 64 0.6 65 0.7 67 0.8 104.7
Total 9860 100.0 9222 100.0 8293 100.0 84.1
Source: Estimated plan (program) of federal property for year 2004 and principal strategy of privatization of federal property until year 2006, Estimated plan (program) of federal property for year 2005, Estimated plan (program) of federal property for year 2006 and principal strategy of privatization of federal property in years 2006 through 2008; the author's calculations.
As it may be seen from Table 3, the total number of FSUE has declined by 1567 units, or by almost 16 per cent11 over two years (in the period from June 1, 2003 till June 1, 2005). It should be mentioned that in the period from June 1, 2004 till June 1, 2005, the decline in the number of unitary enterprises in absolute terms (by 929 units) was almost
11 Hereinafter, there is analyzed the dynamics of units of every organizational and legal form proceeding from their number as on certain date, but not the turnover thereof (i.e. the number of enterprises created and liquidated over the respective period).
two times above the respective indicator observed in the period from June 1, 2004, till June 1, 2003 (by 638 units).
As concerns the sectoral structure of unitary enterprises being in the federal property, over the period under analysis there were observed no significant changes, which amounted to less than one per cent. About half of all FSUE (43 per cent to 44 per cent) belong to the nonproductive sphere defined as the totality of all sectors of the economy with the exception of industry, agriculture, forestry, construction, and transport and communications, whereas 22.5 per cent of FSUE belong to the sector of industry, 13.5 per cent - to agriculture, 10 per cent to 11 per cent of FSUE are registered in construction, and less than 9 per cent - in transport and communications sphere. Among the industrial FSUE enterprises of mechanical engineering and light industry have the most significant specific weights - about 9 per cent and more than 2 per cent respectively.
The most significant (in absolute terms) decline in the number of unitary enterprises observed in the period between June 1, 2003, and June 1, 2005, was observed in the sectors of nonproductive sphere (by 740 units), agriculture (by 218 units), and mechanical engineering (by 174 units). In the case the number of unitary enterprises registered as on June 1, 2005, is compared as the percentage of the respective indicator observed on June 1, 2003, it may be noted that the most significant decline was observed in metallurgy (by more than 30 per cent) and mechanical engineering (by more than 19 per cent). At the same time, in light industry and forestry the number of FSUE did not decline, but even increased somewhat.
Joint Stock Companies, Shares in which are in Federal Ownership
The quantitative dynamics and the sectoral structure of economic agents of this organizational and legal form in 2003 through 2005 are presented below (see Table 4).
As it may be seen from Table 4, the total number of joint stock companies, shares of which are in federal ownership declined by 10 per cent in the period between June 1, 2003, and June 1, 2005. It should be noted that in the period between June 1, 2004, and June 1, 2005, the decline in the number of the said joint stock companies in absolute terms (by 122 units) was almost two times below the change in the respective indicator registered in the period between June 1, 2004, and June 1, 2003 (by 300 units).
In contradistinction to the sector of unitary enterprises, in the sectoral structure of joint stock companies, in which the state had its shares there were observed significant shifts, primarily in the period between June 1, 2004 and June 1, 2005, whereas the sectoral structure registered as on June 1, 2004, practically did not differ from that observed as on June 1, 2003.
The most important shift in the sectoral structure of joint stock companies, shares of which were in federal ownership was the increase in the specific weight of enterprises in industry (from 32 per cent as on June 1, 2004, to 55 per cent as on June 1, 2005), transport and communications (from 9 per cent to 12 per cent), agriculture (from 1 per cent to 6 per cent), and forestry (from 0.4 per cent to 1.2 per cent). At the same time, the share of joint stock companies belonging to the sectors of the nonproductive sphere declined (from 45.6 per cent as registered on June 1, 2004, to 18 per cent as observed on June 1, 2005), and construction (from 11.7 per cent to 7.6 per cent).
Table 4
Dynamics and Sectoral Structure of Joint Stock Companies, Shares in which are in Federal Ownership or Subject to the "Golden Share" Special Right
in 2003 through 2005
As on June 1, 2003 As on June 1, 2004_As on June 1, 2005
Sector units % units % units % In % of units as on June 1,2003
Nonproductive sphere 1918 45.6 1781 45.6 685 18.1 35.7
Industry, including: 1350 32.1 1253 32.1 2078 54.9 153.9
mechanical engineering 225 5.4 209 5.4 187 4.95 83.1
food industry 43 1.0 40 1.0 54 1.4 125.6
metallurgy 34 0.8 32 0.8 28 0.75 82.4
industry of construction mate-
rials 21 0.5 20 0.5 19 0.5 90.5
chemical industry 19 0.4 18 0.5 46 1.2 242.1
light industry 16 0.4 15 0.4 9 0.2 56.3
other industries 992 23.6 919 23.5 1735 45.9 174.9
Construction 492 11.7 457 11.7 287 7.6 58.3
Transport and communications
383 9.1 356 9.1 459 12.1 119.8
Agriculture 46 1.1 43 1.1 229 6.1 497.8
Forestry 16 0.4 15 0.4 45 1.2 281.3
Total 4205 100.0 3905 100.0 3783 100.0 90.0
Source: Estimated plan (program) of federal property for year 2004 and principal strategy of privatization of federal property until year 2006, Estimated plan (program) of federal property for year 2005, Estimated plan (program) of federal property for year 2006 and principal strategy of privatization of federal property in years 2006 through 2008; the author's calculations.
It should be stressed that the increase in the specific weight of industrial joint stock companies, where the state had its shares, occurred primarily under the impact of the data pertaining to the specially singled out group of "other industries" in the sector of industry, which include industries other than those directly indicated in the Table (metallurgy, mechanical engineering, chemical industry, light industry, food industry, and the industry of construction materials). Exactly this group demonstrates the record increase in its contribution both in relative (from 23.5 per cent to almost 46 per cent), and in absolute terms (by 816 units). As concerns other industries, the absolute number of joint stock companies, shares in capital of which were in federal ownership, increased much less: in agriculture -by 186 units, in transport and communications - by 103 units, in forestry - by 30 units, in chemical industry - by 28 units, in food industry - by 14 units although the rates of growth in the number of FSUE in agriculture, forestry, and chemical industry registered in the period between June 1, 2003, and June 1, 2005, exceeded those observed in the group of "other industries".
It should be also noted that in the period from June 1, 2004, till June 1, 2005, the most significant decline in the number of joint stock companies with shares in federal ownership in real terms was observed in the sectors belonging to the nonproductive sphere (by 1096 units) and in construction (by 170 units).
It may be suggested that the factors behind the said changes in the sectoral structure of joint stock companies, shares of which were in federal ownership, were, on the one hand, the implementation of privatization procedures (the sales of blocks of shares owned by the state and conversion of unitary enterprises into joint stock companies), and, on the other hand, changes in classification of joint stock companies as belonging to a certain industry and respective changes in the ratios between thereof.
Another important feature of the sub-sector of the joint stock companies, shares in which were in federal ownership, was the distribution of joint stock companies on the basis of the sizes of their shares owned by the state.
Table 5
Dynamics of Joint Stock Companies, in Capitals of which Participated the State, in 1999 through 2005 (including those Subject to the "Golden Share"
Special Right)
Number of joint stock companies
Date Total Up to 25 % 25 % to 50 % 50 % to 100 % 100 % "golden share"
units % units % units % units % units % to- no tal shares
1999 3316/ 3896* 100 863 26.0 1601 48.3 470 1 4.2 382 11.5 580 **
January 1, 2001 3524*** 100 1746 49.55 1211 34.4 506 1 4.35 61 1.7
January 1, 2002 4407**** 100 2270 51.5 1401 31.8 646 14.65 90 2.05 750**
January 1, 2003 4222 100 2152 51.0 1382 32.7 589 13.95 99 2.35 1076 118
June 1, 2003 4205 100 2148 51.1 1339 31.8 600 1 4.3 118 2.8
Octo-
ber 1, 4035 100 2051 50.8 1308 32.4 552 1 3.7 124 3.1 640 148
2003
January 1, 2004 3704 100 1769 47.75 1235 33.35 540 1 4.6 160 4.3 591 251
June 1, 2004 3905 100 1950 49.9 1183 30.3 499 12.8 273 7.0
March 1, 2005 4075/ 3791# 100 1697 44.8 1154 30.4 487 12.85 453 11.95 ... 284
June 1, 2005 3783/ 3524## 100 1544 43.8 1093 31.0 474 1 3.5 413 11.7 ... 259
* - in the text of the Concept of management of state-owned property and privatization approved in 1999 there are mentioned 3896 joint stock companies, in the capitals of which participated the RF. The figure of 3316 units is a computed value, which is the sum of the number of blocks of shares (stocks) of different sizes indicated in the text of the Concept;
** - the total number of joint stock companies subject to the "golden share" special right without singling out those, where the state has no blocks of shares;
*** - joint stock companies with the exception of 48 blocks of shares in foreign companies;
**** - open joint stock companies with the exception of shares in 75 closed joint stock companies and the shares in authorized capitals of limited liabilities companies transferred in accordance with Resolution of the RF Government No. 454 r of April 2, 2002, "On the cessation of state participation in the authorized capitals of crediting organizations" or obtained under the procedures of inheritance, the deeds of gift, or on other basis;
# - 3791 units is the computed number of joint stock companies, shares in which are in the ownership of the RF with the exception of 284 joint stock companies subject to the "golden share" special right (but where the state has no blocks of shares). The specific weight of joint stock companies with different shares of the state in their capitals is calculated proceeding from this value for the purposes of comparability with the data pertaining to preceding dates.
Memorandum: in the materials prepared for a meeting of the RF Government of March 17, 2005, "On the measures aimed to the enhancement of the efficiency of management of federal property" by the RF Ministry of Economic Development and Trade it was indicated that as on January 1, 2005, in federal ownership there were 3767 joint stock companies with the exception of aforementioned 284 joint stock companies subject to the "golden share" special right, and shares in the authorized capitals of 24 limited liability companies transferred in the federal ownership in accordance with Resolution of the RF Government No. 454 r of April 2, 2002, "On the cessation of state participation in the authorized capitals of crediting organizations", at the same time, in another source (V. Nazarov) it is said that in the register of federal property there were registered 3930 joint stock companies, shares in which were in federal property or subject to the use of the "golden share" special right with respect to the management thereof (562 joint stock companies);
## - 3524 units is the computed number of joint stock companies, shares in which are in the ownership of the RF with the exception of 259 joint stock companies subject to the "golden share" special right (but where the state has no blocks of shares). The specific weight of joint stock companies with different shares of the state in their capitals is calculated proceeding from this value for the purposes of comparability with the data pertaining to preceding dates.
Source: the data presented on the departmental web site www.mgi.ru; Braverman A. A. O merakh po povysheniyu effektivnosti upravleniya federalnoy sobstvennostyu i kriteriyakh eye otsenki (On the measures aimed to the enhancement of the efficiency of management of federal property and criteria of its appraisal) // Vestnik Minimushchestva Rossii, 2003, No. 1, p.p. 13-14; Predpriyatiya s gosudarstvennym uchastiyem. Insti-tutsionalno-pravovye aspekty i ekonomicheskaya effektivnost (Enterprises with state participation. Institutional and legal aspects and economic efficiency). "Nauchnye doklady: nezavisimyi ekonomicheskiy analiz," No. 155. M.: Moskovskiy obshchestvennyi nauchnyi fond; Assotsiatsiya issledovateleiy ekonomiki obshchestvennogo sektora, 2004, p. 47; Program of privatization of federal property for year 2004 (Estimated plan (program) of federal property for year 2004 and principal strategy of privatization of federal property until year 2006) // Vestnik Minimushchestva Rossii, 2003, No. 3, p.p. 4-5; Klyuchevye problemy povysheniya effektivnosti upravleniya federalnoi sobstvennostyu i osnovnye napravleniya dividendnoi politiki Rossiyskoi Federatsii (Key problems of enhancement of the economic efficiency of management of federal property and principal strategies of the dividend policies of the Russian Federation) // Vestnik Minimushchestva Rossii, 2003, No. 4, p. 8; Estimated plan (program) of federal property for year 2005; Nazarov V. L. Administrativnaya reforma i upravleniye gosudarstvennym imushchestvom (Administrative reform and management of state property) // Upravleniye sobstvennostyu, 2005, No. 1, p. 3; Materialy k zasedaniyu Pravitelstva RF 17 marta 2005 g. "O merakh po povysheniyu effektivnosti upravleniya federalnoi sobstvennostyu" (Materials prepared for a meeting of the RF Government of March 17, 2005, "On the measures aimed to the enhancement of the efficiency of management of federal property"); Estimated plan (program) of federal property for year 2005, Estimated plan (program) of federal property for year 2006 and principal strategy of privatization of federal property in years 2006 through 2008; the author's calculations.
As it may be deduced from Table 5, two periods may be singled out as concerns the dynamics of numbers of such joint stock companies: 1) 2000 and 2001, when there was observed a growth in the number of joint stock companies, shares in which were in federal ownership, and 2) 2002 through 2004, when the number of such joint stock companies declined. Thus, only in 2001 the number of such joint stock companies increased by one forth (or by 883 units) and reached 4407 units, what was the absolute maximum in the whole period under observation. In the next years, there was revealed a trend towards a decline in the number of joint stock companies, shares in which were in federal ownership. Over 2002, the number of such entities decreased by 4.2 per cent (or by 185 units), in 2003 - by 12.3 per cent (or by 518 units).
The dynamics of the total number of joint stock companies, shares in which were in federal ownership, is a result of impact of two vectors: on the one hand, it may increase in the result of conversion of FSUE into joint stock companies or a number of other actions, which may result in the appearance of blocks of shares (stocks) in federal ownership; on the other hand, the sales of such blocks of shares in the course of implementation of privatization procedures naturally results in the decline of their number being in ownership of the Russian Federation.
As concerns the practical aspects of this issue, a significant increase in the number of joint stock companies, where blocks of shares are in federal ownership, observed in 2000 and 2001 reflects rather the success of inventory of the federal property carried out after the approval of the Concept of 1999 than the real growth in the number of respective joint stock companies, since the number of FSUE converted into joint stock companies began to grow significantly only in 2003 and 2004.
In the case the structure of the totality of joint stock companies, where blocks of shares are in federal ownership, from the standpoint of how the shares belonging to the state could ensure that the Russian Federation, as the owner, had the adequate degree of control over such companies, there may be noted the following. In 2001 through 2003, the
specific weight of joint stock companies, where more than 50 per cent of shares were in federal ownership (including all companies, where this share made 100 per cent), made from 16 per cent to 17 per cent and by early 2004 somewhat increased making about 19 per cent. At the same time, there was registered a certain decrease in the specific weight of blocks of shares making up to 25 per cent of authorized capitals of joint stock companies and blocking shareholdings (from 25 per cent to 50 per cent), which made about half and one third of all federally owned blocks of shares respectively.
There should be specifically noted the shifts observed in 2004, when there occurred a decline in the share of federal blocks of shares of all sizes with the exception of blocks of shares amounting to 100 per cent. As a result, as on June 1, 2005, the structure of the totality of federal blocks of shares looked as follows: minority ownerships up to 25 per cent of capital amounted to less than 44 per cent of all joint stock companies, in which the state had shares, whereas the blocking shareholdings (from 25 per cent to 50 per cent of capital) made 31 per cent; in about one forth of all joint stock companies the state could exercise majority or total control, and it should be noted that the share of the latter (with 100 per cent share of state-owned capitals) was just slightly below the share of the joint stock companies, where the state being the majority shareholder had less than 100 per cent of shares.
Upon comparing the structure of federal blocks of shares formed by the middle of 2005 as broken down by the size of the shares the state had in the authorized capitals of joint stock companies with the respective structure the RF Property Ministry expected to be formed after the implementation of the privatization program for year 200312, it should be noted that these structures differed considerably.
There was observed a clear bias in favor of the specific weight of blocks of shares, which did not ensure that the state had the adequate degree of control over joint stock companies. Thus, it had been planned to reduce the share of minority blocks of shares to 36 per cent (in reality it made 43.8 per cent), blocking shareholdings - to 22 per cent (in reality it made 31 per cent). On the contrary, the share of full blocks of shares should have reached 30 per cent (in reality it made less than 12 per cent). Only the expected share of controlling blocks of shares (12 per cent) was approximately commensurable with the figures registered in the middle of 2005 (13.5 per cent).
Even more ambiguous results are demonstrated in the course of comparison of the structure of the totality of the federal blocks of shares as in March of 2005 and in 1999 (basing on the data presented by the Concept). There is registered a significant (1.7 times) increase in the share of blocks of shares making up to 25 per cent of authorized capitals of joint stock companies, mainly due to the decline in the specific weight of blocking shareholdings (from 25 per cent to 50 per cent). The share of the blocks of shares making 50 per cent to 100 per cent of capitals has also decreased, but only by 1.5 p. p. At the same time, the share of joint stock companies, where all capitals were owned by the state remained practically unchanged (about 12 per cent). However, it should be noted that the data pertaining to 1999 may be incomplete.
Nevertheless, it may be noted that as on June 1, 2005, the number of registered federal blocks of shares making below 25 per cent of capitals of joint stock companies (1544 units) was 1.8 times above the respective indicators observed in 1999, with the maximum registered in the beginning of 2002 (2270 units), later there was observed a gradual de-
12 In total, it was expected that in the federal ownership there will be 3613 blocks of shares. See: Braverman A. A. O merakh po povysheniyu effektivnosti upravleniya federalnoy sobstvennostyu i kriteriyakh eye otsenki (On the measures aimed to the enhancement of the efficiency of management of federal property and criteria of its appraisal) // Vestnik Minimushchestva Rossii, 2003, No. 1, p. 29.
cline in the number of such joint stock companies. In 2005, the number of federal blocks of shares in the group from 25 per cent to 50 per cent (1093 units) was by almost 32 per cent below than in 1999 (1601 units). It should be noted that in early 2002 (1401 units) it was above the figure registered a year ago (1211 units), later there was also observed a gradual decline in the value of this indicator. In 2005, the number of federal blocks of shares sized from 50 per cent to 100 per cent of capitals of joint stock companies (474 units) was approximately at the level registered in 1999 (470 units); however, it should be noted that it fluctuated within a rather wide band over the period under observation making 646 units in early 2002 and 600 units as on June 1, 2003; later there was observed a decline in the value of this indicator. As concerns the number of joint stock companies, where 100 per cent of shares were in federal ownership, in 2005 it was by about 8 per cent above the figures registered in 1999. The minimal value of this indicator was observed in the beginning of 2001 (61 units). Later, it gradually increased and it should be noted that it grew 2.8 times over 2004 (by almost 300 units).
The largest scales of the use of the "golden share" special right were registered in the beginning of 2003, when alongside 958 joint stock companies, where this right was applied simultaneously with the presence of federal blocks of shares, there also existed 118 such joint stock companies, in which there were no state shareholdings (for comparison: in 1999 there were 580 joint stock companies subject to the application of this instrument, while in the beginning of 2002 there were registered 750 such entities). In 2003 and 2004, as the process of sales of federal blocks of shares intensified, the total number of such joint stock companies declined (in the beginning of 2004 there remained 591 units); however at the same time there was increasing the number of companies, where the presence of the state was reduced exclusively to the "golden share" special right: 284 units as on March 1, 2005, what was 2.4 times above the figures registered in the beginning of 2003. The specific weight of joint stock companies, with respect to which only the special right was applied, in the total number of joint stock companies subject to the "golden share" rule also increased: in early 2003 such companies made about 11 per cent, while in the beginning of 2004 their number was already above 42 per cent.
4.3.2. Major Changes in the Regulatory and Legal Framework
Last year, the improvement of the regulatory and legal framework pertaining to the process of management of FSUE and blocks of shares in joint stock companies being in federal ownership continued.
As concerns the sub-sector of unitary enterprises, the major regulatory and legal innovations in this sphere were the new model FSUE charter and the employment contract with the head thereof. Over the period passed since the autumn of 1999, the date of approval of the Concept of management of state-owned property and privatization in the RF, it has been already third version of the said documents, which form the basis of the process of management of unitary enterprises. The first two versions are dated February of 2000 (it was somewhat amended later), and December of 2003.
The new employment contract with the head thereof was approved by Order of the Ministry of Economic Development and Trade No. 49 of March 2, 2005. In general, it followed the provisions of the preceding version of this document approved by Resolution of the RF Property Ministry No. 6946 r of December 11, 2003. A significant innovation in the document was the provision envisaging the full financial responsibility to be borne by the head of the enterprise in the case there arise direct damages added in the section "Responsibility of the head of enterprise". Other amendments were of purely technical nature
(for instance, the removal of the indication of the minimal 3 year term of the employment contract, whereas the previous norm stipulating the 5 year maximal term was retained).
Somewhat later, by Order of the Ministry of Economic Development and Trade No. 205 of August 25, 2005, there was approved the new Model FSUE charter. Similarly to the Model employment contract, it differed little from its preceding version, the Model FSUE charter approved by Resolution of the RF Property Ministry No. 6945 r of December 11, 2003. Among the amendments made to the charter there may be mentioned changes in the formulations determining the goals enterprises should attain (in this version, concrete goals following from the stipulations of the law on unitary enterprises, to which profits are subordinate, are indicated in individual subparagraphs) and utilization of profits (as concerns utilization of profits, the new version of the charter sets as priorities the defrayal of expenses borne by the enterprise, formation of revenues of the federal budget13, and other goals), as well as the introduction of the previously absent regulation envisaging that proceeds from lease of fixed assets of the enterprise should be transferred to the federal budget under the respective procedures. In the section "Responsibilities of the enterprise" there was set as the priority the previously absent norm envisaging the approval, under the respective procedures, the operating program of the enterprise (earlier, only the approved targets of economic performance efficiency had been mentioned in this context). The procedures governing the approval of the operational programs of unitary enterprises and official evaluation of performance of the heads of enterprises was not changed.
The effect of the approval of the new normative acts regulating operations of unitary enterprises should not be overestimated. As it was noted at the meeting of the Russian Government held on March 17, 2005, by the head of the Ministry of Economic Development and Trade, the adoption of a special law on unitary enterprises containing provisions hindering their economic activities, which took place at the end of 2002, had failed to create the expected incentives for reduction of this sub-sector. Heads of SUE had managed to adapt for the requirements of the law pertaining to the coordination of their actions with the authorities14.
As concerns the sub-sector of joint stock companies, in the capitals of which the state had its shares, the most important innovation was Order of the Federal Property Management Agency No. 228 of July 26, 2005, which approved the following standard documents, which entered into force since August 1:
- Model form of directives to representatives of interests of the RF at Boards of Directors of open joint stock companies, shares in which are in federal ownership;
- Model form of directives to representatives of the state at the general meetings of shareholders of such open joint stock companies;
- Model form of designations of authority of the representatives of the state concerning the representation of interests of the Russian Federation at general meetings of shareholders of open joint stock companies, shares in which are in federal ownership;
- Model form of decisions taken by the single owner of open joint stock companies, 100 per cent of shares in which are in federal ownership;
- Model form of decision taken by the single owner of open joint stock companies, 100 per cent of shares in which are in federal ownership, with respect to increases of the authorized capital by the placement of additional shares;
13 Earlier, there has been no indication of a portion of the enterprise profits as a source of replenishing of the federal budget.
14 Frumkin K. Privatizatsiya na bumage (Privatization on paper) // Izvestiya, March 18, 2005.
- Recommendations pertaining to the formation of the position the state should have on the issue of approval of the annual report of open joint stock companies, shares in which are in federal ownership;
- Recommendations pertaining to the formation of the position, the state should have on the issue of approval of the transactions, in the conduct of which there is interest, and large transactions on the part of open joint stock companies, shares in which are in federal ownership;
- Form of the passport of the meeting of the managerial body of open joint stock companies, shares in which are in federal ownership.
The formulations, used in the Model form of directives, envisage the responsibility of the representative of the state to vote in a certain way (for or against) draft decisions (variants: ensure the election to the Board of Directors (including the Chairperson thereof), audit commission, etc. of certain persons or withdrawal of the issue from the agenda with the indication of the reason for such withdrawal). As concerns other issues on the agenda of the meeting, the representative of the state must vote in accordance with the legislation currently in force and in interests of the state, whereas in the case of introduction of additional issues not entered on the official agenda approved by the Federal Property Management Agency, the state representative should vote "against" the adoption of any decisions concerning such issues. The representative of the state must ensure the presentation of a copy of the records of such a meeting to the Federal Property Management Agency within two weeks after the date, on which such a meeting was held.
The Directives should be documented by a letter of a deputy head of the Federal Property Management Agency and registered in accordance with the procedures set for this agency by the records management instruction. The Directives should be supplemented with a passport of the meeting of the managerial body of the open joint stock company, shares in which are in federal ownership, made in the accordance with the form approved by the said Order. The Directives should be also supplemented with an explanatory note signed by the head of a Federal Property Management Agency department containing the justification of the proposed draft decisions for each issue on the agenda of the meeting and respective positions of the sectoral federal executive authority (if any). It is prohibited to use in the Directives formulations other than those indicated in the Model form.
The Model form of the designation of authority of the representative of the state
should indicate the number of shares owned by the state and their share in authorized capitals. The designation of authority should be issued as a document without the right of delegation to another person, have the validity term not exceeding 7 days since the date preceding the date, on which the meeting of the general meeting of shareholders, and it should be valid in the case there is held the second general meeting of shareholders on condition that the agenda thereof remains the same.
The Model form of decisions taken by the single owner of open joint stock companies, 100 per cent of shares in which are in federal ownership has its specifics, since in this case it should be documented as a resolution of the Federal Property Management Agency. The In this case, the Model form should directly indicate the issues, which should be approved on the mandatory basis: 1) annual report; 2) annual accounting statement, including the profit and loss statement; 3) distribution of profits, including the funds earmarked for the payment of dividends; 4) election of the Board of Directors, including the representative of the state; 5) election of the audit commission, including the representative of the state; 6) appointment of the General Manager; 7) approval of the auditor.
In order to determine the position the Federal Property Management Agency should have on the issues included in the agenda of the general meeting of shareholders of an open joint stock company, 100 per cent of shares in which are in federal ownership, there should be presented the following materials: 1) copies of records of the meetings held by the Board of Directors, at which there were discussed the issues pertaining to the preparation for the general meeting of shareholders; 2) annual report of the joint stock company documented in accordance with the Recommendations approved by this Order; 3) accounting balance sheet with all supplements for the reporting year approved by the head of the enterprise and stamped by the respective tax authority; 4) audit report based on the inspection of the economic and financial operations carried out by the joint stock company in the respective year made by the auditor of the joint stock company; 5) audit report based on the inspection of the economic and financial operations carried out by the joint stock company in the respective year made by the audit commission; 6) recommendations of the Board of Directors concerning the distribution of profits, including the size of dividends on shares in the joint stock company and the procedures governing the payment thereof based on the results of the respective financial year documented by a report on the proceedings of the meeting of the Board of Directors; 7) information about the candidate (candidates) for members of the executive bodies of the joint stock company, audit commission; 8) report on the proceedings of the contest commission as concerns the selection of the auditor for the respective year; 9) other documents required in order to take decisions on individual issues in accordance with the legislation currently in force and this Order.
The Model form of decision taken by the single owner of open joint stock companies, 100 per cent of shares in which are in federal ownership, with respect to increases of the authorized capital by the placement of additional shares should indicate the total number of shares resulting from the issue of additional shares; the amount of increase in the size of the authorized capital; the offering price of one registered ordinary uncertified share of the additional issue at face value; the dates of the start15 and completion16 of the placement of shares, which in the case of the placement with respect to the single shareholder - the Russian Federation - on the terms of closed subscription should be paid for in the full amount. There should be also approved amendments made in the charter of the joint stock company in connection with the changes in the number of shares17.
The decision taken by the single owner of open joint stock companies, 100 per cent of shares in which are in federal ownership, with respect to increases of the authorized capital by the placement of additional shares should be also documented in the form of a resolution issued by the Federal Property Management Agency. In order to determine the position the Agency should have on this issue of the agenda of the general meeting of shareholders there should be presented: 1) copy of the records of the meeting held by the Board of Directors, at which there was discussed the matter of increase in the authorized capital by the placement of additional shares; 2) other documents required in order to take
15 The date of the start of placement of an issue of securities is defined as the next day after the receipt of the notification of the state registration of the securities issue.
16 In a relevant case, there may be also indicated that "the end date of the placement of an issue of securities is the date of granting of the ownership rights with respect to a number of shares (number of shares in words) of the full name of the organization, the shares of which are transferred in payment of the authorized capital; however not later than one year since the date of the state registration of the additional issue of securities".
17 In the cases, where the charter of the organization does not contain the indication of the required number, the face value, categories (types) of shares, which the company has the right to place in addition to the already placed shares (authorized shares), and the rights pertaining to these shares.
decisions on individual issues in accordance with the legislation currently in force and this Order.
In the case the additional shares are paid for in a form other than money (securities, things or property rights, or other rights, which can be evaluated in money), the respective resolution should envisage the list of properties eligible for the use as the payment for the shares. In this case, in order to determine the position the Federal Property Management Agency should have on this issue there should be presented a statement on the results of the expert evaluation of the report concerning the evaluation of the respective properties prepared by the Department for the registration, evaluation, and control of the use of property of the Federal Property Management Agency. In the relevant cases there should be also indicated that the "placed additional shares may be paid for in kind".
Recommendations pertaining to the formation of the position the state should have on the issue of approval of the annual report of open joint stock companies, shares in which are in federal ownership, should consist of the following sections: 1) general information about the joint stock company; 2) characteristic of the managerial and supervisory bodies of the open joint stock company (general meeting of shareholders, Board of Directors, executive body, audit commission); 3) position the enterprise has in its sector; 4) priority strategies; 5) report of the Board of Directors (Supervisory Board) on the results of development of the enterprise with respect to its priority strategies; 6) information on large transactions conducted by the joint stock company and the transactions, in the conduct of which there is interest; 7) report on the payment of dividends; 8) description of the major risk factors relating to the operations of the enterprise; 9) prospects of development of the enterprise.
Recommendations pertaining to the formation of the position, the state should have on the issue of approval of the transactions, in the conduct of which there is interest, and large transactions on the part of open joint stock companies, shares in which are in federal ownership, indicate that the following materials should be analyzed for these purposes: 1) copies of documents confirming that there are persons interested in the transaction in accordance with the legislation currently in force certified under the established procedures (in the case of the transaction, in the conduct of which there is interest); 2) copy of the accounting balance sheet of the open joint stock company, shares in which are in federal ownership, as on the last reporting date certified in accordance with the established procedures; 3) copy of the charter of the respective open joint stock company certified by its head; 4) report on the evaluation of the market value of the assets planned for the transaction prepared in the accordance with the RF legislation on evaluation activities not later than 3 months prior to the date of presentation thereof (if required); 5) statement on the results of the expert evaluation of the report concerning the evaluation of the respective properties prepared by the Department for the registration, evaluation, and control of the use of property of the Federal Property Management Agency (if required); 6) draft contract pertaining to the transaction (with the exception of contracts concluded in the course of a competitive tender) and detailed description of all terms of the transaction; 7) information about the forecast of the impact the transaction may have on the performance efficiency of the open joint stock company as concerns its production and financial indicators; 8) written opinion on the feasibility of the transaction prepared by the federal executive authority charged with coordination and regulation of the activities carried out in the respective sector (sphere of administration) (if any).
The passport of the meeting of the managerial body of open joint stock companies, shares in which are in federal ownership, should contain the following information: 1) the date, on which the respective meeting took place; 2) number of stocks in fed-
eral ownership and their share in the authorized capital (with a separate indication of voting shares); 3) values of a number of economic indicators (proceeds, net profits, net assets) registered in the reporting and the preceding financial years; 4) estimated amount of dividends, including in terms of their share in net profits (with a separate indication of dividends due on the federal block of shares); 5) composition of the Board of Directors (with a separate indication of the actual and estimated number of persons representing interests of the state); 6) package of required documents (annual report, statement of the audit commission, audit report, and report on the proceedings of the contest commission as concerns the selection of the auditor).
An important development, which may have a significant influence on the development of companies, in capitals of which the state has its share, was the introduction of amendments to the current law on privatization, which removed the prohibition on purchase of land by joint stock companies, in which the share of the state and municipalities exceeds 25 per cent. This provision will permit such large companies as Gazprom, RAO UES of Russia, Sberbank RF, and others to buy the land, on which their fixed assets are situated. This circumstance should facilitate the enhancement of investment attractiveness of companies in terms of the growth in their capitalization and ability to attract external borrowings (primarily credit borrowings).
4.3.3. Major Factors Affecting the Development of the Public Sector
In the practical aspect, the period including 2004 and 2005 was characterized by the fact that the issues pertaining to the management of unitary enterprises and companies, in capitals of which the state had its shares, turned out to be interweaved in the context of the administrative reform and its consequences.
First, there should be noted the contention concerning the List of strategic enterprises and joint stock companies. By the beginning of 2005, the RF Ministry of Economic Development and Trade had prepared and submitted to the RF Government a draft Presidential Decree "On amendments to the List of strategic enterprises and strategic joint stock companies".
In accordance with this document, it was proposed to exclude 252 organizations from the List, including 43 federal state-owned unitary enterprises and 209 open joint stock companies. In particular, it was envisaged to exclude from the List 8 blocks of shares in joint stock companies owned by the state and 9 FSUE operating in the sector of civil aviation, 23 open joint stock companies being sea and river ports and shares in 39 joint stock companies engaged in sea and river transport operations, as well as 47 open joint stock companies, the activities of which related to gasification and maintenance of gas networks in the respective subjects of the Russian Federation18.
Therefore, more than half of the strategic joint stock companies proposed to be removed from the List of strategic enterprises operated in the sphere of transport and infrastructure. The RF Ministry of Economic Development and Trade justified this approach by the necessity to attract extra-budgetary financing in the types of activities characterized by high capital intensity and long terms of the recoupment of capital investments under the conditions, where investment demand exceeded budgetary capacities of the state and own sources of the respective enterprises, what contributed in the growing disproportions between the increasing demand for transport services and the capacities to meet this de-
18 Materialy k zasedaniyu Pravitelstva RF 17 marta 2005 g. "O merakh po povysheniyu effektivnosti upravleniya federalnoi sobstvennostyu" (Materials prepared for a meeting of the RF Government of March 17, 2005, "On the measures aimed to the enhancement of the efficiency of management of federal property"), the RF Ministry of Economic Development and Trade, Rossiyskaya biznes-gazeta, March 22, 2005.
mand. In the same context, there was pointed out that private capitals took part in operations in the sphere of construction and maintenance of airports, ports servicing river transport, presence of private capitals on the energy market, and privatization of the majority of companies engaged in the extraction of energy resources.
Among the possible results of privatization, the document indicated the enhanced competitive power of infrastructure objects, reduction of transport costs, increase in the speed of passenger and cargo flows, growth in transshipment (transport) capacities, attraction of new investors, positive impact on the state of the competitive environment, and improvement of the quality of management with respect to such enterprises. As an additional argument in favor of the sale of federally owned blocks of shares the document indicated the expected reduction of the value of such blocks in the case the budgetary financing of the respective enterprises was insufficient.
The draft Decree also proposed to exclude from the List of strategic enterprises 73 joint stock companies, where the blocks of shares in federal ownership were below 51 per cent of authorized capitals. This proposal was based on the analysis of the operations carried out by these companies, which had revealed that they failed to ensure the production of goods necessary for the defense and security of the state, protection of morals, health, rights, and lawful interests of RF citizens. There were no legislative acts, in accordance with which exceptionally state-owned enterprises should be eligible to produce respective goods (carry out works, render services). In some cases, open joint stock companies were not the only producers of strategically important goods, since similar products (works, services) were provided by the private sector, what, according to the RF Ministry of Economic Development and Trade, made the retention of federal blocks of shares in such organizations unfeasible, since the size thereof permitted the state only to block decisions taken by the respective general meetings of shareholders.
Besides, federal state-owned unitary enterprises and open joint stock companies approved by the respective sectoral federal executive authorities for the inclusion in the privatization programs for years 2004 and 2005 should be also removed from the List.
The document was prepared taking into account the proposals made by the federal executive authorities responsible for the implementation of state policies in the respective sectors. The disputes were resolved under conciliatory procedures with participation of the said Ministries and departments.
In spite of the fact that the draft Presidential Decree presented by the RF Ministry of Economic Development and Trade took into account the sectoral specifics, it was significantly changed by the RF Government Office. As the result, the number of organizations excluded from the List of strategic enterprises and strategic joint stock companies was reduced. After the adjustment of the document for the proposals made by the RF Government Office, to the RF Presidential Administration there was submitted a draft containing the list of 8 federal state-owned unitary enterprises and 179 open joint stock companies. Therefore, the number of joint stock companies proposed to be excluded from the list of strategic enterprises was reduced by about 15 per cent and the number of FSUE - more than 5 times in comparison with the first version of the draft document.
Nevertheless, the Legal Department of the RF Presidential Administration rejected the draft Decree and returned for a revision. Alongside with a number of technical corrections, the statement contained doubts concerning the necessity to exclude from the aforesaid List such a large number of enterprises and joint stock companies without a detailed analysis of the role they played in the ensuring of security and defense capabilities of the state. This circumstance made it necessary to hold a meeting aimed at the settlement of these differences. In the process of further work on the document the comments made by
the Legal Department of the RF Presidential Administration with respect to the analysis of the role played by enterprises in the ensuring of security and defense capabilities of the state were taken into account. In this connection, the RF Ministry of Economic Development and Trade found it reasonable to implement the proposal advanced by the RF Security Council Office concerning the development of a regulation envisaging the preparation of proposals aimed at the adjustment of the List of strategic enterprises and strategic open joint stock companies in order to regularly update the List as it is required by the law on privatization currently in force.
In practice, after the exclusion of Rosneft (substituted with Rosneftegaz in connection with the implementation of the project aimed at the consolidation of state control over Gazprom), 12 unitary enterprises and 8 joint stock companies operating in mechanical engineering and defense industry in 2004 and early 2005 there were introduced just a few changes. After January of 2005, in the List there were included only 2 FSUE: Goznak (8 unitary enterprises engaged in the similar activities were transformed in its subsidiaries) and the ITAR-TASS news agency19. Yet another unitary enterprise (a research and development institute) was excluded from the List because of its merger with another enterprise.
Second, the size of the public sector and, indirectly, the processes underway in it, was affected by the decline in the rate of progress of the process of privatization resulting from the conflict between the Russian Federal Property Fund (RFPF) and the Federal Property Management Agency (Rosimushchestvo).
The new administration of the Federal Property Management Agency headed by V. Nazarov, which was vested with the management of this agency created to regulate property relations after the launch of the administrative reform in the spring of 2004, made an attempt to implement the long existing plans to expand the circle of the sellers of federal property in the course of privatization justifying this move by the necessity to accelerate the rate of the privatization process. It should be noted that in all the preceding years this function had been performed exclusively by the RFPF. There was imitated the process of amendment of the law on privatization depriving the said structure of the right to be the exclusive seller. In the course of development of the new charter of the Federal Property Management Agency there was introduced the provision envisaging the right of the Agency to keep in its possession shares owned by the state until the date the new owner take possession of such shares. The Federal Property Management Agency also was the initiator of the process of amendment of the RFPR charter, which were aimed at the deprivation of the Fund of the right to own and manage assets of privatized enterprises and switch the RFPF to the financing from the budget. It should be noted that at present this organization is financed at the expense of the commission fees for sales of privatized property. Perhaps, this circumstance was one of the implicit factors behind the acute conflict between two organizations alongside with purely bureaucratic tensions resulting from the administrative reform.
Basing on its charter and the regulations governing its relations with the Federal Property Management Agency, the RFPF demanded that the Agency transferred to it the shares subject to privatization in advance. However, by the early summer of RFPF could not transfer any enterprises bought by the winners of the respective tenders to the new owners because it could not receive the shares from the Federal Property Management Agency. The RFPF administration headed by Yu. Petrov voiced its intention to suspend the
19 In accordance with Decree of the RF President No. 1470 of November 22, 2004, the Russian News and Information Agency RIA "Novosti" was included in the list of strategic enterprises.
publication of all notifications on future tenders, what would mean the complete freezing of the privatization process. In total, over the last year the Russian Federal Property Fund did not publish informational notifications about the sale of 183 joint stock companies for the first time included in the privatization program20.
Temporarily, this issue was settled by Order of the RF Ministry of Economic Development and Trade No. 122 of June 7, 2005. In accordance with the procedure set froth by the Order, the Federal Property Management Agency should document and transfer to the Russian Federal Property Fund original instruments of share transfer concerning the shares subject to privatization not later than after 3 days since the date the RFPF receives copies of records concerning the results of the respective tenders and sale and purchase contracts regarding shares, the sale of which was recognized as valid. In its turn, the RFPF should document the instruments of share transfer with respect to the transfer of shares to buyers and work in cooperation with the persons maintaining registers of shareholders. The instruments of transfer of shares to the Fund should be forwarded to the registrars simultaneously with the forwarding of instruments of transfer of shares to the buyers, what permits to minimize the time of possession of shares by a person not authorized to exercise the rights of a shareholder on behalf of the Russian Federation (in fact, shares just transit the personal account of the seller).
In order to improve the procedure governing the sales of privatized shares, the RF Ministry of Economic Development and Trade prepared a draft resolution of the Government of the Russian Federation "On the Russian Federal Property Fund".
The draft resolution stipulates that since the date the RF Government approves the estimated plan (program) of privatization of federal property for the respective period, the registers of shareholders in the joint stock companies included in the estimated plan (program) of privatization of federal property for the respective period should indicate the Russian Federation as represented by the Federal Property Management Agency and the Russian Federal Property Fund as the owner of the shares being the property of the Russian Federation.
At the same time, the Federal Property Management Agency should exercise the full rights of the shareholder, whereas the RFPF is vested with the powers to request information necessary for the presale preparation and conduct of evaluation of shares under the established procedure, as well as the powers to directly transfer to the buyers privatized shares upon the establishment of the results of the sales recognized as valid, on the basis of the purchase and sale contracts made in accordance with the privatization laws on behalf of the Russian Federation. Besides, the draft resolution vests the Federal Property Management Agency with the powers pertaining to the setting of the initial price of the privatized federal property21.
Nevertheless, until present time there has not been approved the new version of the Charter of the Russian Federal Property Fund and there have not been brought into compliance with Decree of the President of the Russian Federation No. 649 of May 20, 2004, "Issues concerning the structure of the executive authorities" the regulatory and legal acts of the Government of the Russian Federation regulating the issues of organization of sales of federal property.
A result of the uncompleted reform of relations pertaining to privatization and management of federal property and the conflict between the Federal Property Management
20 On privatization of federal property in year 2005. A report of the Federal Agency for the Management of Federal Property, M., 2006.
21 On the results of privatization of federal property in the first six months of 2005 // Center of Parliamentary Communications, August 5, 2005, www.rosim.ru.
Agency and the Russian Federal Property Fund, which arose in the course of the implementation of the administrative reform was an apparent deceleration of the rates of implementation of a rather ambitious privatization program developed by the RF Ministry of Economic Development and Trade yet in 2003 before the start of the administrative reform. It should be reminded that the Estimated plan (program) of privatization of federal property for year 2004 and principal strategy of privatization of federal property until year 2006 approved by Resolution of the RF Government No. 1165 r of August 15, 2003, embraced a 3 year period (2003 through 2006) and set as its target to offer to the private sector all properties not related to the performing of state functions by 2006, whereas the privatization process should be completed by 2008.
In particular, as concerns the state participation in the corporate sector, as the key targets of the implementation of privatization programs there were set the sale of all state-owned blocks of shares making up to 25 per cent of the respective authorized capitals in
2004, blocks of shares making up to 50 per cent of the respective authorized capitals - in
2005, and all other, with the exception of strategic enterprises, in 2006. In accordance with the estimates presented by the RF Ministry of Economic Development and Trade such a program required that each year there would be carried out the sales of shares in 4000 joint stock companies (including reorganized FSUE). It was planned that in the result of the implementation of the program by the end of 2008 no more than 2000 FSUE and 500 different blocks of shares should remain in the state ownership.
The specific feature of the next privatization programs was the use of the previous targets; however, without the explicit indication that all blocks of shares owned by the state with the exception of strategic ones should be sold in 2006.
Thus, the Estimated plan (program) of privatization of federal property for year 2005 approved by Resolution of the RF Government No. 1124 r of August 26, 2004, stipulated that in 2005 there should be offered for privatization the blocks of shares, the sizes of which were below 25 per cent of the authorized capitals of the respective joint stock companies with the exception of the blocks of shares in strategic joint stock companies or those taking part in the formation of integrated structures, as well as the blocks of shares to be sold proceeding from the need of formation of revenues of the federal budget in 2005 and in the period until 2007 in accordance with the long term financial plan. The Estimated plan (program) of privatization of federal property for year 2006 and principal strategy of privatization of federal property in years 2006 through 2008 approved by Resolution of the RF Government No. 1306 r of August 25, 2005, stipulated in practically the same wordings that in 2006 there should be offered for privatization the blocks of shares, the sizes of which were below 50 per cent of the authorized capitals of the respective joint stock companies. In 2007 and 2008, for privatization there should be offered all federal state-owned unitary enterprises not engaged in the performance of state functions of the Russian Federation, as well as the shares in open joint stock companies created in the course of transformation of the said federal state-owned unitary enterprises.
A graphic illustration of the extent of difference between the planned and actual rates of privatization is the results of 2004, when there were privatized 565 federal blocks of shares (not taking into account 31 blocks of shares, with respect to the sales of which the results were registered only in 2005) and 525 FSUE22, although it had been planned to privatize shares in 1702 joint stock companies and 1374 FSUE23. A similar situation was ob-
22 It is the number of unitary enterprises, with respect to which all preparatory measures had been completed and the decisions on the terms of privatization thereof taken.
23 In reality, not all enterprises included in the plan could be privatized, since some of them were included in the List of strategic enterprises, or represented joint stock companies, which were the RF contributions in the authorized capitals of inte-
served in 2005, when out of 1481 blocks of shares planned for privatization there were sold 521 blocks of shares (not taking into account 273 blocks of shares, with respect to the sales of which the results should be registered only in 2006). However, it should be noted that the number of privatized unitary enterprises being in federal ownership grew significantly and made 741 units; nevertheless, this number made just above the half of the targets set by the privatization program for year 2005 (1453 units)24.
In order to create incentives for the intensification of the privatization process, Resolution of the RF Government No. 806 of December 26, 2005, approved the new Rules governing the formation of estimated plans (programs) of privatization of federal property.
This document envisages that not later than on February 1 the RF Ministry of Economic Development and Trade should submit to the RF Government the report on the results of implementation of the program in the reporting year, including the lists of federal property not privatized in the reporting year and being subject to the inclusion in the program, supplemented with the draft decision of the RF Government. Not later than on April 1, the RF Ministry of Economic Development and Trade should issue the instructions for the Federal Property Management Agency concerning the development of the draft program for the next year prepared taking into account the results of privatization of federal property in the reporting year discussed at a meeting of the RF Government, as well as the principal strategies of privatization for the planning period.
In the course of formation of the program there should be taken into account the proposals advanced by federal executive authorities, authorities of RF subjects, local governments, FSUE, and open joint stock companies, shares in which are in federal property, as well as other legal entities and citizens, which were submitted to the Federal Property Management Agency not later than on May 1.
Not later than on May 20, the Federal Property Management Agency should forward to the federal agencies performing the functions of management of state-owned property under their respective jurisdictions and other federal executive bodies performing such functions (hereinafter referred to as sectoral agencies) the lists of federal state-owned unitary enterprises under their jurisdictions, as well as open joint stock companies operating in the respective sectors, and other properties subject to the inclusion in the draft program (with the exception of properties to be included in the draft program on the mandatory basis in accordance with decisions taken by the RF Government) in order to be agreed under the established procedures. The proposals concerning the inclusion in the draft program of federal properties to be privatized on the mandatory basis in accordance with decisions taken by the RF Government should not be agreed with the sectoral agencies.
Not later than on June 10, the sectoral agencies should submit the agreed lists to the Federal Property Management Agency, which, in the case there are disputes on the draft program, should hold reconciliatory meetings with sectoral agencies attended by representatives of the RF Ministry of Economic Development and Trade not later than on June 20. Sectoral agencies should submit proposals concerning the exclusion of federal state-owned unitary enterprises under their respective jurisdictions and shares in joint stock companies operating in the respective sectors from the draft program in accordance with the special forms set yet by Resolution of the RF Government No. 252 of May 5, 2003.
grated structures; absence of real economic operations on the part thereof, the fact that such enterprises were at the stages of bankruptcy proceedings or liquidation processes; flaws in documentation or total lack thereof; failures of the management to comply with the requirements pertaining to the preparation of respective enterprises for privatization; and various technical problems.
24 On privatization of federal property in year 2005. A report of the Federal Agency for the Management of Federal Property, M., 2006.
These forms should indicate the base characteristics of the objects offered to be excluded from the privatization program and contain justification of the infeasibility of privatization thereof. The proposals documented in contravention of the said requirements should not be accepted for examination.
Not later than on June 30, the Federal Property Management Agency should submit to the RF Ministry of Economic Development and Trade the agreed draft program supplemented with extracts from the register of federal property and other documents, the list of which should be determined by the RF Ministry of Economic Development and Trade. In the case there are unsettled disputes, the draft program should be submitted as supplemented with the records of the reconciliatory meetings and original copies of respective corrections signed by the heads of respective sectoral agencies. The RF Ministry of Economic Development and Trade should hold reconciliatory meetings with respect to the unsettled disputes under the established procedures. Not later than on July 15, the RF Ministry of Economic Development and Trade should submit the draft program agreed with the Federal Antimonopoly Service (FAS) and the RF Finance Ministry to the RF Government in accordance with the established procedures. The RF Government should discuss the draft program at its meeting. Not later than on August 25, the RF Government should approve the program.
Alongside with the updated schedule of processing of the respective documents envisaging deadlines at each stage of processing, the key innovation introduced by the said document in the organization of the privatization process is the provision stipulating that the proposals on the inclusion in the draft program of federal properties to be privatized on the mandatory basis in accordance with decisions taken by the RF Government should not be agreed with the sectoral agencies.
Third, the optimization of the network of FSUE and federal state institutions (FSI) being under jurisdiction of the federal executive authorities carried out in the framework of the work performed by the Governmental Commission on the Implementation of the Administrative Reform, which had been created in accordance with Resolution of the RF Government No. 451 of July 31, 2005, will have a certain impact on the further prospects of the management of unitary enterprises and joint stock companies, in the capitals of which the state has its shares.
As on March 1, 2005, this Commission examined 25473 organizations financed from the budget, including 6498 federal state-owned unitary enterprises and 18975 federal state institutions. In accordance with the officially recorded decisions taken by the Commission, there were set five groups of enterprises and institutions with respect to which there was proposed to take the following decisions25:
The first group includes the organizations to be retained in federal ownership. This group was composed of state organizations engaged in the ensuring of defense and security of the Russian Federation, performance of federal state functions, and preservation of national and cultural values of the Russian Federation. In accordance with the decisions taken by the Commission, in total 10538 organizations (41 per cent of the total number of entities examined by the Commission) should be retained in federal ownership (1019 unitary enterprises, or 15.7 per cent and 9519 institutions, or 50.2 per cent). This group also includes unitary enterprises, which should be converted into joint stock companies, 100 per cent of the shares in which should be retained in federal ownership).
The second group includes federal state-owned unitary enterprises, the assets of which should be transferred in ownership of subjects of the Russian Federation and mu-
25 Rossiyskaya biznes-gazeta, March 22, 2005.
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nicipal entities, as well as federal state institutions subject to the transfer under jurisdiction of the executive authorities of subjects of the Russian Federation. In total, this group includes 3970 organizations (16 per cent of the total number of entities examined by the Commission), of which 202 entities are unitary enterprises (3.1 per cent) and 3768 entities are institutions (19.8 per cent).
The third group is composed of organizations planned for privatization or liquidation as not answering the criteria permitting to retain them in federal ownership. In total, there should be privatized or liquidated under the procedures established by the law 6119 organizations (24 per cent of the total number of entities examined by the Commission), of which 3384 entities are unitary enterprises (52.1 per cent) and 2735 entities are institutions (14.4 per cent).
The fourth group includes enterprises and institutions to be additionally examined after the adoption of regulatory legal acts concerning the social package for civil servants. This group consists of certain state organizations operating in the sphere of health care, health resorts, and transport facilities created to service the federal executive authorities. The Commission decided that additional examination after the adoption of respective regulatory legal acts should be carried out with respect to 70 organizations (0.3 per cent of the total number of entities examined by the Commission), of which 37 entities are unitary enterprises (0.6 per cent) and 33 entities are institutions (0.2 per cent).
Besides, a separate group is formed of the organizations with respect to which there is required more precise definition of their statuses, carrying out and documentation of reorganization and liquidation procedures, and the introduction of respective changes in the register of federal property. The total number of such organizations makes 4776 entities (19 per cent of the total number of entities examined by the Commission), of which 1856 entities are unitary enterprises (28.5 per cent) and 2920 entities are institutions (15.4 per cent).
On the face of it, the work carried out by the Commission primarily concerns the sub-sector of unitary enterprises, since the issues pertaining to the management of joint stock companies with participation of the state were touched upon only as concerns the fact that there were selected just above 1 thousand FSUE to be retained in federal ownership (these FSUE should be included in the number of enterprises subject to conversion into joint stock companies, 100 per cent of shares in which should be retained in federal ownership) and about 3.4 thousand FSUE subject to liquidation and privatization, which may be carried out in the form of conversion of such FSUE in joint stock companies.
However, it should be reminded that about 1.9 thousand FSUE with respect to which there is required more precise definition of their statuses, carrying out and documentation of reorganization and liquidation procedures, and the introduction of respective changes in the register of federal property may be included in the two groups of unitary enterprises listed above after a certain period of time. It should be noted that at present it is not clear in what proportion these FSUE will be distributed among these groups. The possible adoption of amendments to the law on privatization permitting to privatize state and municipal institutions may have even greater influence on the size of the sector of joint stock companies with state participation. The respective draft law extends the procedures governing the conversion of unitary enterprises in open joint stock companies to such entities.
Taking into account the fact that basing on the results of the work carried out by the Governmental Commission on the Implementation of the Administrative Reform there were revealed at least 6503 federal state institutions redundant in terms of performance of func-
tions of federal executive agencies26, it becomes possible to evaluate the field for later potential corporatization. In this connection it should be reminded that in the result of the work carried out in 2004 almost 99 per cent of all privatized FSUE were converted in open joint stock companies. Besides, about 23 per cent of FSUE and 48 per cent of FSI, proceeding from the number of such entities registered as on March 1, 2005, have not been yet subject to the efforts aimed at the optimization of the network of organizations financed from the budget.
Nevertheless, special attention should be paid to the issues pertaining to the scale, motivations, and consequences of the property expansion of the state, which became the specific feature of year 2005.
4.4. Property expansion of the state: a new stage
4.4.1. The state on the corporate control market
Specific activities of the state on the corporate control market are determined by three key functions: privatization sales, acquisition (through administrative or market methods) of such or other assets and regulation (legislation, departmental control, law enforcement). Such or other model of regulating the corporate control market (with all its national peculiarities) being an indispensable attribute of any relatively developed legal system but practical implementation of the first two functions (not as a one-time acts but as a component of the economic policy) can be connected only with a relatively short historic period. As a rule, such implementation is possible only on an alternative basis (for instance, due to ideological preferences of the ruling party) the choice itself depending on a wide range of economic, legal, historic and ethic traditions in a concrete society. A peculiar feature of Russia in the middle of the first decade of the new age was a parallel development of both processes27.
By the late 90s - early 2000s, the state presence in the corporate sector, while quite expansive and proceeding from formal quantitative parameters, was significantly dispersed in the shape of multiple badly or totally uncontrolled unitary enterprises as well as packages of shares pertaining to joint stock societies set up recently in practically all industries of the Russian economy. The integrated structures, initiated by the government and with its participation during the early privatization stages, functioned basically in the fuel and energy complex representing natural-monopoly activities as well.
The 2000-2004 period was characterized by certain efforts to raise efficiency of managing the dispersed assets through their integrating into the state holding structures in such branches as nuclear-power engineering, railway transport, defense and alcoholic industries, air and see transport servicing and infrastructure, postal service. Greater state share in the capital of certain companies outside the framework of the integration processes was rather an exception and could be taken as a "piece" thing. The process of the natural monopolies restructuring started in parallel with this.
Within the same period, more active attempts were registered to establish control (expansion) over the basis financial flows in the Russian economy and, in a somewhat wider sense, stronger movement towards greater dependence of business on the state institutions despite all the respective deregulation decisions, the administrative reform and
26 However, it should be noted that 3768 organizations out of this number are subject to transfer under jurisdiction of RF subjects' executive authorities.
27 In view of the main theme, articles of the privatization problem and legal regulation are not subject to special consideration here.
the plans for further privatization28. The main peculiarity of 2005 was displacement of priorities in favor of direct state participation in the economy. Let us consider some exemplary examples and trends29.
As is well known, one of the noteworthy events in 2004 (apart from the "YUKOS" case) was the start of the scaled "Gasprom" OJJS - "Rosneft" PC merger project. Initially, the state intended to exchange "Rosneft" for 10.74 % of the "Gasprom" OJJS's shares which were on the balance of its daughter companies30 and were necessary for the state to consolidate the control package of the gas holding in its ownership which, in its turn, permitted liberalizing the market of the "Gasprom" shares with no any particular risk of losing such control.
On the strength of the RF President's decree, dated December 7, 2004, No. 1502, "Rosneft" was excluded from the strategic JSS list and 100 % of its shares were deposited as the RF's contribution in the authorized capital of the new "Rosneftegas" OJSS entered in the list of the strategic companies. "Rosneftegas" was intended to appear as a temporary economic organization within which assets could be exchanged.
In 2005, the format of the deal changed. After a lengthy confrontation between the governing bodies of the two state companies, each of them relying on its own administrative resource, it was at last decided that the payment source for 10.74 % of the "Gasprom" shares, to be re-registered as "Rosneftegas" in the summer of 2005, shall be not assets of "Rosneft" but rather a credit (7.5 bln USD) which "Rosneft" is to get from the consortium of Western banks on the security of the non-controlling package of "Rosneft". The payment source for such credit can be monies obtained from selling another non-controlling package of "Rosneft" including due to conducting the respective IPO. By the end of 2005, "Rosneftegas" had paid the first two transfers for the shares of "Gasprom" (about 1.3 bln USD) although the main payments are yet to be made.
Putting such a scheme into practice allows to set up majoritary control over "Gasprom" although with retaining independence of "Rosneft" (including 'Yuganskneftegas", its new member) and control over it. According to the FAUFI data, after the "Rosneft" PC's stock floatation and getting the monies sufficient to pay off the debt for buying 10.74 % shares of "Gasprom" have been completed, "Rosneftegas" may be liquidated in the late 2006 - early 2007. Be such a case, the shares of "Gasprom" shall carry over to the balance of "Rosimushestvo", i.e. will become property of the Treasury. In the end of 2005, adopted were also amendments to the law on gas supply which lifted off the limitation for foreign owners (not more than 20 % of shares) and raised, up to the threshold of 50 % plus 1 share, the minimum permissible aggregate share of the federal property and that pertaining to such JSS where there more than 50 % of shares, put on by the previous reading31. Simultaneously, the share of the state in the fixed capital of the "Rosgazifi-katsia" company (at present, it owns 0.89 % of the "Gasprom" OJSS's shares) must be significantly increased from 72 % to 100 % through depositing it in the authorized capital of the minority packages of shares owned by the gas distributing companies which remain in
28 For more detail see: Radygin A. Russia in 2000-2004: on the Road towards State Capitalism? - Questions of economics, No. 4, pp. 42-65.
29 The respective sources for the factual data were official press releases and interviews by top executives from the RF ministry of economic development, FAUFI, informational materials "Prime - TASS", "Interfax", "RBK", the "lin.ru" project, periodic publications - "Kommersant", "Vedomosti", "Izvestia", "Time of news", "Finance", "Merges and take overs", company websites.
30 Daughter companies of "Gasprom": "Gasprominvestholding", Gasprombank, "Gasfond", "Gaspromfinans" and Gasprom Finance BV.
31 In the previous reading, the minimum permissible state share comprised no more than 35 % but at that allowing ownership of this package exclusively for the federal treasury and absolutely without any other economic bodies.
the ownership of the state. Further on, "Rosgazifikatsia" may be reorganized with singling out of the main asset - shares of "Gasprom" - to the balance of a separate company. At that, the share of the state in such company will comprise practically 100 % and this "special purpose" company as such will be liquidated later.
Nevertheless, failure of the deal in "Rosneft" take over by "Gasprom" did not change the plans of "Gasprom" and its curators in the power bodies to increase the oil component of the holding. In October 2005, the largest deal in the history of the Russian corporate control market took place - acquisition by "Gasprom" of 72.66 % "Sibneft" shares (13.091 bln USD) through one of its daughter companies. This package, along with 3.016 % of "Sibneft" shares, bought from "Gasprombank" earlier, ensure to the holding the required qualified majority when passing a decision.
Hence, both the factual nationalization of "Sibneft" and completion of 'Yuganskneftegas"'s passing over under the control of "Rosneft" not only de jure but de facto as well, did significantly change the balance of forces in the oil industry where only the respective state and "loyal" companies are functioning at present. Open so far remains the question regarding the take over of part of the "Rosneft" oil assts by "Gasprom" which will depend primarily on the balance of power in the respective power bodies. Further growth of their oil (up to 55 % of the whole business) and energy components comprising the gas holding, is nevertheless positioned as a long - term strategy while at the same time preparing grounds for establishing control over the independent gas producers (the "Nortgas" OJSS) or by blocking selling of their packages to other companies (the "NOVATEK OJJS"). Among those oil companies which may become victims of the expansion by "Gasprom", are "Tatneft" which at present belongs to the "Systema" AFC, assets of the Bashkir fuel and energy complex, etc.
To go on expanding in the industry after de facto control over 'Yuganskneftegas" has been completed, "Rosneft"has to solve a whole number of problems of the corporate and finance nature: capital consolidation in the main daughter companies and transition to a single share, solving the problem with minorities in the daughter companies (perspective of having court hearings connected both with possible exchange ratios and still continuing conflicts caused by transfer price formation in the holding), finding monies for paying for credits received in 2004-2005 to buy "Yuganskneftegas" and, possibly, credits to buy shares of "Gasprom" by the "Rosneftegas" company.
Continuing the expansion trend of the natural monopolies was acquisition by the "UES of Russia" RJSS, in the late 2005, of 22.43 % shares of the "Interros" business group controlled the "Power Machines" energy machine building concern (101.4 mln USD). This acquisition, with account taken of more than 3 % of "Lenenergo" owned shares, ensured the energy monopoly control over the blocking package of shares and, accordingly, as well possibility to exert influence on decision taking processes. At the same time, however, an important task for the modern stage in reforming electrical energy system is now liquidation of no specialized assets. It was already in 2006 that 20.62 % of the "Power machines" shares were bought by the "Siemens AG" electrotechnical concern which actually brought its share, with account taken of its current 4.38 % shares, up to the controlling package value. It is to be remembered that FAS refused "Siemens AG" a permission to buy 73.46 % shares of "Power machines" in the spring of 2005 even though this deal had been approved earlier at the level of top executives of both Russia and the FRG.
Apart from the natural monopolies, the "Rosoboronexport" FSUE, a state foreign economic enterprise whose share accounts for the main part of the Russian export of military and technical production, came out as a new and serious player actively engaged in acquiring earlier privatized assets. The sphere of its activities so far includes the defense 364
industry and machine building. It was as far back as 2002 when the "Rosoboronexport" FSUE and the State investment corporation32 set up the "Oboronprom" United industrial corporation whose activities could well be taken as a good illustration of a combined application of administrative and market methods to set up corporate control. In 2005, forming a helicopter building holding became one of its main directions of activity - the authorized capital of "Oboronprom" received state share packages of the Ulan Ude aviation plant (UUAP, 49.18 %), the Mill Moscow helicopter plant (MHP, 31 %), the Kazan helicopter plant (KHP, 29.92 %), the "Forward" Moscow machine building plant (MMP, 38 %) and the Stupino machine building production eneterprise (SMPE, 60 %). To ensure the majority control over the enterprises mentioned above, "Oboronprom" purchased from private shareholders additional packages of shares of UUAP (25 %), MHP (12.5 %) and MMP (31 %). In November 2005, the "Kamov - Holding" OJSS was purchased from the "System" AFC, the former in its turn being the owner of 49 % of shares belonging to the "Kamov" OJSS (11.8 mln USD).
Another method to set up control over a number of enterprises was additional emission of the shares by "Oboronprom" during which 15.07 % of its shares were exchanged for 29.92 % of the KHP's shares being in the ownership of Tatarstan. Still another new participant of the holding was private shareholders controlled the "Rostvertol" Rostov helicopter plant which bought its 2.79 % shares for cash. The holding at that is going to spend the obtained monies on redeeming the additional emission of shares belonging to "Rostvertol" itself since but only 3.73 % of the shares of the enterprise are currently in the ownership of the state. As to the feasible future, "Oboronprom" is planning to increase the package size of its shares in "Rostvertol" up to the controlling value having confined the first stage to the blocking package. "Oboronprom" also controls a number of enterprises having nothing to do with production of helicopters, including the "Defensive Systems" OJSS (more than 75 % of shares) and the "Oboronpromleasing" OJSS (100 %).
As shown by the 2005-2006 events, interests of "Rosoboronexport" go far beyond the defense industry confines covering, in particular, the civilian car building industry. In 2005, for instance, there took place a change in the top management in "AutoVAZ" whose Board of Directors was then joined by representatives from "Rosoboronexport" and the Foreign Economic Bank. Although these changes among the top executives are positioned as attraction of anti-crisis managers no radical changes in the company's policy are expected. The scheme of setting up property control still remains nontransparent although certain sources do point as to the size of the package acquired (about 60 % of shares) and the sum of the deal (about 700 mln USD). In October 2005, instead of placing the state package of shares in the London stock exchange, the "KamAZ" OJSS and its three daughter companies were, by the instruction of the RF government, included in the list of strategic enterprises and as of February 2006, according to the available data, 34.01 % of the shares of "KamAZ" can be transferred for administration to the "Rosoboronexport" FSUE which had earlier sent the respective request to the FAUFI (a unitary enterprise has no right to directly participate in any privatization deals). It became known in January 2006 that the "Rosoboronexport" FSUE made an offer to the major property owners of the "Verhnesaldin metallurgic production amalgamation" OJSS, the titan monopolist, concerning redemption of their shares.
The government is now preparing a draft project for creating a unified National automobile building company by analogy with the Unified aviation construction company (UAC)
32 The share of "Gosincor", after its liquidation in 2003, went over to "Rosimushestvo" which at present shares the capital of "Oboronprom" and "Rosoboronexport" (31.13 %), Tatarstan and the "Rostvertol" OJSS.
principle decision on creation of which was taken in the winter of 2006. Simultaneously, already in 2006, a question of setting up a similar company in the sphere of engine building was also considered (6 large enterprises). As was to be expected, one of the serious obstacles on the way of setting up the UAC is defining proportions in the structure of capital of the holding to be created between the state and other shareholder groups as well as between interests of private shareholders who own different size packages of shares in the enterprises being united in the holding. Possibly, the experience received in the course of setting up the "Oboronprom" helicopter building holding, will be needed when making the UAC. Further plans include the National energy machine building corporation which, in perspective, is quite capable of integrating the "UES of Russia" RJSS and "Gasprom" acquired assets of "Power machines" and "United machine building plants", respectively, the state controlled (51 %) holding of above the water shipbuilding enterprises on the basis of the Baltic plant and "Northern shipyard" as well as a number of others.
In 2005, certain changes, as connected with actions on the part of the state and companies with its participation, concerned aviation adjacent activities such as air transportation and functioning of airports. In August, the RF Saving bank ("Sberbank") became a nominal holder of 25 % shares of "Aeroflot - Russian Avialines". The "Pulkovo" FSUJSE completed its internal division into enterprises engaged in the airport activities and those dealing with air transportation. Later on, "Pulkovo" (air transportation) is to be affiliated to the "Russia "State transport company (STC) which shall apportion and transfer to the RF President's Administrative department property to ensure air transport for the first persons of the state. Court proceedings at the suit of "Rosimushestvo" recognized as illegal the transfer of the "Domodedovo" airport's movable property to the "East Line" company which was the most notorious case of 2005 in recognizing as illegal deals with state property stricken in 1990s. Apart from that, a similar suit is under consideration involving the terminal of the said airport.
Another example of more active effort of the state in increasing its share in the companies with mixed capital up to the required controlling values can be well taken from the relatively recently revived (June 2005) discussion of methods to increase the federal share in the "ALROSA" diamond holding. Increasing the federal share from 37 % to 51 % may be possible through exchanging shares of "ALROSA" issued during the additional emission, for the state packages of shares of five profile companies ("Smolenski crystal" - 100 %; the "Crystal" Special engineering and design bureau - 100 %; The Prioksk plant of non ferrous metals - 100 %; the Vliuysk HPS - less than 1 %; and "Diamand world" - 52.37 %). "ALROSA", in its turn, is viewed as a potentially main partner of the "GMK "Norilski nickel" OJSS. Like in the case with "Gasprom", such a deal may require large crediting with the respective guarantees.
Practical implementation of this scheme faced a strong resistance from the Government of Yakutia, the second large shareholder of "ALROSA" (32 % of shares) which, not even wishing to burden itself with any efforts in taking part in acquiring the "Norilsk nickel", nevertheless had to face the actual need to seek for assets to be entered in the capital of "ALROSA" to prevent possible reduction of their share. This is closely connected with the question of transferring into the federal property of the property complex which earlier belonged to the "Yakutalmaz" Scientific and production amalgamation. Be such a case, the republic then will lose the right to collect rental payments from "ALROSA" comprising at present up to three quarters of its budget revenues. To preserve the existing balance of forces, Yakutia is quite ready for a compromise: greater capitalization of "ALROSA" through depositing in its capital shares of other republican enterprises (75 % minus one share of Takutugol", 34.6 % shares of "Elgauglya" and 10 % shares of "ALROSA - Nyrba"). 366
In 2006, the list of large state holdings can be widened because of the appearance of a new holding - "Atomprom" (NPS, atomic industry, profile scientific research institutions). The basis for such amalgamation is comprised by assets of the "Rosenergoatom" concern being in the process of becoming a shareholding company, and a number of enterprises making the "United machine building plants" group (actually in the ownership of the "Gasprom" group which also owns other assets of the nuclear industry as well). Circulating currently on the open market, shares of the UMP group can be subjected to the delisting procedure with further transforming of the company into a closed joint stock society. The only shareholder of the new holding will in all probability be the state.
Quite symptomatic is also slowing down processes of the natural monopolies restructuring which was typical for the year of 2005. Further reorganization processes in the railway industry are directly connected with discussing possible strategic risks when privatizing various objects of the "RZhD" OJSS. An important question to be answered remains the sources of covering damages of the railway transport should passenger conveyance be singled out of the "RZhD" OJSS into an independent company, its status and owner being then the "RZhD" OJSS itself directly or the respective federal and, possibly, regional authorities. Part of the respective package of shares may be offered for sale already by the end of the third stage of the railway transport reforming (2006-2008) along with shares belonging to the respective daughter companies of the "RZhD" OJSS functioning in the competitor segment of the market.
In the sphere of electrical energy, problems remain as connected with selling the generating capacities after they have been divided by kinds of activities in the regional energy companies accompanied with completion of forming wholesale generating companies as well as with the state of the dispatching offices and network objects. In the end of 2005, a new aspect could be seen in the restructuring plans of the "UES of Russia" RJSS as connected with the additional emission of shares by a number of the generating companies. Quite debatable in this connection remains distribution of their capital, the degree to which participation in them of the "UES of Russia" RJSS itself and shareholders of the holding will be preserved. It should be reminded in this connection that fully in accordance with the original restructurization of the industry plans, upon liquidation of the said RJSS, the state actually intended to leave in its ownership 75 % plus one share in the Federal network company and the System operator as well as the controlling package in the generating company set up on the basis of assets in the hydro-power engineering.
As regards the "Gasprom" OJSS, in practical terms, the problem of radical transforming has always remained at the level of projects and discussions. According to the official statements, these efforts can be understood as an intention to carry out certain measures aimed at reduction of costs, higher transparency and financial recovery. Thus, I. Shuvalov, advisor to the RF President, openly announced that, as different from the electrical energy industry, no global reform in the gas branch of the company was to be expected - the pipe line shall remain within the company which must have a monopoly right for exports provided non-discriminatory access to the pipeline is ensured for the independent producers. Discussed was also a question of creating, as something like a pilot project, free market of gas in the volume of about five (5) bln cub. m a year33.
It is to be particularly emphasized here that the question of the very possibility for privatizing assets of the natural monopolies and its respective conditions is quite far from being obvious and that is graphically confirmed by the example of "Svyazinvest" which, in the period of early 90s when joint stock companies were being set up en masse, was, in fact,
33 Izvestia, 2005, March 18.
also enjoying a monopoly position of the market of communication services. Although the question of selling the state package of shares in "Svyazinvest" have been quite frequently discussed in the recent years, last year objections by the RF power bodies resulted in the fact that privatization had to be put off because it was necessary first to adopt a law protecting the interests of special-type consumers of communication services as well as to develop the respective practical mechanisms.
Since selling the package of shares of the "Svyazinvest" telecommunication holding was intended during all the recent years, inclusion of this object in the privatization list for
2005 did not at all mean any final decision. First, further privatization is directly connected with completing the reorganization processes, the tariff reform, solving the social loads problems of the regional companies and providing communication services to the power bodies (over 600 thousand numbers, that with 600 mln roubl. indebtedness to the holding as per July 1, 2005). Second, with account taken of the growing attractiveness of the telecommunication shares, urgent sales of the holding's securities have little sense in any case. However, there is a counter trend too. According to the estimations of the RF ministry of economic development, even though the holding does own both the controlling and the blocking packages of shares belonging to the regional operators of wire communication, operability of control has been lost by them. Third, any concrete variant of selling does need serious and sufficiently detailed study and work over.
From the viewpoint of the RF ministry of economic development, the most rational approach seems to be a single step privatization of the whole state package (75 % minus one share) which was discussed in 2005 along with the RF President's Decree on excluding the holding from the list of strategic enterprises. Simultaneously, in the course of 2005, continued was coordination and authorization of the terms of sale with the respective power bodies. In October 2005, fundamental amendments of the President's State Legal Department were introduced in the draft project of this decree providing for the necessity to legislatively execute guarantees for the power bodies until the holding has been included in the privatization program. It means in fact that, in all probability, no privatization of the holding is not to be expected in 2006 either. V. Yashin, Head of the holding, announced in the end of 2005 that the said state package could be sold either before July
2006 or only after the 2008 presidential elections.
On the whole, the privatization story (as well as the respective plans) of the "Svyazin-vest" holding really deserves a special study much because it graphically manifested practically all the specific features of the Russian post massive period of privatization: the 1997 "oligarchic war", intransparency of the first package sale, intensive use of the administrative resource both in 1997 and in 2005, risks of the "double" privatization (the holding itself and its daughter companies) as similar to the oil industry of the 90s, a whole set of social and regional problems, strategic limitations and concernment of the respective power bodies, problems of reorganizing and optimizing the corporate structures, concealed struggling between different power and financial groups in the early 2000s and a whole number of others.
Let us now draw some conclusions. The year of 2005 witnessed noteworthy changes in the respective approaches, namely:
- greater activity of the already functioning state holdings and companies which began expanding the scales of their business and its diversification by way of take overs and merges ("Gasprom", "Rosneft");
- involving new "players" (the "Rosoboronexport" FSUE, the "UES of Russia" RJSS) in the property expansion process;
- policy of integrating scattered assets remaining in the ownership of the state, in the respective holding structures becomes of secondary importance34 yet the new structures are beginning actively, although in a rather selective way, function on the corporate control market as independent subjects (the "Oboronprom" OJSS and others);
- although it so far seems to be a little early to speak about actual formation of multi industry conglomerates, progressing of expansion beyond the confines of the fuel and energy sector has become a fact (in 2005 - early 2006, the state manifested its obvious interest to AutoVAZ, KamAZ, the "Verkhnesaldinsk metallurgy production combine" OJSS and others);
- there is taking place gradual shifting of interest from "problematic" or "unfair" assets of companies as from the viewpoint of the state structures (YUKOS, the "Guta" group) towards assets of "neutral" or "loyal" property owners;
- intensification of state participation on the corporate control market is taking place in the context of significant overall growth of deals on the Russian market accompanies with simultaneous recession of "hostile" take overs;
- more wide practice is made of such methods as bringing the size of the respective share in the authorized capital of the company up to the value permitting to exert the decisive influence on their business activity ("Gasprom", "ALROSA", "Rosgazifikatsia", the "Vperiod" Moscow machine building plant, the Mill Moscow helicopter plant, the Ulan Ude aviation plant);
- need in political authorization of possibly large deals both in the country and with participation of foreign companies becomes a necessary component in working such business decisions over (practically all the large deals completed in 2005 with participation of the respective state structures as well as those rejected - sale of the NOVATEK package of shares to the French "Total", placement of the shares of KamAZ on the London stock exchange, sale of the controlling package of "Power machines" to the "Siemens AG" concern).
Special mention should be made here as regards their payment terms and, what is no less important, possibility to export the capital obtained. Actually, what we can see here is something like a "triple standard" which a priori excludes any truly market approach to the respective deals with not at all clear motives for taking such or other decisions. At least two extreme possible variants are well known. First - destruction of the company and de facto nationalization of assets when the question of the deal's market price and possibilities for exporting of the monies obtained, for reasons quite understandable, was not even discussed ("YUKOS"). The second - a deal in acquiring "Sibneft" by "Gasprom" which brought 13 bln USD to the main beneficiary of the company as well as a possibility to use it legitimately both in Russia and abroad. As compared against this, all the preceding sales of Millhouse Capital (aluminum, etc) look real small. With even quite modest understanding of how to have business with the state, one may assume inevitably significant transaction taken by the beneficiary upon himself but actually that's not the point.
Two radically contrary scenarios of completing business which has been created by approximately similar (but not at all necessarily legal) methods during approximately the same period of time (about 10 years) and equally successful from the economic point of
34 Nevertheless, this process is still going on, primarily so in the defense industry. According to the FAUFI data, in 2005, completed was formation of the "Corporation "Tactical missile armament" OJSS, the "United industrial corporation "Oboronprom" OJSS; transformed were all the FSUE subject to depositing in the authorized capitals of the "Constellation" concern" OJSS, the "Vega" radio building concern" OJSS, the 'Okeanpribor' concern" OJSS, the "Morinformsystema - Agat" concern" OJSS, the "Granit - Electron" OJSS. There was but one contrary decision concerning the fuel industry: shares of 77 societies were planned to be deposited in the authorized capital of the "Russian fuel company" OJSS but setting up of the latter was then considered as inexpedient.
view - an ideal illustration of what private property in the contemporary Russia actually is and how significant - as different from the modern Western world - its having to do with the top political power like, for instance, in the countries of the Ancient Orient.
These two extreme variants are characterized by a wide range of possible compromise solutions related, in the spirit of the classical tradition, to the "offer which cannot be rejected" category. Nor it will be sufficiently easy to refer the said deals to market ones as with even all the impression of a fair market price, the state will always have at its disposal certain arguments from the "YUKOS case". In May 2005, according to some data, a question was raised with regard to selling to "Gasprom" a share of Russian THK - BP shareholders (50 %), in January, 2006 - 30 % shares of "Aeroflot" which remain in the ownership of HPK, one of the largest state banks or to "Gasprombank".
According to certain forecasts for the 2006-2007 period, as targets for nationalization or take over on the part of the state companies could become "Norilsk nickel" (51 % shares, 8 bln USD), Promstroibank (1.5 bln USD), the Ural mining company (5 bln USD), "Surgutneftegas" (62 % shares, 20 bln USD), "Vossibneftegas" (130 mln USd), "Tomskneft", "Samaraneftegas", the Achinsk NPZ, the Angar oil and chemical company (8.5 bln USD, altogether), the Syzran NPZ, the Kuibyshev NPZ, the Novokuibyshev NPZ (0.5 bln USD), THK - BP (50 % shares in the ownership of Russian shareholders, 9 - 10 bln USD), "Power machines" (450 mln USD, "Uralkaly" (2 bln USD), "Silvint" (1 bln USD)35.
Nationalization will continue in the oil and gas sector involving also the mining industry and certain segments of the chemical production as well. Probable seems to be nationalization in the transport industry for control over export - import supplies (sea, railway and avia holdings).
In the context of significantly growing direct state participation in the economy of Russia, of particular importance becomes the question of possible aims and consequences of this given process.
4.4.2. Motives for expansion: an attempt of interpretation
Although the expansion processes of direct state participation in the national economy in 2005 became obvious needing to be such or otherwise motivated as a general economic strategy no sufficiently coherent official grounds at the state level so far seem to be in existence at this present time. Let us try to single out several possible variants (hypotheses) at that understanding but too well that they all may become closely and variatively interwoven in real life.
Variant one - "management and efficiency" - is, in such or other form, traditionally present in many leftist and centrist programs of 1990s - early 2000s. Its varieties are mostly apology of advantages in managing economy through large state economic structures as well as more general ideas of the "state capitalism".
Possibilities of setting up holding companies with the state participation in the privatization process were, as is well known, strictly limited (with quite a number of "piece like" exceptions though) by the RF legislation already in the beginning of 90s. A special project was prepared for the V. Chernomyrdin government in the middle 90s to set up one hundred state holdings which actually was a sort of a reaction to the mass privatization of 1992-1994. One of the tasks in G.A. Ziuganov's 1996 pre-election program was "setting up state holdings controlling the state packages of shares fully in accordance with state
35 Mergers and take overs, 2005, No. 12 (34), p. 13-15.
370
industrial policy"36. In its resolution, dated September 1, 2000, No. 29 (221), the Collegium of the RF Counting Chamber raised the question of the need in legal support for procedures of setting up state holdings in the basic industries of the national economy with strategic significance for ensuring security of the country (i.e. adoption of the "On State Holding" law). Finally, in 2001, the Federal Assembly considered a draft project of the "On Holdings" law which provided for setting up state holdings and other state hierarchy structures on the basis of the respective state bodies.
The model of (state) holding detailed analysis of which can be found in a great number of publications has both its obvious merits (in some branches) and no less obvious shortcomings. As concerns the aims of this particular article, we will confine ourselves to just noting that seeming simplicity and order of the system of the state holdings can be quite a significant incentive for another national level experiment. To see an illustrative example, it is enough to have a look at those problems which had to be faced in the early 2000s when trying to form a system of holdings just in one sector - military and industrial complex where the expediency of such structures is usually neither much disputed nor doubted.
Respective references are often made to the state holdings in a number of countries of the world (Italy, Norway, Mexico, Venezuela, China and others). The world experience does contain quite different models, yet the greater part of the state sector, even in those countries which do not share the total de-govermentalization ideology, are usually connected with interests of the national security and social loads. It is also commonly accepted that any attempts to replace private business with state structures are most often fraught with negative economic consequences in the long term perspective. The wave of intensive "deregulation" of economy and privatization which swept through many developed countries during the period of 80s-90s, can also be taken as evidence of serious disappointment with the results of activities carried out on the basis of the nationalized and/or rigidly regulated sectors of the national economy.
Variant two - "global competition and national security" - can be considered by the authorities as justified only if similar private structure do not "reach" the level of the modern international corporations37. Accordingly, forming large state structures in Russia, including such by means of nationalization, can be understood in two ways: firstly, as a method of absolute state support of the selected "power centers" for global positioning in the world (the extractive industries and the military industrial complex), and, secondly, as an instrument of protectionism in such sectors which are most subject to impacts of the global competition simultaneously shouldering on themselves social or infrastructure loads (avia- and automobile building, communications and others). Nevertheless, the number of such sectors is, as a rule, rather limited with the national security criteria being in need of thorough legislative execution. It is also quite obvious that governmentilisation of a whole number of economic sectors actually means transition to the policy of state financial support (with all possible costs) of strategically significant projects which are otherwise doomed to in viability.
In 90s, this given problem was solved in a formal way through introducing endless limitations in the privatization legislation (most of which were as successfully evaded), fixing the respective packages of shares in the ownership of the state and quoting the share
36 From destruction to creation. The way of Russia, XXI century. The main theses of the social and economic program of G.A. Ziuganov, candidate for the presidency from the people - patriotic forces. Moscow, May 25, 1996.
37 Greater role of the state "in many countries of the world is a natural reaction of such or other nation to the interference of transnational structures in the intra-national processes..., making the national sovereignty notion relevant and limited". (Popadiuk N. Is Private Property Private in Russia? - Questions of Economics, 2006, No. 1, p. 144).
of foreign investors in the shareholding capital in a number of Russian companies. Interpreting of external threats can be typically exemplified in the "Policy of the RF national security (1996-2000)" report prepared in 1996 by the personnel of the Secretary for the RF Security Council, where "possibilities for foreign companies to buy up Russian enterprises intensively and at an obviously lower price" are interpreted as a significant threat38. In the new century, the list of strategic enterprises, forbidden for privatization, is annually undergoing such or other changes yet, any sufficiently precise criteria of its formation are still absent.
It is proposed in the RF President's address to the RF National Assembly, dated April 25, 2005, that "... strictly defined must be those spheres of the national economy where the interests of strengthening independence and security of Russia do imperatively dictate the necessity of paramount control on the part of the national capital, the state one inclusive". Such spheres include "certain infrastructure objects, enterprises fulfilling defense orders, mineral ore fields with strategic significance for the future of the country, for the future generations of Russians as well as the infrastructure monopolies". Nevertheless, as V.V. Putin declared, we still do not have any clarity as to what model of Russia's economic development is best (paternalist or liberal) nor with regard to the optimum scales of the presence of the state in the national economy. M.E. Fradkov, Prime Minister of the Russian Federation, expressed himself even more definitely: concentration of production is not to be considered as monopolization but rather as participation in competition.
It could be logically assumed that positioning of Russia both on the world market and in its relationships with the leading industrial countries of the world as an "energy power" and a guarantor of "energy stability" (this subject was declared to be one of the key ones for meetings of the "Great Eight" to come in 2006) is under consideration at present as a dominant of foreign political and foreign economic activities. A lot of reservations taken into account, this can somehow explain creation and/or preservation mega corporations of the fuel and energy sector in the ownership of the state although the very scope of the 2005 expansion makes the exclusiveness of the given variant rather doubtful.
Variant three - the "state rent" - was actively discussed in 2003-2004. It is primarily connected with the idea of the natural rent nationalization (requisitioning of super profits) in the oil and gas sector, ferrous and non ferrous metallurgy moved forward by S.Yu. Gla-ziev, former leader of the "Rodina" political party39 today, there is no sense to consider conceptually neither the "On natural rent requisitioning" legislation (2003) nor the absolute figures given which are quite contradictory in themselves (from 10 to 80 bln US dollars). Certain direct populist measures in this sphere could, no doubt, meet adequate support in the Russian society but the choice was made in favor of the set of indirect measures which are, in a normal case, implemented gradually during 2003-2005: a new tax on extraction of minerals and other tax instruments, export duties, pre-charging of taxes and collecting tax arrears fro the previous years, review of the legislation on the Earth's interior, the licensing policy and procedures for taking part in auctions for the natural resources, etc40.
In other words, the state was as active during the recent years in conducting the policy aimed at redistributing incomes of the fuel and energy complex, which at that does not actually require any serious expansion of the state's direct presence in the sector. It can be assumed, indeed, that nationalization of significant assets is considered as the com-
38 Policy of the RF national security (1996-2000) (draft project). NG - Scenarios, 1996, No. 2.
39 See, for example: Round table "Estimating the rental revenues value as formed in the fuel - energy and metallurgy complexes of Russia", http://atvr.ru/soveshyanie/2003/10/10/4015.html.
40 As regards the subject under discussion, neither economic justification, nor efficiency or transparency of the respective concrete mechanisms play any significant role.
pleting stage in the general "nationalization of the natural rent" policy (with all the uncertainty of the terminology of this notion) but this does not explain the interest shown by the state in 2005 to other sectors of the national economy either. Variant four - "strengthening personal influence and private rent" - is most complicated for such or other interpretations due to factual and/or ethical considerations. Nevertheless, both its triviality and potential pragmatism give it full right of existence pari passu with others, if proceeding from the "principle of Okkama".
Distribution of political power in the society is determined by the existing political institutions and distribution of resources. The natural wants of any new power inevitably include intention to set up maximum possible control over the available resources which is initially ensured with the help of the so called "personnel decisions" in the largest state companies and banks. Further steps are usually directly determined by concrete views as regards the place and functions of bureaucracy in society and the state as well as, what is quite evident, those possibilities which are opened to them by the existing (being built) political system. While the current political institutions do not provide for effective limitations against actions of powers that be and/or getting significant rent from being in power41, the economic institutions, on the other hand, not only do not stimulate economic growth but are even being transformed in the interests of "rent formation"42.
The system becomes workable when control over financial flows is locked on the built state and private "profit centers" both in Russia and abroad. Although vividness of the terminology used by A.N. Illarionov, ex-advisor to the RF President (the "Russian state" open joint stock society and many others), does somewhat simplify the situation. Suffice it to give just one such illustration:
"The main encouragement for a corporate member - his landing in the respective state company whose financial flows size is the most precise appraisal of his/her place in the corporate hierarchy"43.
Under the conditions in the sphere of political institutions, as described above, further development of events logic directly presupposes expansion of the state sector - not because of some abstract motives of the respective strategic interests and the national security but rather in quite a pointed way due to such economic sectors and companies which are highly profitable and do not require any significant and momentary managerial, investment or innovational efforts. To determine a possible scope of the state intervention under the given prerequisites, of significance are two basic factors - time and finance. Each of them has its own limitations: the time factor is, in all probability, connected with the electorate cycle while the finance one - with the presence and volume of available sources to finance new take overs. It is quite possible in this connection that less favorable world price situation for the raw materials in 2000s could lead, inter alia, to a much greater number of cases somewhat similar to that of YUKOS. It seems a situation could be also excluded within the framework of this particular variant when the nationalization of economy process is acquiring a total character.
Finally, the system to be built also means the appearance of new potential "oligarchs" who, at a certain stage of their expansion as well as with the overall support of the state, will make every effort to transform the respective rent into property. Accordingly, a situation seems to be quite possible when completion of the "putting in order" the respec-
41 See: Acemoglu D., Johnson J. Institutions as the Fundamental Cause of Long-Run Growth. - In: Aghion Ph., Durlauf St., eds., Handbook of Economic Growth, North Holland, 2004.
42 In V.A. Mau's terminology, "the country is in a situation which can be described as "falling productivity" of the economic institutions" (Mau V.A. New NEP. - Kommersant, 2006, February 9, p. 1.8).
43 Illarionov A.N. Another country, Kommersant, 2006, January 23, p. 1, 8.
tive financial flows pertaining to the state holdings and putting up the state "power centers" in the economy, will be inevitably followed with their management receiving carte blanche to use them as a basis to start setting up their own private groups. In this connection, it makes sense to mention here an article published recently by M.E. Dmitriev, President of the "Centre of Strategic Problems" foundation, dealing with the nationalization issues where its author, one of the leading Russian liberal economists, suggests a rather unique construction44. Partly because the present day public opinion negatively perceive the 90s privatization results, the author takes the current (and, possibly, the further) nationalization as sufficiently justified "expiation of the original sin", yet the subject of discussion in the article mostly concerns possibilities for new privatization which may be able to "establish a distributed structure of corporate property with greater role of petty shareholders and institutional investors who are backed by interests of millions of people".
Naivetñof such argumentation is but obvious: first, the acuteness degree of the negative appraisals as regards the Russian privatization was no less in the 90s as well but the question of nationalization then was raised only on the level of populist slogans moved forward by the left forces45; second, appealing to the interests of millions of people even in a large corporation with highly dispersed structure of the joint stock capital is as senseless as it is senseless when discussing the "socialist property common to all the people" (this relates to the Anglo-Saxon corporate system as well); third, this shift from the "oligarchic" to the "public" corporate model is all the same taking place in, minimum, 1/3 of the 20 Russian largest private companies; fourth, doubtful seems to be consistency of the processes - nationalization on the wave of perspective stock rise as well as the growth of companies' capitalization and privatization in the context of rather unclear economic situation. However, in case these nationalization processes are financed from the respective budget funds then such consistency - particularly so in the format of the variant under discussion - actually has but very little significance46.
Now, is the question of revising the privatization results is to be raised and discussed it should be done then in accordance with the formulae suggested by A.A. Auzan, President of the Institute for the "Public Agreement" National Project: "introduce a federal law which shall regulate converting the value of the state enterprises which became private property by way of mortgage auctions! However, these rules must be the same for all but not changing in accordance with the principle of proximity to or "equidistant" from the President47. The said M.E. Dmitriev's construction, with all its pros and contras, has one undoubted merit - it can really be implemented only in future but the nature of "a distributed structure of corporate property" can be forecasted, although with some error degree, already today.
44 Dmitriev M.E. In Defense of Nationalization, Kommersant, 2006, January 30, pp. 1, 8.
45 It is to be noted, nevertheless, that the 2004 2005 period saw a sharp growth in the number of "public opinion polls" demonstrating negative attitudes of the population towards private property in the national economy and "oligarchs". In our opinion, it is to a much greater degree connected with providing for the ideological platform of the state expansion than with taking into account the "opinions of the population".
46 Noteworthy mentioning here are also the ideas, moved forward as far back as 2003-2004, which suggested that the state use the Stabilization Fund's monies to redeem part of shares from the most liquid Russian companies, for example, "Gasprom".
47 Merges and take overs, 2005, No. 11, p. 11.
4.4.3. Perspectives and consequences
Regardless the above interpretations, the main distinctive feature of the year of 2005 can be considered to be evident and much more intensive activities of large holdings with the state participation which did significantly expand the scope of their business through its further diversification and vertical integration. This was accompanied, in parallel, with continued integration of atomized state assets and setting up of new holding structures.
In vast majority of the cases, it does not make much sense to talk about nationalization in the direct meaning of the term since the state (treasury) did not formally become the owner of new assets resulting from confiscation or redemption with the budget monies. At the same time, expansion of companies with the state participation was taking place, at least outwardly, with no any obvious use of the budget means. Holdings with the state participation, as the main objects of the given process, became owners of the property rights for new assets resulting from certain market deals which were actually authorized by the respective power bodies and using their own and, mainly the attracted, capital or credits obtained not so much from Russian but rather foreign banks.
That such actions are capable of exerting but indirect influence of the state's property and financial situation goes without saying. Under a favorable development of events scenario, the state, as the owner of large holding companies, can count on certain growth of their capitalization which, though indirectly, implies increasing budget profits when selling (potentially) state owned packages of shares in future. There are also some prerequisites for increasing dividend payments (share of profits) in the budget at the expense of potential incomes growth in the respective holding structures from the activities of their new and otherwise dependent companies. However, this all does require an adequate level of corporate management, transparency and affiliation both in relationships between the state and the respective holdings and between these holdings and their daughter companies.
At present, it seems rather difficult to give a simple estimation to these processes from the viewpoint of their influence on the situation in individual branches and in the economy as a whole. It is only subsequent development of events that can show the extent to which large holdings with the state participation are capable of efficient managing a large number of acquired and/or obtained most different assets. At the same time, however, the scope of the state companies' activities on the corporate control market, graphically demonstrated in 2005 and, in all probability, having all the chances for further development in 2006-2007, make one get thinking as regards the price of such expansion in the context of the general economic perspective.
During the recent 30 years, the world have accumulated quite significant theoretical and applied experience of comparative analysis in the area of efficiency of the state and private forms of property to ignore which is absolutely inadmissible and which, indeed with certain specific exceptions, almost finally does witness in favor of the latter.
A.E. Boardman and A.R. Vining who have quite thoroughly studied over 50 publications devoted to comparative analysis of the state and private property, formulate their main conclusion, including the results of their own calculations, in the following way: "The obtained investigation results prove that if account is taken of a sufficiently wide range of factors [exerting influence on efficiency of economic operations - note by the authors], large industrial companies with a mixed form of property as well as similar firms fully belonging to the state, demonstrate much lesser efficiency level as compared against the like
private enterprises"48. The available multiple empiric studies of comparative efficiency of the state dominant companies and private owners in Russia in 90s - early 2000s differ a lot in their estimations of influence exerted by various types of private property owners on efficiency although such conclusions with regard to the state dominant companies are similarly simple.
Although an extensive referenced - legal basis for regulating the state sector (mixed societies and unitary enterprises) has been created and developed since formal adoption of the well known Concept of Managing the State Property and Privatization (1999), management efficiency in the sector is slightly different from the level of 90s. The guide lines designed (retaining no more than 1000 FSUE and 500 shares in the economic societies in the state ownership of the RF by the year of 2008) do not look too much truthful for two circumstances at least.
First, organizational abilities of the managing bodies for sufficiently rapid reforming the state sector are in serious contradiction with the quantity limitation - its scope as of the year of 2005 (8 300 FSUE and 3 500 shares). Second, sharp reduction in the number of all levels unitary enterprises, with the perspective of their possible conversion into open joint stock societies, explicitly increases loading on the state governing bodies which are quite far from being enough efficient as state representatives at the present time as well. In this context, the counter process - expanding the scope of the state sector - looks at least unnatural particularly so if estimated from the viewpoint of efficiency of the state policy in the given sphere.
In the context of the more general problems Russian companies experience in the sphere of transparency of financial flows, the state holding structures do not traditionally belong to the group of leaders as concerns the respective ratings49. A vivid example of poor transparency in activities of companies with the state participation is provided by organizing export of the Russian and transit of the Central Asian natural gas to Ukraine and/or to other countries on the post-Soviet space which was manifested during the respective negotiations which "Gasprom" conducted in late 2005 - early 2006.
The policy of building up and diversifying assets of the largest state holdings create prerequisites for conserving informational shut down both because of the necessity to practically implement long reorganization procedures and - depending on concrete motives for take over - of optimization of the respective financial flows of the acquired (being set up) companies.
As a mechanism for regulating economic efficiency, the corporate control market is connected with the market redistribution of joint stock property and, accordingly, with the change in the development strategy of the respective corporation. Theory50 distinguishes two groups of incentives which serve to induce to implementing operations on such market: these are the "general" interestedness, e.g., interests in profits which the companies distribute between all the shareholders in accordance with the number of shares they own,
48 Boardman A.E., A.R. Vining: Ownership and Performance in Collective Environments: a Comparison of the Performance of Private, Mixed and State Owned Enterprises. - Journal of Law and Economics. Vol. 32, p. 29.
49 See, for instance, ratings of informational openness of the largest, in terms of capitalization, Russian companies prepared by the Standard & Poor agency in 2003-2005. According to the results of the investigation for the year 0f 2005, in 23 of 54 companies the state still controls over 25 % of equities. While the total share of directly or indirectly state controlled packages of shares in the overall capitalization of the 54 companies comprised 18 % in 2004, it grew up to 24 % in 2005. As to the 2005 transparency rating, "Gasprom" was 16th, the UES of Russia" RJSS - 26th, "Aeroflot" - 27th, Sberbank - 35th, KamAZ -39th and AvtoVAZ - 42nd. It is also noteworthy that as regards the largest state holdings, a correction should be made concerning the objectively given transparency of the property structure whose intransparency is in many other cases significantly decreasing the respective indicators of transparency.
50 For more detail see: Radygin A.D., Entov R.M., Shmeliova N.A. Problems of Merges and Take Overs in the Corporate Sector. M., IET, 2002.
and "private" interests characterizing special advantages for those who own the given corporation (let us say, half of all the shares plus one share). As different from usual financial markets, the corporate control markets are controlled primarily through private benefits. At that, when studying mechanisms of market change of the owner and control, the authors of the well known theoretical models (S. Grossman and O. Hart, A. Shlaifer and R. Vishny, D. Hirshlaifer and Sh. Titman and others) - it is usually assumed that many (all) participants of the said operations are capable of sufficiently precise foreseeing the economic results of such reorganization of the company which will then be undertaken by the new owner.
Among the most important functions of mergers and take overs are redistribution of production resources in favor of more efficient companies and it is usually a less efficient company that becomes the target for the respective take over. This hypothesis quite agrees with the available data on the relationship of the market value of the company to the restorative value of its real capital: value of the Tobin q ratio for the buyer - companies was, as a rule, much higher than that of the respective ration for the target - corporations51. Favorable influence of mergers and take overs on the efficiency of acquired and reorganized enterprises is quite obviously demonstrated in the results of multiple investigations. Thus, for example, results of the analysis of over 20 thousand enterprises, belonging to 5 700 corporations of the USA, for a sufficiently long time period, shows that change of the owner was, as a rule, accompanied with raising economic efficiency, growth of the total productivity of factors included52. In a number of cases, interception of control over a corporation was followed with dismissal of the respective team of managers who were responsible for inefficient management of the company as well as with radical reorganization of its subsequent activities. The "non-horizontal" merges and take overs, inter alia, showed a more favorable effect than the "horizontal" ones.
According to a comparative analysis of potential goals and effects on the classical market of corporate control, these are significantly different from the contemporary practice of the Russian state companies. Although it does not yet seem possible to estimate even the middle term consequences of 2005 take overs, as from the efficiency and change of strategy viewpoint, it is nonetheless obvious that the target - companies, firstly, were not inferior to the "aggressor" as regards the level of efficiency and, secondly, - at least in case of horizontal take overs - showed the so called "primary" negative effect with regard to production indicators (thus, in 2005, both in 'Yuganskneftegas" and in "Sibneft" registered was reduction of extraction and growth of production costs as compared against the year of 2004).
Expansion of the state companies - natural monopolies into other industries is in obvious contradiction to the earlier efforts to reduce their participation in non-profile businesses which but distract monies from investing in the major kinds of activity by exerting mediated pressure on the production costs and, indirectly, on the process of price formation on both the respective production and services.
So far, in all probability, only one formally common feature can be noted - that of changing the management team which is pretty typical for any respective model. At the same time, however, while changing management as a consequence in the classical case of merger or take over, is determined by the disciplining role of the corporate control market (sanctions for the previous failures of the top management), in the respective Russian
51 Andrade G., Mitchell M., Stafford E. New Evidence and Perspectives on Mergers. - Journal of Economic Perspectives, 2001, Vol. 15, May.
52 Lichtenberg F. Corporate Takeovers and Productivity. MIT Press, 1992.
practice, of priority is the task of intercepting control over the financial flows. Certain similar trends can be found in the cases when merges and take overs were used not so much for intercepting the corporate control but rather for using the advantages of uniting the respective capitals or withdrawing shares of some companies from the market turnover.
It is also noteworthy that regular operations, as connected with merges and take overs, suppose a rather high (nowadays comparatively rare) development level of the corporate control markets. As well demonstrated by the practical experience of the countries of the Western Europe and Japan, the corporate control market is capable of fully exercising the functions of decentralized efficiency regulation only in case when it rests mainly on the developed infrastructure of market relationships in general and on sufficiently distinctly defined rights of property, efficient enforcement of contract and property rights and efficient procedures of bankruptcy in particular. Finally, it is almost impossible to make comparisons between the world and Russian (where interventions by the state companies are concerned) practice of applying methods of protection from hostile take overs. That they can not work against the administrative resource, named as "the state", seems to be quite obvious.
One more matter of principal significance - aggravation of the conflict of interests when the state plays simultaneously as the legislator, the regulator and an active independent player (through the respective state companies and banks) on the corporate control market.
Further perspectives for development of the companies with the state participation which became the "main body" of the state expansion in 2005, will be determined, their abilities for paying off the credits taken included, depending on the situation as regards the world prices on the energy carriers. In 2000-2005, foreign debt of the Russian state companies increased many times over (2000 - 570 mln USD, 2002 - 12 bln USD, 200528 bln USD)53 which makes it quite comparable to the debt to the Paris Club. The above described plans of take overs in the 2006-2007 period can easily lead to doubling this amount.
The most pessimistic forecast is based on the significant price decrease for the energy carriers which, to a considerable degree, determine business of the largest state companies - borrowers. The falling oil prices will result in reduction of access to the financial resources on the external markets used to refinance the indebtedness accumulated and hence the price of servicing the attracted credits will go up indeed. This situation is most probably fraught with outflow of short term foreign capital, falling stock market and hard problems in the banking system closely connected with reduction of liquidity54. From the viewpoint of the RF ministry of finance, the state has to have certain responsibility for the activities of such companies by working out unifies approaches to both external and internal loans made by the respective state companies. Foreign loans should not be banned in principle indeed, yet they must be limited quantitatively and, wherever possible, replaced with borrowings on the internal financial market55. Since the question of attracting the borrowed funds is closely connected with proportions in distributing net company profits (dividend payments to shareholders, the state included), a package of the respective documents is being prepared for setting up a unified system of borrowings and a unified
53 Estimation made by the "Trust" investment bank. - Vedomosti, 2005, December 9.
54 Interview with E.T. Gaidar. - Expert, 2006, 2006, No. 3, p. 6.
55 RIA "Novosti", December 8, 2005.
dividend policy56. To what extent such unification of the said processes is possible in principle and how "favorites" of the state property expansion can be fit in it will be shown only by time.
Besides, administratively limited access of the state companies to foreign sources of the debt financing can hardly be considered as an effective anti inflationary mechanism (as was intended by the RF ministry of finance) - rather, probable growth of stakes on the internal debt market will be stimulating an outlet for the private companies to get to the foreign markets in search of "cheaper" and "longer" loans. Solution of the problem of foreign borrowings by the state holdings should rather be sought in another plane - determining their place in the system of state priorities, transparency of the respective financial flows, efficient management of the profile assets.
Both the scope and the nature of direct state participation in the national economy, the more so if the "private rent" variant is taken as viable, exert direct influence on the state of affairs in the sphere of guarantees and protection of property rights.
It is just the state, being the initiator of the property expansion, that become most interested in the absence of distinct rules of the game in the sphere of the property relations. A comparative analogy seems to be quite expedient here with the second half of the 90s when certain interests of the subjects of the post privatization property redistribution process in the private sector accompanied with rapid growth of private corporate groups, were effectively preventing introduction of the adequate limiting norms in the sphere of corporate rights, bankruptcies, market of securities, optimization of the reorganization procedures, state owned enterprises and so on. In the middle of this new decade, they are steadily being replaced by the state companies and enterprises which mostly perform interventionist functions.
Simultaneously, there takes place obvious narrowing of possibilities for fully fledged implementation by a private owner of his basic rights - primarily, that of being in command (according to the "classical triad" terminology) or the right of alienation of all totality of other rights (in the terminology of the theory of property rights). The necessity of political authorizing any deals with such or other significant assets, the more so abroad, not only confirms the system-like character of the state's interference in the sphere of market relationships but does devalue the very notion of private property in principle. Who will need property which, other things being equal, can not be sold by its owner without prior approval of the third persons and for the adequate price?
That the evolutionary history of private property forms means primarily drawing a division line between political power and property is common knowledge. Its contemporary forms first of all presume that belonging to the (supreme) power is no longer considered to be the necessary condition for practical implementing the rights of property. What can be observed in the contemporary Russia really is not too much in agreement with this given thesis. It is indeed only with an obvious share of conventionality that certain analogies could be drawn with the countries of the ancient Orient where power - property - "is not so much property but rather power since functions of the owner are mediated here by belonging to power."57 A constructive (in the context of the contemporary Russian practice) approach with regard to private property was, for instance, formulated by Shan Yan, the most well known Chinese lawyer (IV century B.C.) the main idea of which came down to the
56 It is rather to be reminded in this connection that in 2005, "Rosimushestvo" guide lined the state representatives towards achieving the 10 % net profits transferred as dividends at that adding that higher indicators were to be expected for the future.
57 Vasiliev L.S., History of the Orient. Moscow, 1998, Vol. 1, p. 69.
fact that a rich property owner is a force which is undermining the power of authority58. Although the thesis on instability and protection of property rights in the contemporary Russia have in the recent years begun to sound more like populist rhetoric or even like a sort of a ritual incantation, the problem nevertheless does not become any less acute. In view of the contemporary state of the respective political institutions in Russia, expansion of the state sector in the format as described above, will rather conserve instability of the rights of property ownership for an indefinite term of time.
4.5. Corporate Management Reform: Unsteady Demand
Major objective forces behind the current wave of corporate reform that is gaining momentum in a number of countries is globalization, increased competition, changing nature and rapid growth in the number of shareholders, development of new industries, financial markets and advancement of technology. Unsurprisingly views on which reforms are needed and how best to approach their implementation vary significantly depending on the social status of reform authors. For instance, focus on the institution of Board of Directors is favored by reform activists in the Anglo-Saxon economies, strengthening the role of individual and institutional shareholders is a focus of those concerned with some of the damaging effects of globalization, introduction of tougher legislation for different "groups of industries" finds natural advocates in by judges and regulators in some countries of the Continental Europe. Cooperation between hired labor and the Board of Directors, guaranteeing the rights of shareholders as an absolute priority for economic growth and accompanying reform as well as free market forces' dominance over inflexible government policies are just a few of the notions defended by practitioners of modern economic theory59.
Various national and international codes of corporate practice that have emerged in the late 90's are now gaining influence on the more traditional types of corporate legislation60. Infamous scandals associated with Enron and other big corporations, investment banking and consulting firms in the United States, Germany, France, Italy, Sweden, Japan and South Korea have only added to the already present momentum for a change in the way corporations are run in the new millennium. Ability to transcend national boundaries and attract the attention of the OECD (which has published a review of "Principles of Corporate Management, 1999, new edition 2003), the European Union (which in 2001 has created a special task force dedicated to the subject and in 2003 developed a Plan of Actions) as well as special meetings of the "Big 8" (a privileged club of 8 largest industrialized countries) - all reflect the widening importance of the subject of corporate reform in the eyes of global community.
Corporate reform in Russia, like in other emerging market economies has undergone a certain evolution in the reform's legal and regulatory base as well as in the attitude of various economic players to the subject61.
58 The Book of the Ruler of the Shan Region. Transl. from Chinese by L.S. Perelomov, M., 1968.
59 Hopt K. Modern Company Law Problems: A European Perspective. - In: Company Law Reform in OECD Countries. A Comparative Outlook of Current Trends. Stockholm, Sweden, 7-8 December 2000.
60 Gregory H.J. The globalization of corporate governance, Weil, Gotshal and Manges LLP, 2001; Gregory H.J. Comparative Matrix of Corporate Governance Codes Relevant to the European Union and its Member States, Weil Gotshal and Manges LLP, 2002.
61 An overwhelming number of publications on this subject currently available in Russia and abroad make any singular references inadequate. Among others, an interested reader can consult the following works: T. Dolgolyatova., Russian Manufacturing: Institutional Development., Moscow, 2002; Code of Corporate Behavior. Corporate Behavior in Russia. , Moscow, Economics, 2003; Radygin, Entov, etc. Economic and Legla Factors and Limitations in Economic Model Formation, Moscow, IET,2004; Transitional Economics. Abstracts on Economic Policy of Post-Communist Russia, 1998-2002. Moscow, Delo, 2003 chapters 12-13, p. 441-522; Radygin A., Shmeleva N. Main Corporate Governance Mechanisms and Their Specific
In the 90's foreign institutional investors were virtually the only sources expressing interest in the subject of corporate management in Russia (very much like their colleagues a decade earlier were the lone voices for corporate reform in the United States). Since 2000, however, large Russian companies, created either from scratch or through privatization, took over the leadership on the subject of corporate management. Their active involvement in the matter has spawned an entire corporate management industry, complete with Russian subsidiaries of multinational finance and consulting companies, rating agencies, shareholder interest associations, etc. In spite of a recent slump in the number of Russian corporate initiatives, the Russian corporate management industry has developed enough to support a number of dedicated research centers, legal and consulting firms.
Government agencies, on the other hand, have been either overtly deterring positive changes on a company level by sending out investor-unfriendly signals (an occurrence that has become quite typical for this decade); or chronically slugging in addressing some of the most egregious concerns of corporate management, as demonstrated by virtually all amendments and procedural changes to the Law on Joint Ventures made after 2000. Modern corporate Russian history in general has demonstrated a very strong correlation between interests of certain groups and government's level of involvement in the matter. At the same time, topic of corporate management retains its importance as one of the very few areas to which the government can point at as a display of its concern for institutional reform.
A certain evolution of the corporate management theme is also evident in the specialized, academic literature on the subject. First research papers on corporate management in emerging economies were published at the end of first mass privatization schemes. In that period, the idea of corporate management was regarded as an important but not a key component of the enterprise reform. By the end of the 90's and beginning of 2000's, the situation has changed and the theme of corporate management becomes a priority in the list of further transitional reforms. This shift in focus also coincides with realization that many of the economic models being formed in various not only transitional economies were exhibiting serious shortcomings, even if their governments followed textbook privatization recipes deemed flawless at the time.
By the middle of the first decade in 2000's the discussion shifts from a general prescription of measures for a successful transition to the identification and attempts for understanding the reasons behind the most odious fiascos of the transitional process. Numerous empirical studies of corporate management, its various forms and its relation to the general enterprise reform that have been written since then have not, unfortunately, narrowed down the impractically wide array of subtopics reviewed under the umbrella of corporate management62. On the contrary, last few years have seen a number of research projects and papers published with the term "corporate management" in the title line but in reality having very little to do with the subject. Often the term itself is substituted with other notions of "corporate structure", "corporate law" or "restructuring", etc, while a whole array of truly relevant and specialized topics of corporate management were often left outside of the scope of academic research.
Features in Russia. - In: The Economics of Russian Transition. Ed. by Y.Gaidar. Foreword by S. Fischer. The MIT Press, Cambridge, Massachusetts, 2003, Ch.15, pp. 461-510.
62 In particular, empirical studies on Russia notable for their scope were carried out in 2000-2004 by the Bureau of Economic Analysis (BEA), Russian Institute of Directors (RID), Institute for Economies in Transition, (IET)), Russian Economic Barometer (REB) International Finance Corporation (IFC), High School for Economics (HSE), World Bank, Center for Economic and Financial Research (CEFIR) etc.
A true step forward has occurred only in first years of 2000's when the issues of corporate management have started to present interest to Russia's largest companies formed as a result of inter- and intra-industry mergers, acquisitions and other forms of venture capital concentration and expansion in the country as well as abroad - a process that characterized the Russia's corporate development in the 2000.
In the first half of the current decade, a number of large Russian companies, such as Yukos, LUKoil, Vimm-Bill-Dann, AFK "Systema", Norilsk Nickel, SUAL, a large metallurgical concern from Magnitogorsk have all disclosed information on their beneficiary shareholders. More Russian companies have started placing independent directors, often foreigners, on their boards. Yukos, for instance, was the first Russian company to have a majority of independent directors on its board, while a Russian Joint Venture "United MachineBuilding Plants" was the first Russian company to have its board majority to be made up of independent foreign directors. In the period from 2000-2005 some Russian companies have even paid out considerable dividends to their shareholders, though seldom did such generosity signify any true improvement in a firm's corporate practices. Among other such pioneers, LUKoil became the first Russian company to disclose its dividend policy, Norilsk Nickel was the first company to disclose amounts paid to each of its Board's members, while RAO UES was the first company to introduce share-dealing rules for its top management and members of its board63.
The new millennium has also ushered in significant changes to the decision-making process at Russian companies. In the 90's virtually all corporate decisions were made on a "limited partnership" principle, i.e. within a close circle of actual partners-owners, without any concern for interests of minority shareholders. The gradual arrival of truly "outside" business participants, often foreign shareholders with 3-4% stakes, has paved a way for a different, more "corporate" method for making decisions that showed more consideration for views of minority shareholders. Curiously enough, these "outsiders" were evidently brought in by founding partners' initiative and not forced on them by mass privatization or interim re-structuring. In that sense, one could claim an emergence of a new type of outside influence in the Russian corporate system and with that a tendency for a modification of that system from its "oligarchic" principles to the norms more reminiscent of "public" corporation64.
In light of these optimistic observations one would expect a real demand for ideas on how to further change and improve the corporate culture in Russia. In practice, however, the companies' perception of any innovations in that sphere sets certain limits to further reform.
First of all, level of transparency and types of goals pursued in the process of corporate management reform depend very much on a company's stage in business development. Ideas for a set of corporate behavior standards, in addition, would naturally be tied to a company's long-term strategy, its intentions (if any) to expand internationally, and/or re-structuring needs.
63 For instance, please see V. Golikov, M. Burmistrova, Survey of Corporate Management Trends in Russia, Round Table, "Corporate Management in Russia", Moscow, October 2-3, 2003.
64 This relatively new process is present at about a third of 20 largest Russian extraction companies (excluding state-owned firms). Its substance is a gradual expansion of the equity base by selling a part of shares on the open market by the largest shareholders ("partners", "oligarchs". In doing so, they are driven by various motives, which often appear being far from attraction of investment. legalization of the stock (shares) that remain under their control; a double financial effect from the sales - direct gains from placement and compensation in cash equivalent that appears due to a considerable rise of the company capitalization; enhancement of transparency of the revenue part of the company's budget (a relatively risky carrying out of "gray" and other optimization schemes becomes senseless, because of the growth in the number of outsider shareholders who can pretend for additional benefits without bearing any risks.
Secondly, one has to mention a distinct qualitative gap between those Russian companies who have adopted methods of modern corporate management and those who still have a very vague idea on what the subject entails. At the start of 2000's as various polling data suggests, management of a majority of "typical" Russian companies (80-90%) had a very blurred perception of advantages and standards of efficient corporate practices. By the mid decade, though awareness on the subject has increased considerably, readiness to put this knowledge into practice has not. Interestingly, knowledge of modern corporate practices was highest among Russia's larger companies. Thus, as early as in 2002, according to RID polls, more than a third of 200 largest Russian companies have claimed to have been very familiar with details of the Code of Corporate Behavior. Within this "informed" group of companies there was however a noticeable rift between companies (a minority) that have actually incorporated the Code's practices into use and those who have not.
Data from the polls conducted annually by Standard & Poor among Russia's largest companies reveal that when it comes to financial transparency and disclosure, companies that were made "from scratch", i.e. not from privatization and companies that raise public funds abroad, and often listed on the US exchanges are the ones that come on top. Other factors such as ownership structure, chief executives' remuneration, investor relationship, capital concentration and internal transparency also play a role in determining company's forwardness and readiness to provide information about its finances and accept the corporate norms.
Optimistically enough, in 2006 average transparency rating for Russia's companies rose to 50% from 46% in 2004 and 40% in 2003. In 2002, 2 of the 42 largest Russian companies surveyed, have disclosed more than 70% of the information required, a level quite comparable with Western companies. For largest British companies, for instance, that figure for 2003 was 71%, while 10% was the number for 3 bottom companies on the British list. Russia's average disclosure ratings were comparable to their Latin American peers. In 2005, 6 leading companies on the Russian openness list have disclosed about 75% of the information, while the 6 bottom companies only 17%. Though some progress among the Russian "blue chip" companies is evident, Standard & Poor's survey does little to provide a general picture typical for most of the Russian companies. The survey's main limitation is that it covers only large companies whose shares form about 90% of capitalization on the Russian exchanges. The survey's target audience, i.e. Western institutional investors inadvertently serve as yet another constrain inherent in most all polls of that nature65.
Another factor curbing the apparent optimistic numbers sited above, is that very often paper progress is far from reality on the ground. For now most of the changes for the better are strictly of a quantitative nature, in other words, more of disclosed information, higher number of independent directors (in most cases done under pressure to comply with new listing rules on local exchanges). Qualitative improvements, on the other hand, such as minimizing risks for violation of rights of minority shareholders, streamlining the executive, fair and efficient dividend policy, internal control, beneficiary proprietors, etc are yet to exhibit any significant progress. To a certain extent, one could blame Russian companies' preference for debt over shareholder financing, as creditors tend to value
65 For instance, the annual rating of corporate management at publicly-traded oil and gas companies (Energy Intelligence, США), which is based on the following criteria: number of directors, separation of powers between chairman of the board and the CEO, independent directors, shares held by directors, independent audit, remuneration and promotion committees, board members selection process and term limits. As the survey's authors aptly note, "there are poorly-run companies that score high on all six criteria and there are excellently-run companies who do not". Enron, for instance received a rating of 81.8% in 2001 and was the top company according the survey's criteria (Vedomosti, 2004, January 16).
transparency in financial reporting over protection of minority shareholder rights66. Enterprises with partial government ownership face a host of other challenges on a road to efficient corporate management.
Here it also has to be noted that a success of free market development is closely tied to the scope of information made available through decentralized independent channels67. In other words, the more developed the market is the wider and more reliable is the regular information provided by a company to the public.
Though Russian corporate legislation, in spite of some serious shortcomings, can overall be described as fairly developed. Legislative innovations alone however will not improve the way corporations are run. Good initiatives within companies that serve as a foundation of an efficient corporate culture are equally important. Though building a corporate culture is a lengthy historical process, individual innovations and changes within a particular company can happen once certain environment is in place. In Russia it is a lack of this environment and instead a different set of its "peculiar" conditions, such as a high ownership concentration, fusion (and confusion) of principle/agent roles, self-financing, corrupt and inefficient boards, lack of any competent and meaningful oversight mechanisms, supposedly "public" companies that in practice are impenetrable to outside influence - all prevent true and beneficial innovations from taking place.
Finally, general protection of property rights and the ambivalent nature of signals on the subject coming out from the Russian government also play a role. The infamous Yukos affair of 2003-2005 played a major detrimental role in "freezing" any further progress on increasing transparency and building efficient corporate culture for all large Russian companies.
In conclusion, one could identify three stages of formation of Russian "standards" of corporate management: 1) the so-called "wild" period in early 90's; 2) the somewhat "progressive" period when at least some formal improvements in corporate management were taking place in early 2000's; 3) a certain "freeze" period starting in the middle of this decade when progress on corporate reform is being stalled. This latter period is particularly evident at Russia's largest companies. Though most of qualitative changes in areas such as transparency levels, beneficiary shareholders, financial disclosure were influenced primarily by certain political dynamics, other objective factors such as creation within companies of adequate infrastructures (internal company codes, board charters, etc) that lay some basic rules for that company's actions. Large private Russian companies proved adept at using this new framework and have in 2005 authored a number of internal corporate initiatives, a phenomenon certainly very much tied to an increase in the number of Russian IPOs. Unfortunately to expect that further qualitative improvements of corporate management would be more than cosmetic touch-ups, given the current environment is a bit too optimistic. The change will certainly have to be prompted by a combination of powerful political and financial motivations. A certain "inertia" demand is now being voiced only by smaller companies, which are just now getting ready to make their own foray into financial markets abroad.
66 Please see: V.Bashun, S. Gorbovzov, Waiting for Demand - Expert, 2005, issue 12, p. 52 and National Rating of Corporate Management, RID Consortium (www.rid.ru, www.raexpert.ru).
67 Acemoglu D., Zilibotti F. Information Accumulation in Development. - Journal of Economic Growth, 1999, Vol. 4, Issue 1, March, pp. 5ff.
4.6. Russian Stock Market in 2005: Success or "Soap Bubble" Growth?
Indicators of the Russian stock market (RSM)68 in 2005 cause but quite opposite feelings. Its irrepressible growth in the context of slower growth rates in the national economy, its much greater raw materials orientation, nationalization of the largest companies and ever increasing RSM dependence on the liquidity factor on the global financial markets make one get thinking about the possible risks of the said "Soap Bubble".
As different from the situation in the 2004 period, during which the RSE index practically did not change, the RSM in 2005 became of the world leaders in profitability of investments in shares (see Fig. 1).
-40
-20
Russia
' Columbia Saudi Arabia - RSM index Turkey . South Korea , Austria ■ Argentina SAR
I Brazil I Mexico I Denmark I India
I Norwa I PolanL I Japan Israel I Switzerland 1 Greece Sweden 1 Germany 1 Luxemburf 1 Finlanc The Netherlands Peru Canada France Euronext 100 I Belgium Spain The Philippines I Australia Indonesia The Great Britain Italy Singapore Portugal Chili Thailand Taiwan 1 Hong Kon] New Zealanc The USA Nasdaq The USA NYSE 100
1 Slovei China SSE 180 ■ Venezuela
140
Source: according to the data of the World Federation of Stock Exchanges and the "Economist" magazine.
Fig. 1. Growth of Stock Indices (%, December 2005 to December 2004)
On December 30, 2005, the RSE index increased by 83.3 % as compared against the respective values for the end 2004. Somewhat higher were the results but for the stock indices of the Saudi Arabia, Columbia and Egypt.
High profitability level of the Russian market of securities (shares) was accompanied with obvious improvements in its qualitative parameters - liquidity, volatility and capitalization of companies as shown in Fig. 2.
68 The Russian Stock Market (hereinafter called as "RSM") is understood here as the stock market for emissive securities liabilities for which are denominated in Russian roubles.
I Capitalization
I Volumes of trading in shares on the Russian stock exchanges
Volatility (average quadratic deviation from the RSM earnings index) Ratio
500
450
400
¿3 350
"o T3 300
a 3 250
¡3 200
150
100
50
0
,0,048
472
0,050
0,045
0,040
0,035
- 0,030 o
<u
0,025 o
0,020
0,015
,013
0,010
50 -- 10,2
1998 1999 2000 2001 2002 2003 2004 2005
Source: according to the data of the RBC and the Russian stock exchanges.
Fig. 2. Capitalization, Liquidity and Volatility of the Russian Market of Share
In 2005, capitalization of the Russian companies grew from 230 up to 472 bln US dollars or 2.1 times; volume of the stock exchange trading in shares on the MICSE, RSE and the "Saint Petersburg" stock exchanges increased from 124.4 up to 180.2 bln US dollars or 1.5 times. The indicator of the daily average quadratic deviation of the RSE index, as characterizing the "blue chips" price volatility, in 2005, comprised 0.013 as against 0.020 in 2004, which means lesser risks for investing in investing in shares by 35 %. High profitability, moderate risks and availability of the investment ratings make the said RSM sufficiently attractive for all categories of investors.
Fig. 3 and 4 show the RSM capitalization and liquidity as compared against similar parameters demonstrated by the respective foreign stock markets in the year of 2005.
In 2005, the RSM outstripped the stock markets of China, Singapore, Mexico, Norway, Argentina, Chili and Turkey in the absolute level of capitalization. However, the RSM lagging in capitalization from the developed markets of capital still remains practically quite huge and will hardly be overcome in any feasible future. A somewhat more realistic development aim of the RSM in the nearest years could be an attempt to catch up in capitalization with the respective markets of Brazil, Taiwan, India, the South Africa and the South Korea.
The USA (NYSE) Japan
The USA (Nasdaq)
The Great Britain Euronext Canada Germany Hong Kong Spain Switzerland Australia Denmark Italy
The South Korea The SAR India Taiwan Brazil Russia - 2005 China SSE Singapore Mexico Russia - 2004 Norway Malaysia Turkey Greece Chili Austria Thailand Israeli China SZSE Ireland Poland Indonesia The Luxemburg Argentina The New Philippines Hungary Peru
Source: according to the data of the World Federation of Stock Exchanges.
Fig. 3. Capitalization of Companies, bln US dollars
As regards liquidity of shares in 2005, the Russian stock exchanges manifested somewhat higher results as compared against the respective stock markets of Brazil, Mexico, Chili, Argentina, Singapore, Thailand, Malaysia and Indonesia. However, similar to the indicator of capitalization, the RSM lags behind not only the developed capital markets but from a number of developing markets as well - the South Korea, Taiwan, India, China, the South Africa and Turkey. On the whole, according to the data in Fig. 3 and 4, despite all the records of 2005, the RSM still remain somewhere in the middle when viewed in the context of the largest developing capital markets. This also means its greater role in developing the respective behavioral factors of the global investors as well as the state of the global markets of capital, primarily that of the American one.
As the positive trend of 2005 we can take obvious strengthening of the RSM positions on the global market of shares and the depositary receipts by the Russian issuers which fact is graphically reflected in Fig. 5. The London Stock Exchange share in the overall volume of trading in shares and the depositary receipts by the Russian joint stock societies went down from 74.0 % in 2004 to 45.9 % in 2005; the share of the MICE stock exchange in the same period went up from 21.0 % to 40.6 %; the sum total share of the RSE and "Saint Petersburg" stock exchanges - from 2.1 % to 10.0 %. It is quite noteworthy that de-
0 2 000 000 4 000 000 6 000 000 8 000 000 10 000 000 12 000 000 14 000 000
472 000
230 000
spite the leading positions in the market liquidity sphere of the MICE group's shares, the year of 2005 showed a trend towards somewhat lesser lagging behind such within this RSM segment of the RSE group of companies including the "Saint Petersburg" stock exchange.
3 000 000 6 000 000 9 000 000 12 000 000 15 000 000
The USA (NYSE) The USA Nasdaq The Great Britain Japan Euronext Germany Spain Italy
The South Korea Switzerland Denmark, Finland, Sweden Canada Australia Taiwan Hong Kong India China SSE Norway The SAR Turkey
The Russian stock exchanges - 2005 Brazil China SZSE
The Russian stock exchanges - 2004 Singapore Thailand Ireland Greece Mexico Malaysia Israel Austria Indonesia Poland Hungary T he New Zealand Chili Argentina The Philippines Peru
The Luxemburg
□ □
: ]
]
180 188
124 364
Source: according to the data of the World Federation of Stock Exchanges.
Fig. 4. Volume of Stock Trading in Shares, mln US dollars
The changing balance of forces between stock exchanges in 2005 was caused not only by the growth of volumes in the stock trading on the RSM from 124.4 bln US dollars to 180.2 bln US dollars (i.e. 1.5 times) but even more due to a considerably greater fall in the volumes of trading in the depositary receipts for shares of the Russian joint stock societies on the London Stock Exchange from 381.3 bln US dollars to 161.2 bln US dollars or 2.4 times. This, in our opinion, is indeed connected with the fact that although part of the respective global investors did reorient their operations to the internal RSM in 2005, the other part of much more conservative investors cut down significantly operations with share instruments of the Russian issuers having actually not recovered after the shock as connected with the 'Yukos" affair.
The 2005 period saw a rather intensive growth of the internal bond market. The overall volume of the rouble bonds circulating on the RSM, including the respective federal security, as well as corporate and regional bonds grew from 1.1 trillion roubles in 2004 up to 1.5 trillion roubles in 2005, or almost by a third. The volume of the rouble bonds floatation,
0
as is graphically shown in Fig. 6, exceeded the maxima for the State Short Term Obligations in the middle of 1990s.
1998 1999 2000 2001 2002 2003 2004 2005 Source: according to the data of stock exchanges (without the NYSE).
Fig. 5. Relative Weight of Stock Exchanges in volumes of trading in shares of the Russian Joint Stock Societies
The moving force for the growth of the bond market emissions get implemented in the shape of corporate bonds whose floatation volume increased from 140.4 bln roubles in 2004 to 260.6 bln roubles in 2005 (or 1.9 times). Under conditions of negative real profitability of the most large and liquid issues of the corporate bonds, the major investors on the given market are banks and non residents as possessing possibilities for using different speculator strategies to compensate for the losses from somewhat "passive" ownership of such bonds.
At the same time, the emission volume of the regional bonds which comprised 56.8 bln roubles in 2005, did not practically increase as compared against 2004. The cost of OFZ floating in 2005 reached 167.2 bln roubles having thus decreased by 24.8 bln roubles or by 12.9 % as compared against the preceding year. Availability of the stable profits base of both the federal and regional budgets serves to lower the respective interest of different level power bodies with regard to financing expenditures through involving the respective borrowed funds. Such a trend is expected to continue in 2006 as well.
500
400
300
200
100
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
^ GKO - OFZ □ Regional Bonds □ Corporative
Source: according to the data of the RF Ministry of Finance, CBonds and stock exchanges.
Fig. 6. Volumes of the bond floatation on the RSM
An important event on the RSM in 2005 was accelerated development of the time-termed market. After its crash in Russia in 1998, when the Western investors suffered billions worth of losses in fixed-termed contracts, any hopes for the restoration of the market of the derivative financial instruments in our country seemed to be quite illusory. However, the 2005 events did disprove such doubts which fact is further witnessed in the data presented in Fig. 7.
In 2005, the volumes of the stock exchange trading in Russia comprised: futures contracts - 21.5 bln US dollars and options - 2.8 bln US dollars. This sharp increase in the volumes of trading on the RSE fixed-termed market in the second half of 2005 was determined by appearance of new financial instruments - fixed-termed contracts for the RSE index and the portfolio of bonds of the city of Moscow playing, in the absence of the liquid market of the state bonds in Russia, the role of the sample securities with minimum risk for the RSM. The said financial instruments became particularly attractive for different categories of portfolio investors who are interested in investing in the "sample" RSM instruments.
Factors which actually determined growth of the Russian fix-termed market, are to a considerable extent similar to the circumstances resulting in the appearance of the stock fix-termed market in the USA in the middle 1970s which were then mentioned in the Nobel lecture of R. Merton69. Lower volatility of the finance assets spot-market makes investors and in-betweens start using finance instruments with a wider choice of the range of risks. At the same time, however, growth of the portfolio investors does increase the topicality of the respective derivative financial instruments helping to raise the degree of the market forecast ability, to lower the operational costs of investors and to practically implement the hedging of financial risks strategy.
69 Merton, R.K. Supplements to the Estimation Theory of Options: Twenty Years Later. Nobel Lecture. December 9, 1997 -The World Economic Thought. Through the Prism of Ages. T.N. book 2. — M.: Mysl, 2005. - pp. 207-209.
110 000 100 000 90 000 80 000 70 000 60 000 50 000 40 000 30 000 20 000 10 000
250 000
200 000|5
o
150 000 §
TO
<+H
H- 100 000 2
(U
50 000 g
OOOOOOOOOOOOO
W S « W S « W S « W ES « w oRgoRgoRgoRgo
I I Volume of trades with futures # Number of transactions with futures
Volume of trades with options Number of transactions with options
Source: according to the data of the "Russian Trading Systems" Stock Exchange" OJSS.
Fig. 7. Volumes of Trading and Quantity of Deals on the OJSS RSE Fixed-Termed
Market from 1.09.2001 to 1.01.2006
Thus, in 2005, practically all the RSM segments manifested accelerated cost growth of the finance assets, denominated in roubles, which significantly outstripped the growth rates of the national economy, earnings of the population and other macroeconomic indicators.
At the same time, however, the RSM growth in 2005 brought about a whole number of questions and problems.
1. Disproportion in the development of RSM and the banking system. In 2005, quite obvious became certain inconsistency between efficacy and the development level of the national banking system, on the one hand, and the development scale of the economy of Russia and the requirements level of the largest companies in the borrowed funds, on the other. Growth of the companies' capitalization factor does reflect growth of their requirements in investments and the respective borrowed funds. However, the Russian banks turned out to be rather unable to satisfy the growing investment requirements of Russian companies.
Fig. 8 contains data on the share of internal banking credits, capitalization and direct foreign investments (DFI) in the GDP of Russia.
25
45
35
15
5
1994 ' 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: according to data of the CBR, Rosstat, the World Bank and the UNCTAD.
Fig. 8. Relative Weight of Banking Credits, Direct Foreign Investments and Capitalization
of Companies in the GDP of Russia, %
The capitalization share of companies in the 2005 GDP increased up to 61.5 % as compared against 39.5 % in the preceding year. In the same period (year) Russia became one of the world leaders in direct foreign investments which, according to the estimations of UNCTAD, comprised 26.1 bln US dollars, having thus doubled as compared against the year of 2004. In this context, the yearly share of internal credit in the GDP went down from 25.9 % to 18.4 % of the GDP70. Disparities between the indicators of capitalization and internal credits show significant disproportions between the development level of the banking system and growth of the respective Russian companies.
Fig. 8 contains the data on the share of internal banking credits, capitalization and direct foreign investments (DFI) in the GDP of Russia.
A significant factor explaining the low efficiency of banking activities in Russia is the lack of the refinancing of banks mechanism which stimulates issuance of credits to business. Though such a conclusion may seem somewhat strange in the context of the statistical data, as shown in Table 6 below.
70 This indicator reflects banking credits to different sectors of economy, including credits to the state management bodies, non-finance organizations, the population and other finance institutions. Decrease in this indicator in the year of 2005 was determined by the fact that under conditions of the growing Stabilization Fund of Russia, the respective state governing bodies changed their status from the net - debtors to the net - creditors of the banking system which, nevertheless, did not result in any additional growth of crediting in other sectors of the national economy.
-5
Table 6
Volume of Crediting Operations by the Bank of Russia, bln roubles
2004 2005 Прирост, %
Intraday credits 3 051,9 6 014,0 97,1
Overnight credits 30,3 30,8 1,7
Pawn-shop credits 4,5 1,4 -70,1
Credits in the "direct REPO" form 594,2 1 495,7 151,7
Source: according to the CBR data.
The crediting volumes of banks by the Bank of Russia in 2005 reached 7500 bln roubles. Yet, the intra day credits as well as the overnight (for one day) credits which, in 2005, comprised 6014.0 bln roubles and 30.8 bln roubles, respectively, can hardly be referred to the mechanisms of refinancing banks engaged in crediting business owing primarily to their short term and issuance with no due security. However, refinancing the banks in the form of pawn-shop credits and direct REPO assumes issuing of credits for the term from one to several days which prevents their calling as instruments of refinancing the banking activity as such. Giving credits to banks in the form of direct REPO and the pawn-shop credits is implemented on the security of the respective state securities and bonds of somewhat larger issuers which, in its turn, does stimulate primarily bank speculations with the above mentioned securities but not the activities in long-term crediting of business.
The most efficient mechanism of the bank refinancing seems to be the Central Bank's stock-taking of the respective bills of exchange issued by companies when formally executing the credits being received by them. Owing to their rather insignificant volumes, such operations, even through they were executed in 2005, are not disclosed by the Bank of Russia. Meanwhile, crediting is quite capable of brining additional profits to banks due to the latter's being much better informed on the real situation with regard to their clients. When acquiring bond, the bank inevitably looses part of its incomes since the public nature of disclosing the relevant information with regard to their issuers and securities brings up the problem of the so called "free rider" thus lowering the expected return from the credit resources involved. A moderate profitability level of the banking business at the level of 20 % which actually obstacles attraction of long-term investment resources to the respective banks is the result of excessive involvement of such banks in speculations with securities as well as with foreign currencies to the detriment of the credit activities.
2. Growth of Russian Companies' Foreign Debt. Weakness of Russian banks compels business companies to come to the aid of more active attraction of the borrowed funds abroad, primarily in the form of credits and issues of securities which resulted in significant changes in the foreign debt of Russia and the respective Russian companies in the year of 2005 (see Fig. 9, below).
^ State bodies of power □ Bodies of money - credit regulation
□ Banks □ Non Finance enterprises
Fig. 9. Foreign Debt of the Russian Federation in 1999-2005, bln US dollars
In 2005, foreign indebtedness of the respective non finance companies and commercial banks comprised 103.3 bln US dollars and 43.6 bln US dollars, respectively. Then, within the year period, the debt of the non finance companies increased by 34.2 % and that of the banks - by 34.1 %. The sum total foreign debt of the respective banks and companies two (2) times exceeded the debt of the respective state control bodies.
Outstripping growth of foreign indebtedness of the respective non state organizations is not anything like a negative trend in itself representing but one of the consequences of a high investment activity level of business under conditions of the weak national banking system. At the same time, however, stronger market position of external creditors is fraught with potent risk of further weakening of the Russian banks' competitive positions.
3. Greater RSM dependence on the liquidity of the American finance market and the behavior of the global investors. Positive trends in the RSM in the year of 2005 were to a certain extent connected with the internal factors. The country is characterized with a rather stable macroeconomic situation. Within one year, the GDP growth rates exceeded 6 %, the cost of the gold and currency reserve and that of the Stabilization Fund reached, by the end of 2005, 182.2 bln US dollars and 51.6 bln US dollars, respectively. Obtaining the investment ratings by Russia made its financial markets accessible for the respective global investors. In 2005, the largest world investment banks (Goldman Sax, Morgan Stanley and others) opened their branches in Russia, operative activity of the investment funds, companies and banks which had long before functioned on the RSM. In the year of 2005, certain obstacles were removed thus enabling the non residents to acquire shares of the Saving Bank of Russia and liberalization of the "Gasprom" shares was completed by the end of the same year. Hence, the prices of both the ordinary and the preference shares of the Saving Bank of Russia grew 2.7 and 4.6 times, respectively, and those of the
"Gasprom" OJSS - 2.6 times. Early in the year of 2006, "Gasprom" joined the top ten largest world corporations as regards capitalization.
Registered has been greater demand for the shares on the part of the internal investors - physical entities, company managers of the unit investment funds (UIF) portfolios, the pension funds, private investors and insurance societies. In the course of only one year, assets of just the said UIFs grew from 111.6 bln roubles up to 223.9 bln roubles, i.e. more than two times over.
However, the actual influence of the said internal factors on the growth of the RSM should not be overestimated. The decisive influence on the growth of markets for different assets in the developing countries during the recent years was exerted by rather high levels of liquidity which was characteristic for the US finance system71 which was set up resulting from implementing the "cheap money" policy in 2001-2004 for purposes of financing deficits of the trade balance and the budget in this country. Surpluses of such liquidity which do not find any effective use on the little-profit American stock market, are ever more and more actively placed in the developing countries72.
More significant influence exerted on the growth of the RSM liquidity factor of the global financial markets as compared against the values of the respective macroeconomic factors in Russia does reflect the specific features of the growing stock indices on most largest developing markets as is clearly shown in Fig. 10 and Table 2.
-RTS ' KJ -\ — -ssp 5Q0
—■— BRSP Bovespa {Brazil) —"— MXSE IPC GRAL (Mexico)
MERVAL BUENOS AIRES ( Argentina! -ISTXU10D (Turkey)
......SSE Composite IndexfChina) -BSE SENSITIVE (India)
■■ ■■ ■■ r"RS rate. % aniH^3:i7rd
Source: according to the data of the FRS USA and the respective stock exchanges.
Fig. 10. Growth Rates of the Stock Indices and the FRS Rate in 2001-2005
71 Liquidity is understood in this case as a volume of means available for investments.
72 Dependence of the developing stock markets on the state of liquidity on the American and European markets was well justified in the book by M. Pettis "The Volatility Machine: Emerging Economies And the Threat of Collapse" (Oxford University, 2001). Growth of the liquidity role in the developing countries was analyzed in Chapter 1.3 of C. Wein's book "Investments and Trading: Forming the Individual Approach Towards Taking Investment Decisions". M.: Alpina Business Books, 2006.
In 2001-2005, the S&P index of the American market practically did not grow. While at the same time most of the developing markets were growing at quite accelerated rates. The growth rates of the RSE index for the given time period comprised 799.3 %, that of the respective stock indices of Argentina - 370.3 %, of Turkey - 420.2 %, of Mexico - 318.4 %, of Brazil - 219.6 %, of India - 231.5 %. Until June 29, 2004, such growth of the developing markets was accompanied with obvious decrease (from 6 % down to 1 %) of the refinancing rate of the US Federal Reserve System which is the basic indicator of the cost of money on the American finance market. At that, as is clear from Table 2, both in 2003 and in 2005 observed was a higher RSE index of correlation with the S&P 500 and even higher level of RSM index of correlation with the respective stock indices of India, Brazil, Mexico, Turkey and Argentina. In 2004, correlation of the RSE index with all the said indices was rather weak which fact can be explained by the outflow of liquidity with the RSM because of the well known events with regard to the "YUKOS" company.
Table 7
Correlation of Indices of the USA and the Largest Developing Markets with the RSE Index in 2001 —2005
Коэффициент корреляции индекса РТС с:
MXSE STRAITS TIME (Singapore) MERVAL SSE Composi te (China)
S&P 500 BSE SENSITIVE (India) IST:XU10 0 (Turkey) IPC GRAL (Mexico) BRSP Bovespa (Brazil) BUENOS AIRES (Argentina)
2001 -0.27 -0.47 0.59 0.25 -0.37 -0.43 -0.57 -0.32
2002 -0.17 -0.19 -0.28 0.23 -0.16 -0.07 -0.11 0.21
2003 0.89 0.81 0.71 0.89 0.83 0.88 0.83 -0.54
2004 0.14 0.34 0.16 0.13 0.04 0.02 0.53 0.55
2005 0.73 0.98 0.95 0.96 0.92 0.81 0.72 -0.28
20012005 0.28 0.91 0.92 0.92 0.87 0.74 0.93 -0.79
Almost synchronous growth of most developing markets in 2003 and 2005 clearly shows that the global investment funds invest in these markets practically simultaneously being guided preferably by concrete needs in diversified floatation of additional finance resources than by any specific features in the macroeconomic situation of the developing countries.
In this given case, the RSM growth acquires the well known features of the "soap bubble" which is growing not on the basis of the rising efficacy of the internal national economy but rather under the influence of the global liquidity factors. This phenomenon is fraught with new risks and limitations for the Russian finance system. In the first place, factors of this given RSM growth are outside the competence sphere of the respective Russian power bodies the monetary authorities. Secondly, greater RSM dependence on the state of other developing markets and factors determining behavior of the global investment funds whose influence on the developing financial markets (as clearly demonstrated by the experience of the known financial crises in the South East Asia, Argentina, Turkey, Brazil and Russia) is not infrequently of critical nature. And thirdly, additional difficulties appear on the RSM for the internal investors in the form of limitations for possibilities to create diversified portfolios through the respective securities of Russian issuers.
The latter circumstance is directly connected with certain specific features in taking business decisions by the global investors when investing in the developing markets:
- significance of the factor of the current state of the developing markets on the whole does override that of certain peculiar features typical for the developing markets so to say individually73;
- should the decision on investing in some developing market be taken then the so called "country-wise" approach prevails over the industry-wise approach74.
In the result, the price dynamics of the largest national companies on the developing market is tied up to that of its respective stock index while any changes in the latter - to indices of the other developing markets.
4. RSM dependence on the foreign investment funds with short-term speculative strategies. Transformation of the RSM from a sort of "the middling market" up to the leader assumes its purposeful promotion as among the global investors. This actually means not only greater share of the Russian issuers in the respective global indices, including the diversified portfolios of the international investors, but formation of large investment funds specializing in investing in Russia as well, including also greater share of the respective Russian companies in the largest industrial investment funds.
Russia, even despite somewhat higher interest towards the RSM, is so far losing in this struggle to the other developing markets. There are not any large enough conservative investment funds among the largest investment funds in the USA, Europe and the South East Asia which specialize in the Russian stock market75. Those of them which do specialize in Russia are, as a rule, low capitalized76 and mostly have the status of hedge-funds or funds oriented towards qualified investors (e.g., the Hermitage Fund or investment trusts under the control of J.P. Morgan Fleming).
The RSM remains the only large developing market for the shares of which no one stock exchange index fund (ETFs) has been set up to be included in the respective listing of the American or the leading European stock exchanges. Funds specializing in Russia, are not to be found among customers of the international Euroclear and Clearstream clearing systems which cover the securities market of more than 20 thousand European investment funds. As different from the markets of China and India, the RSM does not yet attract attention of the largest direct investment funds which mostly specialize in restructuring the largest companies. Such a situation seems to be rather unjust with regard to the RSM which regularly takes the leading positions in the world as to its investments attractiveness, their profitability and risks factor taken into due consideration.
73 This regularity has been well justified in the candidate — of — sciences dissertation of Kudinova, M.M. "Russian and Foreign Markets of Securities: Problems of Interactions". M.: Finance Academy under the RF Government, 2005. An example of such an approach is the Morgan Stanley's promoting among other investors of the idea to invest in the portfolio instruments of the BRIC countries (Brazil, Russia, India, China).
74 Brooks R., Del Negro M. The Rise in Co-movement across National Stock Markets: Market Integration or IT Bubble. Federal Reserve Bank of Atlanta. - Working Paper 2002 - 17a, September, 2002.
75 A rare exception here is the example of the ING Russia Fund fully controlled by the ING Investments, LLC company. In the end of 2005, according to the WSJ quarterly report, dated January 5, 2006, as regards the overall profitability for the last five - year period, this given fund was the first among all the American mutual funds while that for such as regards per annum profitability, came second. At the same time, its assets are rather insignificant as compared against other American mutual funds comprising but no more than 300 mln US dollars.
76 Classification of such funds is cited in the third chapter of the dissertation by Khromushin, I.V. "Portfolio Investment Funds in the International Finance and Credit System and Their Role in the Development of the Russian Market of Shares". The RAS Institute of World Economy and International Relations, 2004.
5. The development risks of the state capitalism in Russia. Stronger role of large state corporations is inevitably becoming an obvious trend in the economic development of Russia. These exert ever increasing influence on both the external and internal finance markets. This initiates the risks of the RSM "degrading" in future much because of the liquidity flows switching over, including the non resident ones, into the intra corporate sphere. The most fresh examples of these given instances on the RSM are purchase of large packages of the "Mosenergo" OJSS and the "UES of Russia" RJSS shares by the Gasprom structures, transition of the "Sibneft" OJSS under the "Gasprom" control, transition of the OMZ and the AutoVAZ controlling packages to the "Rosoboronexport", etc. In the years to come, this chain reaction is going to involve ever new and new spheres.
At that the facts do show: of priority for the state corporations are not so much the RSMs but rather the global stock markets. In accordance with the 2006 decision taken by the power bodies of Russia, 35 % of the "Gasprom" OJSS shares representing 90 % shares of the companies being in the so called "free circulation", will be transformed into the depositary receipts and will leave the RSM for the NYSE (the USA) and LSE (the Great Britain). A somewhat similar scenario is awaiting the shares of Rosneft, BTB and other largest Russian issuers.
Consequences of such policies for Russia can be well seen in the example of China whose experience ever more actively followed by the Russian internal economic policy. As shown in Fig. 9, the 2001-2005 internal stock market (SSE Composite) index went down by 43.5 % which even outstripped the falling rates of the American stock market which S&P index went down by 1.4 %. The main reasons for the deplorable state of the stock market in the mainland China are not in any inefficiency of the state policy in this given sphere77. Under conditions of orientation towards promoting large state corporations (Bank of China, etc.) on the Western stock markets and restructurization of the commercial banks credit portfolios the powers that be show ever less and less interest to developing the internal stock market, greater efficacy of those working in it as financial middle-men and savings of the population in securities.
6. Low level of savings by the population in securities. Despite the obvious progress in developing collective investments, somewhat accelerated RSM growth does not exert any significant influence on bettering welfare of the country's citizens nor on strengthening the national system of savings. According to the 2005 statistical data on investments of the population in securities as compared against other financial assets (see Fig. 11, below), make rather a painful expression.
77 China's securities industry. Fixing broken brokers / "The Economist", February 11th, 2006. - pp. 67-68.
398
16 -,
14 -- -
12 -- -
□ To "before savings" (credit taking)
□ In cash (foreign currency) ^ In roubles
□ In securities by Russian issuers
Ü In foreign currency bank accounts
□ In Russian roubles in the bank accounts
Source: according to the CBR and Rosstat data.
Fig. 11. Inclination of the Country's Population Towards Savings in 1997-2005
According to the 2005 data, the incomes share of the population invested in securities, comprised but only 0.5 %. This indicator turned out to be almost two (2) times less as compared against the crisis 1998 year. As the Rosstat figures say: the net investments of the population growth in securities in 2005 comprised something about 68 bln roubles while the growth of the country's citizens' earnings in the bank deposits as well as the greater indebtedness in the bank loans comprised 587 bln roubles and 479 bln roubles, respectively. Even though with the statistical data incompleteness, as regards the population's investments in securities, taken into due consideration in the context of the market cost growth of the shares of the Russian companies during the same period in the sum of 242 bln US dollars, the 68 bln roubles (or 2.4 bln US dollars) figure shows the absence of any direct connection between the RSM growth and incomes of the population.
The almost paradoxical situation with the population's non participation in obvious advantages which were brought by the RSM in 2005, has a number of explanations. This is connected with insufficient development level of collective investments, finance in-between, informativeness of the population, defenselessness of the minority shareholders' rights and other factors as well. However, to a much greater extent, this is a result of the economic policy conducted in the recent years by the Government of the Russian Federation in the sphere of the pension reform and the collective investments. Most unfortunately, the year of 2005 will be remembered as the year of missed opportunities as regards setting up the finance - stable pension system. When liberalizing the "Gasprom" OJSS shares market, when taking off limitations in issuing the depositary promissory notes for the RF Saving Bank, when stimulating the inflow of the strategic investor - non residents into oil companies, it was not at all difficult to see the much divisible growth of the said fi-
399
nance assets. In the context of rather permanently discussed deficit of sufficiently reliable instruments to shape the Pension Fund of Russia (PFR) portfolio, the 2005 period did not see any changes in the PFR legislation permitting investment of the respective pension accumulations, at present under the Vnesheconombank control into the shares of the above said issuers78. Thus, subjectively, real possibilities were missed to include into the PRF portfolio of high profit and sufficiently reliable assets79.
Changing in the set up situation does require the RSM forming as regards the compatibility factor for finance middleman ship quite capable of sufficiently increasing the investment processes, the lesser investment risks, including the information asymmetry and the global markets also capable of bringing about real profitability in various categories of investors. Except for certain segments of the finance market, e.g. the sphere of clients' asset management, this problem is rather far from its solution. Weakness of its regulation bodies here can be noted in the absence of any open statistics on the assets, the own capital and other finance indicators of activities caused by the major bulk of non bank finance in-betweens.
So, let us do some sum up. The rapid RSM growth in 2005 causes not only the feeling of optimism for its future but also alarm with regard to obvious lagging behind of the banking system from investment requirements of business, greater RSM dependence on the state of the global markets under conditions of its excessive orientation towards short-term speculative investors, insufficient development level of the national saving system strengthening the trends of making the public OJSS state entities.
Ensuring the RSM compatibility requires a somewhat complex approach. Successful RSM development must first of all rely on conducting a coherent and efficient economic policy which assumes lower inflation, re-orientation of the finance system to functioning under conditions of positive interest rate, real bank reform as well as the system of their refinancing. The RSM development strategy should provide for: the system of "soap bubble" risk control including stimulation of diversifying the portfolio investment funds, etc; RSM promotion among the largest and most conservative institutional investors on the global market; creating conditions for the come of the largest direct Western investors to the RSM. Noteworthy steps are needed in the area of the investment climate betterment in the country, taking the law on insider trading on the stock and currency markets, further development of the respective legislation on joint stock societies towards protection of rights of minority shareholders. The priority here must be creating the conditions for outstripping growth of collective investments as well as more active position in the field of reforming the corporate control.
4.7. Merges and takeovers: dynamics, factors, branch peculiarities
According to the data of the M & A Agency analytical agency, 894 merger and takeover deals were completed in Russia during the nine months of 2005 with the total amount of such deals comprising up to 30.9 bln USD. Cost estimation of the market in 2004 comprised, according to different relevant data, from 22.9 to 26.7 bln USD and in 2003 - 18.3 bln USD. Thus, the respective growth in this area comprised about 70 % during the three years.
78 Representatives of the Finance Service for Finance Markets and the RF Ministry of Finance declared but too often that such proposals were being discussed.
79 It is not at all surprising that none of the Public PRF Council members, called upon to control the efficacy of the PRF reserve system, on the part of the managing companies which include a lot of the respective market structure components, has not so far expressed its due attitude to what is going on in this sphere.
If we now turn to analysis of the branch structure of the merges and takeovers in Russia in the year of 2006 as compared against 2004, then the results thus obtained, can not be taken as vivid demonstration of any revolutionary shifts in the branch structure of the companies which took part in the said deals directly connected with merges and takeovers. The branch structure of such deals as regards the cost criteria for January - November 2005, is shown in Fig. 1280.
H Oil and gas industry □ Extraction of minerals ■ Metallurgy
■ Construction □ Food industry □ Machine building and OPC
0 Chemical industry ■ Other industries ■ Finance and insurance
□ Communication □ Trade S Mass media
Fig. 12. The branch structure of the merges and takeovers market as regards the volumes of deals completed during January - November 2005
The data as shown in Fig. 12, permits to make the following conclusions:
First, the oil and gas industry still keeps the leading positions as to the volume of the deals completed. At that, although the largest in the history of Russia takeover deal was registered in October 2005 - redemption by "Gasprom" of 72.663 % of the shares of "Sib-neft" for 13.09 bln USD, - the share of the oil and gas industry in the overall volume of such deals, as compared against the similar indicator in 2005, went down by more than 9.7 per cent points81.
Second, much greater amount of deals in the field of minerals extraction - by 5.2 p.p. It is also noteworthy here that the main contribution to achieving such a high indicator was due to the deal in redeeming of 97.5 % shares of the "Mikhailovski ore mining and processing enterprise" OJSS (1.65 bln USD or about 65 % of the overall volume of the respective deals in the industry) by the A. Usmanov's structures.
80 Hereinafter use is made of the materials and data base for the deals in merges and takeovers in the Russian economy which were published in the "Merges and Takeovers" magazine for the respective periods of time.
81 At that, the high 2004 indicator was also to a considerable extent backed by the largest at the time deal - auction selling of 76.79 % of the "Yuganskneftegas" OJSS shares for 9.35 bln USD.
Third, increased in the overall market volume was the share of the construction industry (it did not go beyond the 1 % confines in 2004 but it comprised 5.5 % in 2005) as well as that of the food industry (its yearly growth comprised 1.7 p.p.).
Fourth, there was a sharp decrease in the volume of deals in the transport and finance industries - by 2.61 and 1.9 p.p., respectively.
To have a fuller estimation of merges and takeovers intensity in the industry it also seems quite expedient to consider the respective statistics as regards the number of deals completed in the year of 2005 as compared against the year of 2004 (see Fig. 13).
40 -,
35
30 -l-25 20 15 -I-10 --
5
0
Fig. 13. Qualitative parameters of the merger and takeover deal in Russia f
or January - November 2005
As can be seen from the data in Fig. 13, the highest intensity for the period under consideration was demonstrated in the food industry, machine building, trade, finance and insurance, communication and oil and gas industry. It is also noteworthy here that, as compared against the year of 2004, the leaders have not practically changed but only somehow exchanged their places. The first as regards the number of deals in 2004 was the oil and gas industry, then there followed the food industry, communication, transport, finance and machine building. As we can clearly see, significant reduction in the indicator of the amount of such deals in the transport industry is also followed with some reduction in the number of deals being made — in 2005, this branch is no longer among the said leaders. At the same time, however, even despite the decreasing share in the overall amount of deals on the market, the finance industry still remains among the leaders as regards intensity of the merger and takeover processes.
Special mention should also be made of the rapid development of the respective merger and takeover processes in the sphere of trade. In 2005, completed were deals for the overall amount of 528 mln USD with the average deal price being rather low as compared against other industries under consideration: 23 mln USD is the lowest indicator among the leading industries in the year of 2005. 402
In our opinion, the more general development direction in the market of corporate control in 2005 consists in greater informational openness of the processes of transferring the property rights on to the respective assets, greater share of using the "civilized" forms in merges and takeovers, lesser average cost of deals as well as greater share of the state in the property rights on the basic industrial (mainly those pertaining to raw materials) assets of the Russian national economy.
The trend towards the decreasing average cost of deals in mergers and takeovers has been observed, minimum, during the last three years. Now, while the average cost of such deals on the Russian market comprised 107.5 mln USD in 2003, but in 2004, this indicator already equaled but only 96.1 mln USD. At that, as different from 2004, no high cost deals which frequently distort the overall picture, were registered in 2003 (selling the 'Yuganskneftegas" OJSS shares). The average cost for such deals comprised 116.1 mln USD in the 2005 January - November period. These figures, it would seem, demonstrate growth of the 2005 indicator as compared against the year of 2004. To make it more obvious, however, excluded from the said calculations should be the largest for the history of Russia deal in acquiring by "Gasprom" shares of the "Sibneft" OJSS the amount of which comprised about 48 % of the total volume of the market for the period under consideration. Provided it is excluded from the said calculations, the average cost value of the respective deals, during the eleven months of 2005, is about 61 mln USD.
These data graphically demonstrate a trend towards lessening of the average cost of deals which, in our opinion, can be considered as positive proving growth in the investment activities of the middle business environment. Moreover, the monies obtained resulting from selling the business, will most probably be invested in creating new sources of income. At that, the decreasing concentration of investments resources "in one and the same hands" can stimulate greater competition and quality growth of the products and services produced.
It also seems quite necessary to mention here decreasing activities on the market of unfriendly takeovers in the context of retaining high level of law offence in this sphere. Since any sufficiently exact statistics with regard to the number of unfriendly takeovers is actually absent, it is easily explained by lack of desire on the participants in these processes to spread any respective information of the kind. Meanwhile, of definite interest for better understanding of this phenomenon seems to be the statistical data as regards the quantity of criminal cases instituted by the respective law enforcement bodies in connection with such "unfriendly seizures". Accordingly, while 36 criminal cases were initiated by the respective law enforcement bodies and the Prosecutor's Office of Moscow in 2004 for the ascertained facts of "coercive seizure" and unfriendly takeovers (Criminal Code articles: "fraud", "property damage", "coercion to making a deal" and others), only 8 such criminal cases82 were initiated as of August 2005.
The following could be mentioned among the main reasons of this given trend:
- tougher factual administration in the sphere of corporate seizures by the state executive power bodies regardless of how populist these action may look or actually are;
- stronger factual administration of the transferring processes of property rights to the respective assets by the anti monopoly regulation bodies;
- partial changes of the respective legislation in the field of regulation in the executive power bodies of official changes concerning legal persons (for instance, introduction of the notarizing the signature of the previous Director General on the application sub-
82 In accordance with the information of the SEPD (Security of Economic Policy Department) press-service of Moscow.
mitted to the tax service for entering the respective data on the new single executive body in the Unified State Register of Legal Persons); - using by the companies of efficient (preventive ones included) anti seizure measures.
A significant factor here is retaining the trend, which became quite discernible in 2004, of increasing share of the state participation in the redistribution process of property rights to the largest assets in the Russian national economy. At that, if in the preceding years the said participation was to a considerable extent evidenced in solving conflicts between the acting state power bodies and some large owners (for example, the "YUKOS" case; redeeming the assets of the Guta Group [the Guta - Bank, the Perm Motors] when the state interests were mainly directed to the so called "unfair" [from their point of view] owners) and increasing the state component in the strategic raw materials branches of economy (for instance, consolidation of "Gasprom" shares), but in the 2005 - early 2006 period, the authorities started to show obvious interest to the assets of "loyal" and "non problematic" oligarchs as well. Thus, it became known in 2006 that the "Rosoboronexport" FSUE made an offer to the main owners of the titan monopolist, the "Verkhnesaldinsk metallurgy production amalgamation" OJSS concerning possible redemption of their shares. A similar example of the same kind can be seen in the factual setting of the state control (in 2005) over one of the largest automobile building enterprises of Russia - the "AutoVAZ" OJSS.
One more factor of significance - consolidating the role of the stock market as well as strengthening the informational openness of business companies. One confirmation of the given thesis can be taken in the volume dynamics of public placing of the Russian companies' shares during the recent years. The quantitative parameters for then primary placement of the Russian companies' shares in the period from 1997 to 2005 look as follows.
Table 8
Dynamics of volumes for Russian IPO in 1997-2005
Indicator 2004 2005 % of growth 2003 1997-2002
Quantitative volume of IPO market, pieces Volume of IPO completed, mln dol. 5 619.6 13 4 550.6 116.67 624.4 2 (RBK, Drugstore Network) 34.4 3 (VimpelKom, MTS, Vimm- Bill-Dann) 627
Source: M & A Agency (www.mergers.ru), VEB - PLAN Group, data from companies.
Significant growth of the monetary and in-kind volume indicators stimulated through the stock markets of attracting investments can be taken as vivid evidence proving also that Russian owners are quite ready to reveal information on the structure of their property to third persons since its public placing demands full disclosure of info on the current company beneficiaries which in most cases was not at all typical for Russian companies only 3-4 years ago. Another thing confirming this given trend can be sought in the results of the study in the field of Russian companies' informational transparency conducted annually by the Standard & Poor's. In the recent years, the said results have been demonstrating better disclosure of information standards as compared against the respective preceding periods. Thus, in 2005, for example, the transparency index for the largest Russian companies comprised 50 %, with the 2004, 2003 and 2002 indicators being 46 %, 40 % and 34 %, respectively.
Besides, it seems quite expedient to touch upon the subject of modern world trends in the field of mergers and takeovers, the more so because further development of the 404
world capital market will be indeed telling on the integration processes with participation of the foreign capital in Russia. It was already in May 2005 that the World Bank predicted the first case of a positive value for the net inflow of capital to Russia in the year of 2005. According to the data of the RF Central Bank, this indicator was registered at the level of about 3 bln USD already in the 3rd quarter of 2005, even though the summary value of the said indicator for the nine months of 2005 remained negative. These forecasts were then further confirmed by the end results of the year - the value for the net inflow of capital to Russia comprised 0.3 bln USD which took place at that in the context of reducing inflow value of the speculative foreign capital.
According to the data of the "Thompson Financial" research company, volume of the world mergers and takeovers market for the nine months of 2005 comprised 1.8 trillion USD. As calculated by the "Dealogic" analytical agency, this indicator turned out to be even greater and comprises 1.97 trillion USD which is almost 52 % higher than the similar indicator for the year of 2004 (1.3 trillion USD). Analysts of the "Credit Suisse First Boston" tend to interpret these figures as the beginning of a new (the sixth, but already the world one) wave og mergers and takeovers (at the present stage, 5 waves are usually considered in the US history of mergers and takeovers which took place in the period from late XIX to late XX centuries). To confirm this assumption, let us turn to the figures for the preceding years.
The data on the volume of the world mergers and takeovers market in 2001-2003, as regards the number of declared deals, are presented in Table 9. In 2003, as compared against 2001, there was significant fall in the respective activity on the world mergers and takeovers market - more than by 25 %. In 2002-2003, this indicator remained almost unchanged and comprised about 1.25 trillion USD. In 2004, according to the KPMG data, volume of the world mergers and takeovers market reached the level of 2001 and comprised 1.73 trillion USD. Extrapolating the respective values for the January - September 200583, it can be assumed that the world mergers and takeovers market will reach 2.5 trillion USD which is 45 % more than in 2004. Thus, in the course of 2004-2005, the world mergers and takeovers market averagely grows 40 45 % a year (2005 - forecast). However, these statistical data are not at all really indicative. The length of one mergers and takeovers wave in the United States comprised 8 to 12 years in average. Thus, the following conclusion seems to be quite logical: the sudden leap of the voluminous world mergers and takeovers market indicators did take place in 2004-2005 but to talk about the beginning of a new wave of mergers and takeovers, it is necessary to at least subject to sufficiently thorough analysis further (during not less than 2-3 years) changes in this indicator.
Table 9
Volume of the world mergers and takeovers in 2001—2003 (by number
of declared deals), bln dollars
Period/Region World USA Western Europe
2001 1 700.5 771.4 519.7
2002 1 231.4 458.3 462.3
2003 1 260.0 490.0-556.0 no data
Source: M & A Agency.
These trends appear to be most interesting, particularly so in the context of the investment ratings of Russia (both the long — term credit rating and the short — term sovereign rating - S & P) which evidently grew in 2005. Besides, according to the data of the
83 At present, we do not have the final data for the year of 2005 in our possession yet.
"A.T. Kearney" consulting company, Russia was the sixth in the rating for the countries most attractive for direct foreign investments in 2005, while in 2004, as regards the above said indicator, Russia was but only eleventh (the eighth in 2003). The capital, being freed as a result of the mergers and takeovers, can be invested in the respective Russian assets which fact, although so far only in part, is already taking place (see indicator values of the capital net - inflow in Russian in 2005, as cited above). Hence, further strengthening of transparency on the corporate control market as well as its regulation on the territory of the Russian Federation seems to be one of the priority directions for the economic policy of the state since it does provide for stronger current trends and further growth of the positive balance of the international movement of capital in Russia.
4.8. Some Innovations in the State Regulation
4.8.1. Development of the Contemporary Legislation on Privatizing the State and Municipal Property in the Russian Federation
Most commonly, privatization can be understood as any economic process resulting from which the state looses its control over production in such or other field of the respective activities. Be such a case, we can talk then about both privatization of an individual industrial enterprise and privatization of the whole economic industry if the state stakes its development on private business. In the latter case, privatization can also be implemented through cutting down the state monopoly on performing functions which were earlier exclusively controlled by the state.
However, the respective legislation on privatization regulates but only relationships directly or indirectly connected with alienation to private property of such state and municipal property which is recognized as privatization proper. Both the first Acts on privatization and the current Law, dated 21. 12. 2001, No. 178-FZ "On Privatization of the State and Municipal Property" (hereinafter called the Law on Privatization), interpret privatization as selling (alienation) different state and municipal property objects into private ownership. That, as is noteworthy here, also includes transforming any unitary enterprise into any open joint stock society in question.
The RF legislation on privatization does recognize such transformation as an independent method of privatization beginning from the year of 1997. Conceptually speaking, such treatment of the question is deemed possible only with a rather large share of relativity. In case of transforming a state enterprise into a joint stock society, privatization as such can be understood exceptionally in the strictly legal sense of the word: the ownership right of the state on the property, earlier vested in the enterprise thus transformed, is being passed over to the new joint stock society through the process of the said transformation. This is accompanied with certain changes only as regards the respective regulations within the framework of which the state can exert influence on the business decisions to be taken by the enterprise - instead of the legislation on the unitary enterprises, that on the joint stock societies is practically applied84 in the configuration as provided in it for such socie-
84 This most vividly manifested itself only after the law, dated on 14. 11. 2002, No. 161-FZ, "On the State and Municipal Unitary Enterprises", had entered into force. Before that, turning a unitary enterprise into a joint stock society made it potentially possible for the state management bodies to improve their control over the said economic activity subject through using the already existing but complemented with greater detail corporate legislation, for instance, the law on join stock societies which entered into force beginning from January 1, 1996. A component part in practical controlling such OJSS on the part of the state must also be certain indirect property control ensuing from Art. 65 of the "Law on Joint Stock Societies" which refers to the competence of the respective Board of Directors (Supervisory Board) of the said joint stock society decision of a number of questions having actual influence on the property state of this joint stock society (increasing the authorized
ties with the sole founder. Controllability of the enterprise on the part of the state structures looses practically nothing in its fullness degree (with due account taken of the regulations contained in the Charter of a concrete joint stock society in which it is possible to set up, in particular, certain additional requirements as regards the deals stricken by the society in question in the category of - and respectively the appropriate regime - "large").
It is rather interesting that the Civil Code of the Russian Federation which, as per its Article 217, provided for the notion of privatization, at the same time does interpret it as "alienation of property" but at that not specifically stipulating for the role of "turning it into a joint stock society" in the process of such privatization implementation. The first law on privatization, passed in 1991, also provided for a possibility for "turning it into a joint stock society" as part of the privatization arsenal but only implying it in the context and not directly from defining the notion of privatization proper. De facto, as an economic process, privatization will become a true reality only when the state has sold (has privatized) its share in the respective authorized capital of the joint stock society which it set up. Actually, turning an enterprise into a joint stock society is either some intermediate stage of privatization or some particular case when the property owner of the unitary enterprise wishes to go no further than changing the organizational and legal form of the person managing the business under the owner's control. However, the "instrument kit" used by the respective legislation on privatization, almost prevents taking these rather insignificant fine points (at least for a lawyer) into any practical consideration.
Thus, the legal language of the legislation on privatization, to a certain degree, does resist attempts to define privatization as a reality of economic life. This language, on the contrary, means privatization as alienation of while the "state or municipal enterprise" - a legal person set up in the organizational form of a unitary enterprise. That is why, for example, the word combination "privatization of enterprise" causes quite understandable indignation of legal experts who, in our opinion, quite justly think that a legal person simple can not be subjected to alienation. A more correct expression for such a case is deemed to be the following: "privatization of the property complex of the respective state and municipal enterprise".
At the same time, however, it is not to be doubted that the Civil Code refers transforming a state and/or a municipal enterprise into an open join stock society to the notion of privatization as well: Article 96 of the CC is quite explicit about peculiarities of setting up and the respective legal status of joint stock societies created in the process of such privatization, referring this legal substance, quite naturally, to the subject of regulation by the said legislation on privatization.
Transforming a unitary enterprise into a joint stock society is, undoubtedly, a necessary component for the "toolbox" of privatization. Except that it is exactly the enterprise which become the object of privatization as a legal person that is subjected to reorganization through transformation. From our point of view, this fact permits to do without terminological errors in using the "privatization of enterprise" notion in the respective normative - legal acts having in mind just such transformation. Otherwise the legal regulation of privatization becomes rather difficult, including establishing order in forming the prediction plan (program) of the said privatization: instead of unitary enterprises as objects of privatizations, the program shall have to mention their respective property complexes while it is exactly enterprises that are objects of privatization in the form of the above said transformation.
capital through additional emission, issue of bonds, determining the price [monetary evaluation] of the property, the price of placing and redeeming the emission securities, approval of large deals and those with interest, etc).
Nevertheless, the notion of privatization does depend on the sense - economic or legal - in which it is used. Thus, what is called as a "complete privatization" of a unitary enterprise, that is privatization in its economic sense, makes it necessary to execute privatization in its legal sense two times: first to transform the unitary enterprise in question into a joint stock society and only then to privatize its shares85.
As objects of privatization are, on the one hand, all kinds of the state property, neither withdrawn from the circulation86 nor confined to such, including unitary enterprises, packages of shares pertaining to joint stock societies (less frequent - shares) in the authorized capital (property) of other legal persons as well as individual property objects being in the state treasury or the respective municipal formation. On the other hand, however, privatization has never been intended to cover the whole range of possible deals with the state and/or municipal property. On the contrary, it was as far back as December 3, 1991, that the Decree of the RF President No. 255 "On Primary Measures in Organizing Work in the Industry of the RSFSR" recognized property, registered on the balance of state enterprises, registered in then proper name as the "right for full economic use" while the enterprises themselves - as having "full business and economic independence". Both in this here and further legislation on privatization, quite distinctly traced can be the line of non interference in internal affairs (business and/or economic activities) of such unitary enterprises. Thus, the respective 1997 and 2001 laws on privatization point out directly that the sphere of their effect does not include deals with the property of the state and municipal enterprises, i.e. such deals which are carried out by them in their own name within the framework of the legal capacity as prescribed to these subjects.
Of secured character is the prohibition on carrying out certain property deals by the state and municipal enterprises without agreement of its owner as well as for cutting down the number of those employed, as written in Point 3, Article 14 of the Law on Privatization. This prohibition is designed to protect enterprise property from alienation from the moment it has been included in the program of privatization. In its time, this particular norm also made up for the gap with regard to the unitary enterprise legal capacity which was actually removed in the end of 2002 by the No. 161-FZ Federal Law "On the State and Municipal Unitary Enterprises": practically all the "privatization" bans were accordingly absorbed by the usual requirements of this Law to making deals with unitary enterprises (large deals, credits and loans)87.
Thus, the normative legal acts on privatization regulate the system processes of shaping the private sector in the national economy of the Russian Federation though not involving making deals with the state and/municipal property in the process of usual economic activity of business enterprises. Since most part of the so called "excessive" state and municipal property, not used directly for performing the basic authority of the Constitution and Law based state power bodies of the Russian Federation as well as those of the local self-government, is to be transferred to private property, the respective legislation on
85 Such a possibility to privatize an enterprise as selling its property complex is not subject to any special treatment here since its presence does not exert any system influence either on the theory or the respective practice of privatization.
86 In this context, of significance are also limitations for property circulation capacity establishing that it can be exclusively in the state ownership. Such a record does not at all mean full withdrawal of the property from circulation because it allows involving it in the civil - legal deals which do not have any property alienation as one of their consequences.
87 The exception, probably, being only the ban on cutting down the number of those employed in the respective unitary enterprise beginning from the date when the privatization of the federal property feasibility plan (program) was approved of and to the moment the respective ownership rights on the privatized property are transferred to the buyer of the unitary enterprise property complex or the moment the newly set up open joint stock society is officially and duly registered by the respective state body.
privatization for the medium term perspective shall also retain its role both in the system of the civil legislation and in its adjoining branches of law.
Further on, after the optimum volume of the state and municipal has been achieved the respective privatization legislation can be reduced having lost at least its civil - legal component. The deals within the framework of which alienation of the state and municipal property proper is completed, are, both in form and essence, of the respective civil and legal character. Transforming the state and municipal enterprises into open joint stock societies are also subject to the common reorganization rules of legal persons in general and to those on the said transformation, in particular. Special legal regulation of the respective civil and legal aspects of property alienation in the former and in the currently acting legislation on privatization are both connected with the necessity of introducing into practice certain uniform procedures for sufficiently efficacy in using the respective state and/or municipal property. Further on, it will be quite enough to legislatively fix up requirements on total and unconditional publicity of all the respective deals including the stages of their completion, actions in selling the state and municipal property and to select, on the competitive basis, agents representing a state or a municipal formation as well as to carry out a competitive "chose a buyer" procedure.
At this present time, however, privatization of both the state and municipal property does need a more distinct and detailed legislative regulation at the federal level. Yet, even if such is present, locally practical privatization is sometimes typical of significant deviations from the procedures respectively prescribed. It is because of this that the legislation on property, at the present modern stage, rests on further specifying the normative instructions which provide for, transparent for both the economic agents and the public, efficient and enough uniform gratuitous alienation of the respective state and/or municipal property.
Contemporary legislation on privatization of the state and municipal property is based on the Federal Law "On Privatization of the State and Municipal Property", dated December 21, 2001, No. 178-FZ, which was prepared by a group of experts in the field of the state property management (mainly - those from the RF Ministry of Property and the Russian Federal Property Fund) basing their work on the available practical experience of the earlier legislation on privatization.
By that time, the said privatization was being regulated through a rather cumbersome body of various normative and legal acts developed and accumulated during the economic reform years: decrees by the President of the Russian Federation, adopted in the period beginning from 1992, and the 1997 half - and - half Law on Privatization intended for the consequent passing of the law on the state program of privatization (which actually never happened) as well as acts of the Government of the Russian Federation and those of the RF State Committee for Property. Certain internal contradictions in the said acts (due to relatively wide time dispersal of the dates when they were adopted in the context of rapidly developing civil legislation) in fact permitted selling at the respective auctions and contests securities (shares) pertaining to only newly set up (privatized) joint stock societies and/or other property. The said process of transforming the state unitary enterprises into the respective open joint stock societies was actually stopped by the year of 2000.
This year of 2000 did manifest obvious disproportion between the rates and efficacy of privatizing the unitary enterprises and the respective packages of shares. Profits from selling the latter brought to the national budget 31.5 bln roubles which 1.5 times exceeded the planned figure. It was the best result for all the previous years of privatization. Practice of selling the state property, as permanently complemented with both the national and international enriching experience, was developing much faster than the respective norma-
tive and legal basis which, in turn, required its rapid improvement. The main problems here were: a rather limited "tool box" of privatization methods, quite sophisticated selection procedures of objects to be then duly privatized and getting the necessary approvals, numerous obstacles in forming the property complex of practical steps and quite a number of others. In 1998, for instance, Federal Law "On Estimating Activities in the Russian Federation", No. 135-FZ, dated July 29, 1998, was adopted as making it compulsory to apply an independent estimate in all the cases where the state and/or municipal property was involved in the civil turnover. Market-based estimation of property was already practiced in privatizing at that moment but it was still necessary to establish it normative-based with regard to all the respective privatization deals.
The said bill, worked out in the period from 2000 to 2001, was based on the new methodology for initiating and planning the said privatization process; broadening the range of privatization methods; tuning up the privatization "tool box" for selling the property depending on the respective demand (liquidity); involvement into the privatization process of the land plots under the enterprises in question; registration of the rights for intellectual property; greater responsibility of the state and of the enterprise administration. The law was passed in the end of 2001 and entered into force beginning from April 26, 2002. This postponement not so frequently practiced with regard to federal laws, does somehow characterize the degree of novelty in the ensuing new order of privatization: it was quite clear for those who had been preparing the said bill that both the state and other participants in the privatization process really needed some period of time to get better acquainted with the new rules of privatization as well as to prepare them for practical use.
The Law provides the right to initiate privatization only and exclusively to the owner of the respective state or municipal property in the person of the respective bodies. Privatization planning has become more tough and realistic, it also got a sort of anchored to the budgeting process: on the one hand, the program should include all the federal property subject to privatization in the respective year regardless of its cost or other parameters; on the other hand, such a program is to be taken not by the Duma but by the Government which then submits it to the Duma along with the draft project of the budget for the year to come (as part of the documents and materials set enclosed). Individual objects, as directly stated in the Law, are to be privatized in accordance with a special law - these are shares of the "UES of Russia" RJSS, the "Gasprom" OJSS and property in the natural monopoly sphere in the railway transport. In the latter case, such privatization has already taken place on the basis of the Federal Law "On Specific Features of Controlling and Managing Property of the Railway Transport", No. 29-FZ, dated February, 2003, owing to which the "Russian Railway Roads" Open Joint Stock Society was set up. Other objects, somewhat connected with ensuring the defense capability and security of the Russian Federation in accordance with the list as determined by the RF President, can not be included in the privatization program during this period. However, subject to privatization is a package of shares of an open joint stock society, if included in the above said list, to the extent which is higher than the share thus stated. The lists of the respective strategic enterprises and the joint stock societies were later approved by the Decree of the RF President, dated August 4, 2004, No. 1009.
Share packages of joint stock societies, enterprises and other property, included in the privatization program, shall be privatized exclusively by means and methods as stated by the Law including those for privatization of the municipal property. The respective Law has provided for such means which also enable practical implementing of property not in demand when being sold at the auctions but the only criterion for their use is the very fact that such demand is really not registered and not just supposed or expected. Thus, the ba-410
sic method of privatization, both in the former and the new legislation on privatization, was and still remains to be auction whose starting price is set up exclusively on the basis of the market cost of the property as estimated by an independent broker.
Advertised bidding in the form of auctions is really the best way to sell property which is in the ownership of public education. All the shortcomings as they come out into the open during such auctions, should be viewed as resulting from objectively existing differences between those as described in the "ideal model of the efficient market" theory and the market which exists in reality. At the same time, however, it is just this theoretical model of ideal trading that allows us first to evaluate both the nature and the manifestation degree of deviations from it, practically observed, and then to accordingly correct the rules for the given trading in its broadest possible sense - from the respective informational supply to the order of qualifying its participants and the procedure of trading as such.
The Efficient Markets Hypothesis (EMH) assumes fulfillment of three conditions:
1. availability of a large number of buyers and sellers due to which actions of individual buyers and/or sellers do not exert any significant influence on the price of the respective security;
2. information shall become available for all the market participants simultaneously and to receive it shall not be connected with any expenditures;
3. all subjects of the market shall act rationally and striving towards profits maximization.
Since, under privatization in the general case, no external influence can be exerted on the first condition because the shares to be privatized, particularly so for newly set up joint stock societies, can not be represented on the stock market, the resource for increasing efficacy of the trading, all its shortcomings taken into due account, is to be sought for primarily in the area of normative bringing the said conditions closer to the two remaining assumptions. And although the Law on Privatization has already undergone certain changes as regards the order of auction conducting, which do somehow strengthen its market potential, the present experience nevertheless demands that these activities be continued indeed.
The situation where the demand for the property to be auctioned, is actually non existent (which fact can be clearly seen in complete absence of the respective applications for participation or appearance of the sole participant), is not at all anything extraordinary for the privatization phenomenon as such but for other cases when auctions are to be held. The former legislation on privatization had but one and only way to correct such a situation -repeated carrying out of the auction with lowering the originally declared initial price. Be such a case, the Law on Privatization permits the owner (but does not oblige him/her) to carry out trading with lower proposal price but starting from the level not lower than that of the initial price of the trading not performed. Thus, having tried an unsuccessful attempt to find the true property market price that is higher than his/her supposed minimum market value (the initial price of the auction trading not performed), the owner, step by step, fully in accordance with the lowering of price stages, is moving towards the maximum price of demand for property which is below the stated value. In the text of the Law, such trading is normally called as sales of property by means of public supply.
In the absence of proposals on acquiring property, sales of property by means of public supply stop at the level of 50 % of the price of the auction not carried out. At the stage when market did not show any interest to selling property even at a 50 % discount with regard to the earlier price, property owner has the right to chose one more method of privatization. Selling property without declaring its price (just by the very mechanism of carrying out) can be defined as a zero initial price auction carried out in the closed form of price offering.
The said bill on introducing changes in the Law on Privatization, worked out on the basis of the privatization results analysis of the 2003-2004 period, has a new form of selling by means of public offering - trading by voice, i.e. in accordance with the usual procedure Dutch auction is conducted. Probably, it seems quite sensible then to think of initiating a similar face - to - face form of auctioning for selling property without prior declaring of the initial price as well.
In case an auction could not be held, the Law on Privatization also allows use of other methods of privatization, namely selling on the organized market of securities (on the stock exchange), depositing in the authorized capital of a joint stock society (the authorized capital of a strategic joint stock society can take shares of another joint stock society so to say "ahead of line", i.e. with no need for factual confirmation of the absence of the market demand through an attempt to carry out the auction). Selling of shares according to the auction results by means of their preliminary transference into the asset management88, provided for in the Law on Privatization as one more possibility for the "second rank composition" of privatization means, was not fixed normative-wise in the said Regulation of the RF Government and hence can not be applied when privatizing not only the state property but the municipal one as well. At the same time, however, inclusion into the above mentioned "second rank composition" selling of shares through the stock exchange is understood as a sign of excessive caution of the legislator manifested with regard to this new method of privatization. In the bill in question, the said perspective type of trading has its due place, along with auctioning, in the system of privatization "tool box".
Non optimum queue in applying certain privatization means is not the only compromise achieved when adopting the said Law on Privatization, to be later appropriately corrected. The most manifest example of such a compromise - requirements to the order of determining the initial selling price of the property in question as fixed in the Law on Privatization. On the one hand, the Law fully supports the ideology of the previous Law on Estimation accordingly requiring that the initial property price be set up on the basis of some independent estimation. But on the hand, it does introduce into the privatization price formation process a rather artificial element of the owner's control over the lower limit in setting the initial price of the trading in question - the normative price. Thus, in the Law on Privatization, the structure ensuring performing a privatization deal, does not formally borrow the respective instruments from the earlier legislation and privatization (for instance, a commission for establishing the initial price on property) but is essentially oriented towards balanced participation in this process of "two centers": the owner in the person of authorized state body and the same owner in the person of a specialized organization - the seller. And it is the latter that the principally important function of setting up the initial trading price actually belongs to.
In such relationships, the owner in the person of the respective state body, is endowed with the right to set up the said normative price as the minimum possible value of the initial price. From the economic point of view, such a possibility does not provoke any significant criticism just like the very presence in the legislation on privatization of the insti-
88 At present, the order of transferring into asset management the federally owned shares of joint stock societies which were set up during the privatization period, and concluding the respective management contracts for such shares are regulated by the respective articles of the Resolution of the RF Government No. 989, dated August 7, 1997 (in further editions), which provide for the rules conducting the respective contests and samples of the standard documentation. Nevertheless, it seems necessary to emphasize that this particular mechanism does not provide for a possibility to alienate the shared transferred into asset management during the validity term of the said contract and after such term of the asset management has been completed in case of duly performance of the terms of such contract. It naturally goes without saying that in case of the subsequent sale of the said shares, the respective asset manager is entitled to take part in the standard privatization procedures, and all the other potential participants also are.
tution of the seller which is not a state body taking decisions with regard to privatization. In the relationships of selling a thing on the commission basis, for example, its owner is also entitled to declare to the respective broker the minimum price size of the property in question. That the Law on Privatization has not set up the criteria for determining the size of the normative price is quite a different story. In principle, two variants to calculate it are possible: the market one as based on the independent estimation and the normative proper implying use of a certain formulae which is actually a surrogate result of the respective independent estimation. The Law on Privatization related the order of setting up the said normative price to the competence of the executive power (in the person of the Government of the Russian Federation) which fact, however, is, most unfortunately, also met with in other legislative acts when the legislator finds it difficult to give a sufficiently clear answer to a rather complicated question.
As to the first of the outlined above ways to calculate the normative price, the said norm-making thought has not yet progressed further than the then existing roles distribution between the owner who appears in the two above mentioned persons. Now if both the state body when setting up the normative price, and the seller when setting up the initial price, use one and the same broker's report (which is necessary for the first of the stated prices to correlate correctly with the second one), then it is primarily the said state body that in fact determines both the time-term for completing the privatization deal in question and its starting conditions. In that time, this structure was considered to be a violation of the seller's competence when in the process of privatization and, accordingly, the normative approach to setting up the same normative price triumphed. In such a paradigm, even though the formulae of its calculation, as determined in the Regulation of the Russian Government No. 369, dated May 31, 200289, actually borrowed the standard methodology of three approaches to property estimation, the normative price seems to have fully lost practically any economic sense like, however, any other attempt of normative (designed) determination of the market indicators admitting no expert correcting whatsoever. In practical terms, values of the normative price were placed both into the field of possible meanings of the property market price when the normative price was actually performing its function with such or other efficacy degree, and into the area below these meanings (which is equivalent to its absence) as well as into the field above them which inevitably resulted in breakdown of the trading forcing the owner to take untimely decisions with regard to changing the method of privatization for selling through the said public offer.
The said bill on amendments to the Law on Privatization rests on the assumption that the initial price of the privatized property is a most important condition for efficacy of trading and, therefore, has to be determined by the state but, no doubt, with practical use of the independent estimation. This, quite naturally, somehow reduces the range of the seller's possibilities in independent determining the respective sale of property policy. Such methodology is fully used in the respective bill on selling the federal property whence the RF subjects and the municipal formations retain the possibility to delegate their authorities in setting up the initial property price to the respective sellers90.
89 Calculation based on the data of the summary book-keeper's balance for the given society as the average weighted meaning of the whole number of values (cost of shares on the basis of net profits, on the basis of stock exchange quotations and for net assets) with use of special purpose ratios as reflecting the degree of shareholder's influence on decision taking in the given OJSS depending on his/her share or on using the special "golden share" right.
90 At the same time, however, abolition of the normative price does increase both potential possibilities and incentives for the buyer to get the evaluator interested in making a lower estimate of the property to be privatized. It goes without saying, indeed, that there is also a probability that the buyer will too try to get representatives of the respective property management body interested in the "proper" calculation of the initial price. Yet, it is quite necessary to have it in mind that determining the
The subject of orderly privatization of the state and municipal unitary enterprises does deserve a separate consideration. The Law on Privatization brought about a great step on the way towards more detailed description of such order fully in accordance with the general principles of the civil law. The main privatization means for a unitary enterprise still remains transforming into an open joint stock society. Since the universal succession is the key feature for any reorganization of a legal person, the Law requires compulsory stock taking of the property and all the respective liabilities of the enterprise in question fully in accordance with the general rules (as set up by the RF Ministry of Finance, the intermediary book-keeper's account compiled according to the results of the respective stock taking on the basis of which (based on the results of the auditor examination) and property composition subject to privatization (including the respective land plot which is then also included in the deed of assignment) as well as the list of property not subject to privatization, and the list of all limitations and burdens on the rights on the property of the enterprise. It is specifically emphasized in the Law that there is no need in estimating property for purposes of privatization in the form of transforming the enterprise in question since this process does not contain the purchase and sale element, nor any economic prerequisites for finding out its market value.
Noteworthy among the gaps in the normative regulation of the transforming processes of unitary enterprises under privatization is the absence of the requirement on the compulsory notifying the enterprise's creditors and among its shortcomings - rather tough choosing the form of an open joint stock society as de facto the only variant to privatize such an enterprise. The above mentioned bill proceeds from the assumption that the most optimum form of privatization for most state and municipal unitary enterprises is vividly demonstrated by the method of duly transforming into a joint stock society, Ltd.
Noteworthy is also one more subject of regulation by the Law on Privatization as the starting point for further improvement of the Law without creating a wrong impression that such necessity has been caused by an incorrect or gap prone regulation of this matter in the Law. The subject matter here concerns the informational support for the respective privatization process. The said Law on Privatization introduced principally new requirements with regard to ensuring openness and transparency of the privatization process during all the stages of its implementation which, in fact, was one of the main motives for its adoption. To begin with, the first stage in informing the public about the said privatization is the publication of the privatization program which has been earlier approved (within the framework of the budget process in the summer of the year preceding the planned one). Further, also to be published are decisions concerning the terms of the said privatization which determine the privatization method and other relevant requirements. Publication of informational reports on property sales, inviting the buyers to take part in the respective trading, which formerly used to be the only compulsory element of informational support for privatization, is now the third stage in disclosing the privatization information which is followed with publication of the trading results. Actually, the only things that the Law is lacking to improve the quality of openness and transparency of privatization, is a formalized requirement to the "coverage area" of information on privatization. Even though general availability of the informational sources on privatization was theoretically assumed, our practical experience insistently demands that direct indication to that be made. The said bill not only establishes that the mass media means, actively used during the privatization
normative price is also leading to higher degree of control and authenticity of estimations due to using various sources of
information.
process, should be available to all but also demands that information on privatization in the general electronic mass media means, i.e. Internet, be published as well.
Practical introduction of the above described novelties has already brought quite positive results. Accordingly, the main task was solved as posed when developing the said Law: the privatization process of unitary enterprises got at last moving. At the same time, significant growth in the rates of privatizing the federal state unitary enterprises (FSUEs) can be also considered as an indirect effect from entering into force of the Federal Law No. 161-FZ "On the State and Municipal Unitary Enterprises" which contains norms making their economic activities more difficult because their top management has to get a lot of authorizations and/or approvals of the respective higher administrative bodies and that, in the opinion of the RF ministry of property, is expected to become a significant stimulus for reducing this given sector of economy.
Another achievement of the acting Law is that its text, when being worked at and analyzed, it allowed to be given a somewhat technological character. The privatization alienating of the public property procedure is sufficiently uniform regardless of the actual for the given moment aims of its practical conducting. There are no limitations on foreign investors taking part in the said privatization which fact makes it absolutely unnecessary to change the text of the law every time under each change in the situation with regard to the role of privatization in the national economy. The very process of aim setting both in privatization and in other organized activities involved in reforming the state sector lie in the area of the institutions for planning the social and economic development of the Russian Federation during which interacting with each other are the presidential, the executive and the legislative branches of power.
Concluding, it is necessary to point out that involving a state or a municipal enterprise in the respective privatization process inevitably makes correct understanding of the ideology of the Law as well as good knowledge of its order and procedures when practically using such critically important. Particular consideration, for example, is required by such questions as involvement into privatization of the land plots under real estate property subject to private property alienation; the order of preparing a unitary enterprise for privatization; the order of trading in the sales of property and perspectives for greater improvement of the rules regulating these relationships. Further development of the respective legislation on privatization would undoubtedly be efficiently stimulated by sufficiently serious and thorough discussion of such aspects as, e.g., the role of the special right for participation of the state in managing a joint stock company (the golden share); the content and normative regulating of burdens on the rights on the real estate property as necessary for the privatization purposes; the optimum privatization model of municipal unitary enterprises in the communal housing sector and quite a lot of others.
4.8.2. Hostile Takeovers as an Object of the Respective State Regulation: Some Legislative Modifications
The questions of regulating unfriendly takeovers have been have been attracting ever growing attention including that of the most various levels of the state management in the business sphere as well. In 2004, special hearings were held in the State Duma; in August and September, 2005, conferences on the problems of unfriendly takeovers and protection means against them were held in the RF Trade and Industrial Chamber and in the Moscow Trade and Industrial Chamber with participation of representatives from the state power bodies, respectively. Similar problems were also considered by the Expert Council for Corporate Management under the RF ministry of economic development and trade in
2005 when preparing the Development Concept of the Corporate Legislation up to the year of 2008 (hereinafter called as "the Concept").
The Concept's authors point to several tasks of improving the respective corporate legislation including those as regards protecting the ownership rights in the corporate sphere, development of the stock market as well through stimulating use of the joint stock form to conduct business, forming adequate legal support for the required business concentration and diversification. Practical implementation of its key provisions can result in significant positive changes in the legislation on the respective economic subjects (registration, transference of ownership rights, etc), on the disclosure of information and the corporate conflicts regulating. Considered below are such novelties which are primarily connected with regulating the said unfriendly takeovers.
One of the most important novelties is deemed to be legal fixing the mechanisms of securing the rights of owners and/or investors in case of probable chance of control over the company. The Concept also offers legislative setting up of certain procedures for the following directions:
1. Setting up the procedure for timely and full informing the respective shareholders and investors on intentions and actions of the company - buyer. Such a norm, widely used in the USA and the countries of the European Union, is, no doubt, a necessary novelty since it allows a minor shareholder to take a decision on quitting membership of the company's owners in case either the new main owner himself or his new strategy of development suit the said minor shareholder. When working out a concrete legislative act with regard to this question, it seems rationally expedient to use the experience of the United States (the Williams Law), when a company - buyer discloses the relevant information on a tender offer through filling in the respective standard blank - form which includes a special section on plans of the company - buyer with regard to the company to be acquired (plans to sell any assets, reorganization of the company, changes in the composition of the Board of Directors, the dividend policy, etc). This blank - form is to se sent out to all the shareholders of the target - company as well as to be presented to the stock exchanges where shares of the said target - company are in trading;
2. Creating the mechanism for practical implementing the right of minority shareholders to sell shares for a just price in case the significant conditions change as compared against those on the basis of which the shareholder took the respective investment decision. This situation continues the previous one and ensures the rights of the minority shareholder should he/she decide to evaluate the changes undergoing in the composition of the owners of the company and/or in their understanding the development strategy by the new owners as negative;
3. introducing a more complicated procedure of taking decisions with regard to protective measures when in the process of taking over in order to provide the shareholders with the right to chose a more efficient owner and stopping the respective management from withdrawing the capital. Such a situation does not yet seem of current importance for Russia because it is so far is quite necessary for observing the lawful economic interests of the owners of the company with a dispersed structure of property when no one of the owners is in the possession of the controlling package and hence do not have any real possibility to control activity of the respective management enough quickly and efficiently. In Russia, the overwhelming majority of companies (both large, medium and small) have but one main real owner. The situation described above, is the future of Russia which can be quite definitely asserted through analyzing the respective experience of the Western countries. We are not going to make any detailed comments
on the given direction of changes because the very text of the Concept, inter alia, does not contain any concrete mechanism for its practical implementation; 4. fixing the mechanisms providing for the balance of interests of the largest corporate owner (90 % or 95 % of the authorized capital) and that of the minority shareholders when implementing the so called "displacement" process under which shared of the minority shareholders are bought out at a just price. This particular proposal has quite a "long" story already. To maintain the balance of interests between the majority and minority shareholders, it is necessary to set up sufficiently reasonable principles for estimating the real cost of purchasing out shares of the minority shareholders. It was proposed some years ago that this given estimation be determined on the basis of some independent market estimation when it shall be the majority owner who will be the customer of such independent market estimation which is quite explainable and logical from the economic point of view (i.e., determining the subject to incur the respective expenses). Unfortunately, the available practical experience shows the reverse. The estimation services market in Russia can hardly be considered as truly independent which explicitly implies distorting the real values of the shares under the respective estimation. We are proposing a somewhat different method to estimate the cost of shares to be redeemed: in case a company's shares are traded on the stock exchange, their market cost is determined as average weighted for a certain time period (a month, for instance) but not less than the cost for which the new majority shareholder acquired the shares in question from the former owner. If, on the contrary, such shares are not traded on the stock exchange, it shall be possible to use the prices of only the latest deal. The said method does also have a number of shortcomings though primarily because the "official" cost of the deal between the new and the previous majority shareholders in Russia can still remain quite different from the real one. Yet, it does seem to be somewhat more objective nevertheless. Besides, assuming all sorts of possible abuses, it is necessary to establish that such a redemption can not be made compulsory should both the seller and the buyer of the majority package in question happen to be affiliated persons because in this case, selling such majority package can very well be used as a mechanism for redeeming shares from minor shareholders at a low price.
Another novelty of obvious significance can be establishing the procedure for preliminary judiciary investigation of the appropriateness of the refusal by the Board of Directors to convoke an extraordinary general meeting of the shareholders as requested by the shareholders with more than 10 % of shares. This given initiative is motivated by the fact that convocation and conducting of such extraordinary general meeting of shareholders by the said shareholder - initiator usually results in setting up of two parallel bodies of control -the board of directors and the board of general directors - which are then used for unfair purposes by certain unfair people in the ensuing corporate disputes. On the one hand, consideration of this question seems to be both timely and necessary because setting up any parallel bodies of control is quite a widely spread tactics of unfriendly seizure of companies. However, this measure, in our opinion, is not at all the only way out of such a situation since holding of the extraordinary general meeting of shareholders with the preliminary judicial control is going to be rather difficult in practical terms: the said judicial procedure, after the decision of which the respective shareholder will be entitled to convene such a meeting independently, is normally going to take a lot of time - from four to eight months (with account taken of possible appeal of the judicial decision). This is the period during which the relevancy of the questions the respective shareholder was planning for discussion and consideration at the said extraordinary general meeting may very
well be lost and even forgotten. Thus, speaking in practical terms, when taking on such a clause, shareholders owning more than 10 % shares of the respective company can find themselves deprived of one of their legitimate rights - that of convening and holding the extraordinary general meeting of shareholders. Therefore, while preserving the acting order of convening and holding the extraordinary general meeting of shareholders, it is deemed both necessary and possible to entrust such control to a specialized self-regulating body which is expected to take decisions on the possibility to convene and hold such shareholders' meetings in a more timely and mobile way than the respective arbitrage courts (first of all because of their greater specialization and lesser loading).
Of undoubtedly positive significance are further improvements in the procedural legislation and substantive regulation in the sphere of procedures for resolution of corporate disputes, namely:
- establishing a list of categories of corporate disputes pertaining to special jurisdiction of the arbitrage court;
- determining exclusive cognizance (to the respective arbitrage courts at the location of the respective legal person) of all cases regarding disputes between members of organizations as connected with participation in economic partnerships and societies; setting up the rule in accordance with which measures for providing for claims and applications in regard of the said requirements are implemented only by the arbitrage court at the location where the said legal person resides;
- setting up the rule on compulsory uniting into a joint judicial proceeding of closely interconnected requirements pertaining to one and the same corporate dispute;
- limiting of possibilities for introducing the respective securing measures (introduction of either the compulsory counter security for the non-property claims or individual measures exclusively in the course of the respective court proceedings);
- disclosure of information on the court proceedings, being prepared or initiated, as connected with such or other corporate dispute.
Should these proposals be practically implemented, they will make it much more difficult to use the said unfriendly tactics of company takeovers.
Besides, it is noteworthy that these proposals have already been reflected in the draft project of the Federal Law "On Introduction of Changes in the Arbitrage Procedural Code of the Russian Federation and Some Other Legislative Acts of the Russian Federation for the Purpose of Improving the Procedure of Resolving Corporate Disputes" (hereinafter called as "Draft Law") prepared with participation of the MERT Expert Council. The said Draft Law also provides for introducing in the RF CoAP of the respective measures of responsibility for violating the said clauses which, in turn, ensure the efficacy of the said norms (rules). It is particularly noteworthy that this Draft Law distinctly and precisely regulates the question on informational openness of economic disputes in the respective arbitrage courts for all those participating in the said disputes. It is exactly this clause that makes the corner stone in the "black" and "grey" schemes of property "seizure" and its efficient regulation at the legislative level will significantly strengthen the position of lawful owners in their struggling against "raiders", the more so because, in real practice, it is only from the resolution of the court produced that such owners of valuable assets not infrequently find out that the said asset does not belong to them any longer.
A significant novelty seriously limiting a possible range for using the current methods of unfriendly seizures and conducive to more orderly account of lawful owners' rights, can also be produced by measures in improving regulation of the respective accounting system of the securities market, namely establishing certain solidary responsibility of both the registrar and the issuer for the damage incurred to the owner of securities by illegitimate 418
actions of the said registrar. This given measure is deemed to be quite ripe and efficient since it does helps stronger material responsibility of the said registrar for the actions accordingly performed. In our opinion, its adoption will significantly increase the "cost price" of aggressive ways to seize such or other assets and, hence, cut down possibilities for their practical application. Other measures for improving regulation of depositaries and registrars have been formulated more generally which fact, therefore, does not allow for their critical appraisal.
Another rather important novelty is greater responsibility on the part of those in the governing company bodies, namely boards of directors and directors general, achieved through their initiative to abolish clauses of the Labor Code should a claim is presented in connection with compensation of damages caused by the respective actions of these bodies. So far, the Concept does not yet contain any concrete mechanisms in the form of conceptual formulations of the respective changes in the said Labor Code. Meanwhile, practical implementation of these initiatives makes it necessary to preserve the existing balance of interests between the plaintiffs concerned and the company in the person of the respective executive bodies for the purpose of preventing the law permitted freedom of actions limitations for the said executive bodies to perform their functions under constant threat of facing such claims. Particularly significant in this light appears to be a possibility of judicial disqualifying of the executive bodies members at the lawsuits of the company' owners which initiative is also provided for in the Concept. As to the mergers and takeovers sphere, practical implementation of the said measures is expected to help in cutting down the area of abuses by the "temporary" executive bodies which got their commanding positions in the result of their aggressive actions.
At the same time, however, it seems worth to cast doubts on implementation efficacy of one of the measures as suggested in the Concept, namely: "a member of the Board of Directors (the supervisory board, the respective collegial executive body) can not vote at any meeting nor on any resolution regarding the question in which this given person or a person with whom this given person is somehow connected, is materially interested or an obligation which contradicts or may lead to appearance of a conflict with the interests of the company in question". Since the company's Board of Directors is formed at the general meeting of the shareholders (in case of a joint stock society), it is the shareholders themselves who move forward such or other candidatures for approval. Thus it follows that, in accordance with the above interpretation, accusation in material interestedness of a member of the Board of Directors can be applied to any of them since, being proposed by the interested owner, such a member of the Board of Directors is connected materially with the interested person - a shareholder. In our opinion, in case of a corporate dispute, when the company's owners have opposite interests, this clause will enable initiating judicial claims practically for all disputable questions duly considered by the said Board of Directors.
An important initiative, quite ripe for practical use, is represented in the regulation procedures for mixed type reorganization of legal persons when different organizational and legal form economic subjects (non commercial organizations included) are involved in such reorganization. At present, such forms of reorganization are not permitted by the current legislation thus making the respective owners additionally do certain preliminary work for changing the said organizational and legal forms of the economic subjects under reorganization. This is but just an extra barrier fraught with unnecessary monetary and time expenses at that not at all compensated with any tangible advantages.
Of no less importance is the legislative regulation of relations as connected with the so called insider information as well as with measures to prevent its practical use by insid-
ers to the detriment of the third persons. The Concept's draft project does not contain any concrete description of directions in which this given question could be resolved. Hence, it seems more expedient to turn to another relevant document - Development Strategy of the Finance Market (DSFM) in the Russian Federation, prepared by the Federal Service for the Finance Markets in the year of 2005 (hereinafter called as "Strategy"). The given document is also compiled with the help of the Expert Council for Corporate Management set up under the said FSFM in April 2005. The FSFM itself have prepared the respective concept of the draft bill and is also planning to complete in the nearest future the law "On the Insider Information and Market Manipulation". The authors of this Strategy intend to develop special mechanisms for exposing violations of the law and calling to account for illegal use of insider information of civil servants. The Strategy also contains a number of concrete proposals concerning qualification of law violations in the field under consideration which are to be reflected in the said bill and seems to be quite effective, namely:
- making a deal by two or more participants of the trading in their own interests or in the interests of clients of two or more mutual deals, i.e. deals in which each of the participants in the trading, during a comparative short period of time and under the same market conditions, act both as the buyer and the seller of one and the same security. At that, the said deals do not have any economic sense either for one of the participants of such trading (or his/her client) or for both of the participants in this trading (or their client);
- repeated placing by a participant in the trading in his/her own interests or in the interests of his/her client of claims with either the greatest price for purchasing or the least price for selling in the result of which deals are concluded as leading to a considerable increase or, on the contrary, decrease in the price of the given security.
Noteworthy here are also two more quite ambiguous initiatives. The first of them concerns the principles of forming the respective documentation which puts this reorganization into the necessary formal shape. It follows from the Concept, it is necessary to legislatively strengthen the norm according to which when taking a decision on reorganization, the corresponding legal body is obliged to simultaneously approve both the general quantitative and the qualitative parameters of the rights and obligations (or the respective property complexes or their component parts) to be passed over from the legal person under the reorganization process to all the organizations being set up as a result of such reorganization. The said "novelty", at that, is explained by the fact that since the process of such reorganization can take months or even years, both the separating balance and/or the respective deed of assignment then actually do lose their due authenticity. It is, nevertheless, to be particularly mentioned here that certain changes are to be expected in the said quantitative and qualitative parameters as determined in accordance with the notion stated above, as well. Thus, this particular measure seems to be rather unnecessary and not at all any transforming the existing state of affairs in the area. In our opinion, there is no need to change such whatsoever. We think this is just a case when it seems possible to fix legislatively the clause that the said separating balance, which is approved together with the protocol of the general shareholders meeting where the decision on reorganization was taken, is subject to the second consideration and approval before the reorganization has been completed with due account taken of the corrective should there arise need in the latter.
The other initiative deals with fixing the creditor rights of the society to be reorganized on requesting pre-term performance of the obligations to them of such company being reorganized. The authors of the Concept suggest that the judicial order for such requesting be formally introduced. This novelty seems to be infringing upon the said creditor 420
rights because (as has been mentioned above) this "judicial order" is quite a long story during which certain suffering will befall not only the creditor himself but the company under reorganization as well. We think it quite natural if a temporary ban on such reorganization is put should this case becomes subject of the respective court hearing (before such or other verdict has been passed). In our opinion, it also seems expedient to preserve the present legislative level order when consideration of the creditor rights of the company under reorganization is brought not to the competence of the arbitrage court but rather to that of the respective self-regulating organization.
It is also noteworthy that the Concept a sort of "ignores" the necessity of legislative adoption of the norm in accordance with which, during the reorganization of a legal person, at least one legal assignee reserves for himself the licenses issued in the name of the said legal person being reorganized. This norm seems to be quite natural much owing to the fact that a lot of companies find themselves practically faced with such a problem (This can be well exemplified by the situation which was brought to life by joining the "Vym-pelKom - Region" OJSS to the "VympelKom" OJSS obviously connected with the risk to lose the respective license for providing the communication services by both companies which are among the leaders on the respective markets; in connection with this, the merger process of these two companies was significantly delayed). Another "omission" in the Concept is lack of proposals for determining sufficiently accurate list of the so called "affiliated persons". Absence of, for instance, close relatives - owners of the company in such a list may lead to certain divergences in the respective list of formal and real beneficiaries of the company and hence - the informational closeness of such companies. This has been clearly noted in the Strategy but with no any concrete recommendations as regards reforming the existing legislation as connected with this particular issue.
The analytical results of these given novelties permit the following conclusions:
- The Development concept of corporate legislation for the period of up to the year of 2005, should it be adopted and practically implemented, could become quite a positive step in putting in order and regulating the existing development sphere of corporate control over the situation. The main notions of this Concept, the respective remarks, proposals and amendments indeed taken into due consideration, could well become the basis for modifying the current legislation in the field.
- The most important and on the whole ripe initiatives of the Concept are issues of suppressing possibilities for unlawful seizures of economic subjects, legislative fixing of the necessity for informational openness of the companies as well as increasing the responsibility level of the respective executive bodies. Mechanisms of these given initiatives, as defined in the Concept, on the whole seem rather efficient from the view point of their practical implementation (provided due account has been taken of the above remarks).
There is a number of arguable questions in the Concept, namely:
- establishing the judicial control procedures over convening the extraordinary general meeting of shareholders by the owner having not less than 10 % shares at his/her disposal;
- ban on voting by a member of the Board of Directors as connected with a person having material interest in the issue to be voted. In case this norms has been adopted, it is necessary to concretely define the degree of such interaction between the said director and such interested person as well as sufficiently precise definition criterion of such interconnection;
- additional (apart from the above said separating balance and the deed of assignment) approval of quantitative and qualitative parameters of the companies' reorganization;
- the judicial order of creditor claims of indebtedness of the company under reorganization.
Two important questions have been omitted in the Concept:
- succession of licensing rights of the respective economic subjects which appear as a result of reorganizing companies having such licenses;
- lack of sufficiently distinct list of the affiliated persons as established at the legislative level.
Certain questions, as suggested in the Concept for preliminary court investigation, can be submitted for the resolving of the respective self - regulating organization. Be such a case, the principles of this organization's activities must be clearly defined in the said Concept (without any legislative fixing of its creation) while the initiative of such creation is to proceed from the respective executive power bodies of the state.
Special mention should also be made of other initiatives as connected with the regulation procedures in this given field of civic and legal relationships. In particular, it seems expedient to spare some time on one of the latest initiatives of the RF Ministry of Internal Affairs (RF MIA) in the field of regulating the corporate control market. In order to protect enterprises from possible unfriendly takeovers, the RF MIA prepared and directed to the Federal Taxation Service (FTS) a draft bill which provides for notary certification of the most significant events in the business life of the economic subjects. This bill will also be concerned, inter alia, with decisions taken by the respective boards of directors and/or general meetings of shareholders and connected with election of their executive bodies, reorganization and liquidation, increasing of the authorized capital and so on and so forth. In our opinion, except for significant complications in the process of documenting most important decisions, made by the said owners, for all legal persons without exception, this initiative simply can not any significantly tell on the efficiency of struggle against unfriendly takeovers because no full checking of legality of the respective documents prepared for duly notarization as well as the proxy of the persons who signed such, seem to be possible.
Finally, it is also necessary to mention practically the only legislative initiative which was later implemented in the year of 2005. On January 5, 2006, the RF President signed the Federal Law "On Entering Changes in the Federal Law "On Joint Stock Societies" and some other legislative acts of the Russian Federation (hereinafter called as the "Law"). This Law has become a result of a year and a half long discussion which took place with participation of the RF President's Administration, representatives of the RF State Duma, various investment funds. It was as far back as July 2004 that the RF State Duma considered, in the first reading, the draft bill moved forward by a group of deputies, including V. Ple-skachevsky, Head of the Duma Committee on Property, and V. Reznik, Head of the Duma Committee on Credit Organizations and Finance Markets. The basic assumption of this draft bill was: shareholder having 90 % plus 1 and more shares in the OJSS with over 1000 shareholders, can carry out compulsory redemption of shares from the rest of the shareholders for the price as confirmed by an independent appraiser. The bill caused a wave of justified criticism because the mechanism of estimation, proposed in it, could be leading to a forced sale of minority shares at an obviously lower price - the customer for the estimation service was the buyer of such shares. In the Autumn of 2004, a group of official representatives from various investment funds, certain international ones included, prepared a letter to the address of the RF President in which they expressed serious concern with the fact that the RF State Duma passed the said draft bill in this form in the first reading.
Apart from the above stated problem as connected with estimating the redemption price for shares of the minority shareholders, the said Law has quite a number of other shortcomings, namely: 422
- rather limited sphere of application - OJSS with over 1000 shareholders;
- too high a cut off threshold of the minority shareholders who can be forced to sell their package of shares - 10 % minus 1 share. It is to be remembered that the Federal Service for Finance Markets (FSFM) at the same time did suggest to use the said forced redemption only when the main shareholder has reached the quantity of shares threshold of 98 %;
- the low does not provide for the government control over vetting a fair price for which the redemption is effected.
Thus corrected draft Law, prepared by deputies L. Pepeliaeva and V. Piligin, was directed for the consideration of the RF State Duma in April 2005, and in the summer of the same year was already approved by its Committee on Property. In December 2005, the draft Law was approved by the RF Council of Federation, then, in January 2006, it was duly signed by the RF President. The essence of this newly adopted Law can be better understood through separate consideration of both its advantages and shortcomings.
The Law is aimed at cutting off the so called "greenmail" - a sort of corporate blackmail on the part of the minority shareholder who has only an insignificant package of shares but nevertheless uses his/her legal right to register claims on reimbursing damages inflicted on him/her by the top management of the company. Similar instances are not at all anything new for the respective practice in Russia. In the officially adopted version of the Law, the owner with 95 % and more shares (in the quantitative terms) is entitled to buying from the minority owners their shares for a just market price. It is to be noted here that most Western countries also have a similar legal norm in their respective corporate legislation in accordance with which redemption can be done in case 90 % to 98 % package of the company's shares is to be acquired.
The Law does reasonably define the principles of estimating the just price of shares. Thus, in case shares of the company are traded on the stock exchange, such "just price" is usually understood as the average weighted price for the given share during the last 6 (six) months. Otherwise, in case these shares are not traded on the finance markets, such price is determined by the respective independent appraiser but it can not be lower than the highest price at which the 95 % — th owner or his/her affiliated persons were buying these shares during the last 6 (six) months.
The Law also provides for the state control in determining the correct redemption price: the FSFM is entitled to suspend redemption should it any suspicions arise with regard to obviously lower redemption price when dealing with the prospect for such redemption which is duly sent to the said FSFM.
Normally, shareholders of the company mostly know about the appearance of any new large shareholder as when acquiring a package of shares, a physical or a legal person becomes the owner of 30 % or more shares of the company, such physical or legal entity is obliged to officially send the respective proposal on such redemption to other shareholders of the company. At that, if the initiator of such proposal is the said legal entity then such proposal must contain information on its owners as well. It is also quite noteworthy that we consider this particular change as exerting extremely positive impacts on the market of unfriendly takeovers by significantly limiting the scope of its effectiveness.
Along with adopting changes in the Law "On Joint Stock Societies", material responsibility of citizens, functionaries and legal persons is also provided for the violation of the respective regulations being introduced in the said Law. Similarly stipulated is the responsibility for the respective appraisers in case of a non objective estimating of the "just price" for the redemption of shares from the minority shareholders.
Viewing this adopted Law positively on the whole, we nevertheless think it worthy to specially note such a shortcoming in the corporate legislation of Russia as lack of any law with regard to the so called "affiliated persons". This situation permits manipulating with regulations of the Law on compulsory redemption by a large property owner formally having in his/her possession less than 95 % of shares. It is also noteworthy that the said Law enters into force beginning from July 1, 2006, so there is still some time to prepare and practically consider the draft bill on the above said affiliated persons the acute need in which has been long spoken much about both by representatives of the state power and by those of business.
4.8.3. Problems of Legislative Regulation of Competition and Monopolistic Activities on the Commodity and Finance Markets
One of more significant initiatives was preparing in 2004-2005 a draft project for the new version of the Federal Law "On Protection of competition" (hereinafter called as "Draft Law" which caused quite an ambiguous reaction. Three major blocks can be singled out in the changes with regard to the acting legislation:
- expansion and unification of civil rights objects (respective deals, provision of the state and municipal aid, etc) as regulated by the acting legislation on competition and monopolistic activities;
- specifying the definitions used in the field of protection of competition (as compared against the currently acting legislative norms), as well as defining certain procedural questions as connected with possible abuses in the regulated area in question;
- changing the threshold norms and values for some indicators which are considered as key ones for determining the dominating position on the respective commodity and finance markets, and require approval of the regulating executive power body or its timely notification as well as time-terms for formal appeals against decisions taken by the respective anti monopoly bodies.
One of the main system - forming novelties in the draft Law is that it is called upon to unite two currently acting federal laws - the RSFSR Law No. 948-I "On Competition and Limiting the Monopolistic Activities on the Commodity Markets", dated March 22, 1991 (with multiple changes and amendments) and Federal Law No. 117-FZ "On Protection of Competition on the Market for Finance Services", dated June 23, 1999 — into one regulative document.
Thus, should the new Law be adopted, the object of its regulation will become "relationships connected with protection of competition on the commodity markets and markets of financial services in the Russian Federation, prevention and suppression of monopolistic and unfair competition which are participated in by Russian and foreign legal entities, the Central Bank of the Russian Federation, the federal bodies of the state executive power, the state power bodies of the subjects of the Russian Federation, bodies of the local self-government, other entities performing functions of the said bodies of power or the respective bodies of local self-government bodies or organizations as well as physical persons and/or individual entrepreneurs" (Art. 3 of the draft Law). This novelty is not without certain economic sense because, from our point of view, it does contain absolutely correct and fully justified approach: application of unified regulation standards to all subjects of civil and legal relationships regardless of the branch and essence of the relationships entered into by all subjects of civil rights on the territory of the Russian Federation.
Another, no doubt, positive novelty contained in the said draft Law is, in our opinion, regulation of the procedure for providing state and municipal aid. Taking the norms regu-
lating the given sphere of the civil and legal relationships up to the federal law level with sufficiently detailed defining the rules for providing such aid, in our opinion, is leading to greater transparency and easier control over the targeted spending of the respective federal and municipal means. The only question as regards this section of the said draft Law which requires additional explanation, is establishing the threshold for such aid - not more than 5 % of the given economic subject's incomes for the previous year (in case this aid is provided neither to the R&D, nor to agricultural producers and the like - P. 3.1, Art. 16 of the draft Law). Unfortunately, the general aim of providing the said state and municipal aid, as worded in the draft Law, is not sufficiently distinctly formulated. Meanwhile, truly important seems to be just one goal - assisting further development of socially significant entre-preneurship initiatives and projects. At that, the investment requirements of business which, apart from purely economic aims, are targeted at the social result as well, can, to a considerable extent, exceed the said 5 % incomes threshold for the previous year with the overall significance of the project for the state being quite high. At the same time, however, such a threshold should indeed be set up for purposes of unification and retaining the equality factor for all beneficiaries of this aid. In connection with this, it is suggested to increase this said threshold minimum up to 10 %-15 % of the incomes received - the minimum tax load on the commercial organization (for instance, the unified tax rate for the imputed earnings in Moscow comprises 15 % of the imputed proceedings).
It is also noteworthy that according to the respective explanatory note to the draft Law, one of its obvious advantages is that should the new Law be adopted, a definite ban shall be imposed on combining functions of the economic subjects and the respective bodies of power. We can not agree to such interpretation as is contained in the said P. 3, Art. 7 of Law No. 948-I, i.e. the law currently acting at the present time as well, because this ban is also manifestly present in no less clear formulation.
The draft Law does distinctly define such kinds of monopolistic activities as coordinated actions of the respective economic subjects and coordination of economic activities by the third person, at that:
- coordinated actions of the respective economic subjects are such "actions of the economic subject on the commodity market the economic results of which corresponds to the interests of the given economic subject only if other economic subjects, whose sum total share on the given commodity market exceeds 35 %, act in the same way, and if such actions are leading or may be leading to barring, limiting or eliminating competition on the respective commodity markets and (or) impair interests of other persons" P. 17, Art. 4 of the draft Law);
- coordination of economic activities is "coordinating actions of the respective economic subjects by the third person not being part of any one group of persons with any of such economic subjects" (P. 18, Art. 4 of the draft Law).
While the acting legislation (Art. 6 of Law No. 948-I) defines "coordinated actions of the respective economic subject" rather essentially (even though somehow taken out of the context), the "coordination of economic activities" notion is actually a new definition and, essentially, provides for and regulates certain actions of the respective regulating body in finding and suppressing such activities. This norms is deemed as necessary since it does suppress certain actions of non-formalized holdings in their strive towards monopolistic activity. Besides, despite the fact that the coordination of economic activity definition is of a rather general nature it nevertheless does seem quite sufficient for finding any forms of abuses in this sphere and hence - efficient from the point of view of its practical application.
Some modification in the version of the said draft Law also undergone the understanding of a certain group of persons: conventionally expanded was the list of several economic subjects classifying mutual economic interests. Apart from those already existing in the respective current legislation, the following was also added to the list of such conditions: several persons have either concluded an agreement with each other or are performing a sort of coordinated actions which give these participants considerable technologic or trading advantages as against the other economic subjects on the corresponding commodity market which further improves the required understanding of coordinated actions of the respective persons (P. 21, Art. 4 of the said draft Law).
Certain initiatives, as represented in the said draft Law, seem to be rather controversial. In the first place, p. 4, Art. 6 of the draft Law - violation of the coordination of economic activity clause is understood as comprising a justification for liquidating the economic subject judicially. Since this preventive punishment is considered to be unnecessarily cruel, it seems expedient to replace this measure with certain penalty provisions in the first case with the respective liquidation sanction permitted only in case of repeated violations (two or more times in the course of three years). Secondly, the anti-monopoly body is entitled to put forward proposals to the respective licensing bodies with regard to withdrawing licenses from those violating legislation in the sphere of monopolistic activities (p. 20, Art. 20 of the draft Law). In our opinion, withdrawal of licenses is also somewhat too hard a form of regulation since the economic sense of licensing is not in any way connected with whether the licensee does or does not enjoy the monopoly position on the respective market. It is therefore advised that this given norm be totally excluded from the said draft Law.
We deem as particularly important initiatives defined in the said draft Law with regard to changes in certain threshold values which currently still exist in the Russian legislation as well as introduction of new threshold values.
As dominating recognized is position of the economic subject in question whose share on the market of a certain commodity exceeds 50 % (p. 11, Art. 4 of the draft Law); in Law No. 948-I, this value was 65 %. It is not at all simple to determine the threshold which it will be necessary to proceed from owing to the absence of sufficiently rich practical experience in applying the currently acting legislation to the area under consideration. Meanwhile, quite possibly, it is just because of lack of such practice in Russia that this currently acting higher threshold value has been determined.
This dominating position notion is introduced by the sum total share of several economic subjects on the market. Thus, the position of each of several economic subjects (except for financial organizations) is recognized as dominant if the following conditions are observed with regard to them: (1) the sum total share of no more than three economic subjects where the share of each of them is greater than those of other economic subjects on the given market, exceeds 50 %; (2) the sum total share of no more than five economic subjects where the share of each of them is greater than those of other economic subjects on the given market, exceeds 70 % (at that, this rule is not applicable if the respective market share in at least one of these economic subjects does not exceed 5 % - p. 11, Art. 11 of the said draft Law). Accordingly, the given norm can be related to both the second and the third of the above enumerated groups of novelties because the application sphere of the said draft Law involves not only the monopolistic but the oligopoly activities as well thus expanding the field of regulation covered by the said Law.
There have been some changes and significant narrowing of the range of deals in reorganizing the respective legal entities which require neither approval nor any notification of the anti-monopoly body. Thus, preliminary agreement of the said anti-monopoly body is 426
required by the deals as connected with the said reorganization of the legal entities (merger, joining, etc) if the summary earnings of these legal entities for the calendar year or the balance value of the respective assets for the last accounting period exceeds 3 (three) bln roubles (p.p. 1, p. 1, Art. 25 of the said draft Law). This novelty can be taken as positive because it does somewhat simplify and significantly reduces the time terms for practical implementing the reorganization procedures for small and medium size economic subjects. Notification by the respective anti-monopoly body is required for the deals concerned with reorganizing the legal entities whose similar sum total indicators comprise not more than 200 mln roubles (p. 2, Art. 25 of the said draft Law). The earlier threshold value in need of approval by the respective anti-monopoly body was 200 thousand MROD (Minimum payment for Labor Size), that for the respective notification - 100 thousand of MROD (Art. 17, of Law No. 948-I).
As to exercising control over acquiring rights for the shares in the respective economic societies, the Law stipulates that such an order of things be retained only with regard to the deals in the result of which the getter is for the first time given the right to be the boss of the blocking package of shares, the controlling packet of shares and the 75 % package of shares (Art. 25 of the said draft Law). At present, the necessary approval is needed in case 20 % of shares of the legal entity in question are to be acquired (Art. 18 of Law No. 948-I). This novelty is to be positively estimated too because the new threshold values are well justified from the economic point of view (it is primarily they that endow the new owner with different levels of authority with regard to the legal entity in question fully in accordance with the respective Russian legislation on legal entities).
It is in such formulation that the said regulation seems to be efficient because regardless of the quantity of shares being acquired, under control remains any changes in the owner's status of influence on the company in question and not just the quantitative parameters of such deals (the quantity of shares being acquired in a particular deal) which fact inevitably includes the deals that objectively become subject to such regulation, into the range of those regulated. However, in our opinion, even this formulation can be extended to cover the cases when part of the company's shares have already been redeemed and is taken into account in the balance sheet of the company itself. Subject to control in such a case are the deals in the result of which the property share in the company, with account taken of the respective correction factor as reflecting the relation of the new package of shares to that not yet redeemed by the said company itself, comprises more than 50 % to 75 %. For instance, if 5 % shares of the company belong to the very company and if that same company has not yet decreased its authorized capital by the sum of the shares redeemed, then the shareholder who increases his/her package from 40 % up to 49 % of the package of shares, in fact owns the controlling package of shares since all the other owners (except for the company itself) have at their disposal but only 46 % shares.
Besides, agreement of the anti-monopoly body, as per clauses of the said draft Law, is required for the payment of the authorized capital in shares of the finance organization in question strictly in accordance with the rules (size of the authorized capital of the respective financial organization) set up by the RF Government (p. 1, p. 1, Art. 25 of the said draft Law).
Another novelty here is that the time term has been significantly lowered in the said draft Law during which any decision of the respective anti-monopoly body can be appealed against in the court. The current legislation stipulates a three month term for such cases (p. 2, Art. 28 of Law No. 948-I) while the said draft Law stipulates but only one month for the court appeal against injunctions of the respective anti-monopoly body (Art. 32 of the
said draft Law). This particular novelty does not seem quite expedient because such a court appeal usually requires serious preparation and, as is to be expected, considerable time of the respective experts in plaintiff organization and hence - quite a sum of money. Moreover, should such preparation for the respective court hearing will lack the necessary quality, this fact may be leading to significant financial losses while there are not many evident advantages, it seems, to be gained from shorter time terms for the appeal procedures in the end result.
The said draft Law still retains one of the more disputable aspects, namely relating the unjustified reduction or complete stoppage of production of commodities which have consumer demand and/or concrete orders, accompanied with definite possibilities for their profitable production (p. 1, Art. 5 of the said draft Law), to the monopoly activity. It is undoubtedly necessary to ensure freedom of business activity for the economic subject in producing such or other commodity. Also, it would seem more reasonable to give up such definition of the said violation. Moreover, should this producer who chooses to give up production of such or other commodity (service, work), does nevertheless has at his/her disposal really unique factors of production, it is suggested to include into the said draft Law a clause on transference of these factors to the new owner, gratis, but on the competitive basis only.
Another rather disputable norm which is also still in existence in the current legislation, is the following: obtaining into ownership, practical use or owing by one economic subject (a group of persons) of the basic production means or non material assets of another economic subject, should the balance cost of the property making the subject of the deal (several interconnected deals) in question, exceed 10 % of the balance cost of the said basic production means and the said non material assets of the economic subject which alienating or transferring the property in question (p. 2, p. 1, Art. 25 of the said draft Law). At that, if we are, for such or other reason, not inclined to agree with the general meaning of this point in the said draft Law, then its universality can not be agreed with either. In our opinion, apart from a relative value - percentage of the organization's property cost, — it is imperative to set up the minimum cost of such property deals with which are subject to certain preliminary coordination with the respective anti-monopoly body. Otherwise, for instance, selling the office equipment being the property of a small auditing company to be liquidated, may be subject to approval on the part of the FAS. Besides, it is also suggested that excluded out of the list of deals subject to the said regulation, be selling of the buildings and other respective constructions not being directly related to the production activities of the legal persons taking part in the deal in question, because such deals, as we deem, can not in any way limit competition either on the respective commodity or the respective finance markets.
In conclusion, it is quite noteworthy that, on the whole, the said draft Law does correspond to the contemporary needs in regulating economic activities of the respective economic subjects of the Russian Federation since it makes it somewhat easier to set up unjustified administrative barriers when performing entrepreneurship activities, it regulates a number of economic functions, it distinctly enough defines the processes rather vaguely defined in terms of the respective legislative notions. This, inter alia, does somewhat simplify possibilities for proper administration in the protection of competition and monopolistic activities area. Nevertheless, to our mind, a number of shortcomings, as mentioned above, still remain which are subject to further and more detailed working out before the said federal law has been formally adopted.
4.9. The Housing Market of Moscow Region91
The first months of 2005 created a clearly unfavorable socio-economic background that exerted an adverse influence on the state of the real estate market. The conflict between business and state power encouraged the capital flight. There appeared projections of a downfall of prices for energy sources. The acceleration of inflation in January 2005, which has long become traditional for Russian economy, was further aggravated by the "monetization " of benefits that provoked mass street protests. As a result, savings and bank deposits were inflated.
However, the pessimistic forecasts have failed to come true. The oil prices continued to soar, while the population's discontent was gradually put out by growing allowances and pensions and a partial return to the in-kind and subsidized delivery of benefits, and freezing of the plans to spread the monetization on payments for the housing and communal services. As a result, a great amount of money was infused in the economy. The positive dynamics of Russia's socio-economic development have also had their effects. The distinctive features of Russia's economic development in 2005 that played a notable role in the dynamics of the real estate market were:
First, high oil prices that provided a considerable support to the economy on the whole and the real estate market in particular.
Second, there remained rather a stable rise of investment demand, which was backed-up by positive trends in the financial sphere (excessive liquidity in the banking sector and declining domestic interest rates, and a relative stability on the world debt markets).
Russia's rising investment attractiveness has become a key factor that drove the real estate market. Despite the noted capital flights due to the conflict between business and the state, both parties have gradually adjusted themselves to new conditions, which resulted in a gradual fall in the capital flight.
Third, the 2005 main targets in the financial area became curbing inflation to 8.5% and a moderate (at 8%) appreciation of the Ruble vis-à-vis the forex basket. However, the government has failed to reach both macroeconomic targets. According to the 2005 results, inflation accounted for 10.9%, thus being greater than the government had initially planned and not differing greatly from the 2004 level (11.7%). The average monthly nominal USD to Rb. exchange rate was fluctuating between 27.6 and 28.8 Rb./USD, with an upward trend in place, while the depreciation index of the USD vis-à-vis Rb. in relation to December 2004 made up 1.031. The average monthly Euro rate was on decline over the years from 37.3 to 34.2 Rb/Euro, while the depreciation index of the Rb. vis-à-vis Euro in December 2005 vs. December 2004 made up 0.915.
The general dynamics of the Rb. appreciation vis-à-vis foreign currencies and a fairly high inflation rate lay a critical role, as far as the real estate market is concerned. Housing has become one of investment instruments, which guarantees a fairly stable income level, while the stability of macroeconomic parameters only increases the attractiveness of such investment and gives positive signals to operators and customers on the real estate market.
Fourth, the consumer demand was on the rise in 2005 and it was backed-up by the soaring population's incomes and boom on the market for consumer credits.
91 In this section, we used the data of the research entitled "Rynok nedvizhimosti Moskovskogo regiona. Analiz razvitiya i prognoz na 2006 god" by "MIEL-Nedvizhimost" company (November-December 2005). The research team comprised: Sternik G.M., Lutskov V.M., Kazimir L.M., Logvina E.A., Mironchuk Ya. S., Ascheulova N.A., Korobkova M.V., Rzhavsky A.I., Krasnopolskaya A.N., Sternik S.G., Prokofyeva V.V., Shlelenko N. V.
The integrity of the aforementioned factors has changed both the aggregate effective demand on the market and the population's readiness to spend their savings. As a result, after nearly a year of a relative stability between the summer and autumn 2005 the real estate market in Moscow regions once again saw the rise in prices and demand.
4.9.1. The Secondary Housing Market
The rise in demand and prices on the secondary market for housing of the city of Moscow started in June-July 2005, followed by the same process in the Moscow oblast housing market since October 2005. In December 2005, the average proportional prices for Moscow apartments hit USD 2, 658/sq.m., and USD 1, 121/sq.m. in Moscow oblast.
Given that in the first half year the price rise rates in Moscow made up "inflationary" 1.0-1.5% a month, since July they grew up to 2.0-2.5%, followed by 4.5-5.5% reported in September through December, which speaks of a sudden rush demand. In Moscow oblast, the prices had been practically stalled, with up- and downward fluctuations accounting for 07.-0.8% a month. September 2005 saw a 1.2% increment of the average proportional price, which was further proved by the further rise in October, November and December (at 5.2, 3.1 and 7.2%, respectively) (Fig. 14).
$/sq. m 3000
2500 2000 1500 1000 500
♦ Moscow Moscow Oblast
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Fig. 14. The Dynamics of the Average Proportional Offer Price of Apartments in Moscow and Moscow Oblast between 1990 and 2005
In the second half 2005 the average proportional offer price for apartments on the secondary market for housing in Moscow grew by 26.9%, while with account of the price rise of the first half of the year - by 7.3%.
By results of 2005 the housing prices in the city of Moscow grew by 36%, which is lower than the respective 2003 index (46.9%), but over 1.5 times greater than the 2004 annual increment rate (21.4). The nominal price index vs. December 2003 grew by 1. 651 and 2.425- vs. December 2002. In Moscow oblast, the 2005 housing prices grew by 23.5%, which became slightly different from the 2004 results (21.4%), but notably lower the respective index of 2003 (33.8%) (Table 10).
Table 10
The Dynamics of Increment Rates and Housing Offer Price Growth Rates in Moscow Between 2002 and 2005 (December)
Moscow Moscow oblast
Month, year The average proportional price for apartment (offer), as USD/ sq.m. Growth index relative to the basic period (nominal) Increment rate (relative to the prior period), as % The average proportional price for apartment (offer), as USD/ sq.m Growth index relative to the basic period (nominal) Increment rate (relative to the prior period), as %
12.2002 1096 1.0 - 559 1.0 -
12.2003 1610 1.469 46.9 748 1.338 33.8
12.2004 1954 1.783 21.4 908 1.624 21.4
06.2005 2095 1.911 7.3 954 1.707 5.1
12.2005 2658 2.425 26.9 1121 2.005 17.5
12.2005* 2658 2.425 36.0 1121 2.005 23.5
* - values that characterize the December 2005 increment vis-à-vis December 2004.
Just a reminder, the consumer prices showed a 10.9% rise in 2005. The USD average nominal rate in December 2005 was 28.81 Rb. vs. 27.92 registered a year earlier. Hence, the Rb.-to-USD depreciation index made up 1.031 in 2005. Accordingly, the 2004 USD inflation index in Russia accounted for 1.076. Thus, the USD continued to depreciate in Russia last year, albeit the rate of decline of its purchasing power decelerated notably (some 7% vs. 15% in 2004).
As for the index of real (cleared from inflation of both the Rb. and US) housing prices (the IGS index)92, its 2005 value vs. its respective value of 2004 made up 1.264 for Moscow and 1.148 for Moscow oblast. Thus, the year of 2005 repeated the 2003 situation, when both nominal and real housing prices in the city of Moscow had demonstrated a greater pace of growth than those in Moscow oblast, while in 2002 and 2004 the growth rates of the indices in both Subjects of RF were roughly equal.
Since early 2004 the secondary market for housing in the city Moscow and Moscow oblast demonstrated a fairly steady rise of volumes of offer of apartments, which can be easily attributed to the stagnation of prices and fall in the market turnover. The tendency was in place until March-April 2005, except for January, when the fortnight-long Christmas holidays resulted in the contraction in the population's business activity and affected the aggregate volume of apartments on sale. The tendency reversed in March-April and the number of flats offered on the secondary market began to fall: from the monthly offered 30,000-35,000 in the city of Moscow to 9,000-11,000 in Moscow oblast to 17,000-20,000 and 7,000-8,000, respectively.
This change can be explained by two causes:
- a growing rate of apartments withdrawn from the market (primarily, due to sales, as well as withdrawals from sales); and
- maintenance of the rate of putting apartments for sale (the monthly number of apartments newly put for sale in the city of Moscow is stable and accounts for 8,00010,000). It traditionally declines in December.
The decline in the offer volume against the rising demand in turn triggered a further rise in price growth rate.
92 The IGS index is computed according to the formula: IGS=Ihp/Icpi=Idp/Idi, where Ihp - the Rb. -denominated housing price, Icpi - consumer price index, Idp - USD-denominated housing price, Idi = Icpi/ Idrb - the USD inflation rate in Russia (vs. the dynamics of consumer prices), Idrb - index of the Rb depreciation vs. USD.
If the rates of sales of apartments remain unchanged, one should expect a rise in the volume of their offer, thanks to an additional putting of apartments on the market, only with a 3-6- month lag, when their owners and sellers realize the new situation and discontinue to anticipate a further price rise on the market.
The dynamics of sales volumes of apartments on the secondary market in the city of Moscow and Moscow oblast proved to be in many ways similar to the dynamics of their offer. Because of the growing demand, the turnovers on the Moscow oblast secondary market for housing began to grow in the 2nd-3rd quarters (Fig. 15).
on the Secondary Market for Housing of the City of Moscow and Moscow Oblast
in 1999-2005
The annual turnover of the Moscow city secondary market for housing reached its peak in 2003 (87.53,000 apartments, the 12.4% increment) and consequently plunged to 77.600 (the 11.3% fall). In 2005, the turnover made up 82.38,000 apartments (6.2% up) (Fig. 16).
Thus, the progress in the macroeconomic situation in the country has led to a rising effective demand on the real estate market in Russia's capital. The rise in the turnover on the secondary market for housing and prices for apartments that started between the summer and autumn 2005 fueled the "washing out" of objects and contraction in the offer volume, which in turn triggered the further price growth rates.
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Fig.16. The Annual Volume of Apartment Sales on the Moscow City Secondary Housing Market in 1994-2005
4.9.2. The Primary Market for Housing
The main factor underlying the state of the primary market for housing in the city of Moscow and Moscow oblast became volumes and growth rates of house building. Different sources provide somewhat confusing data (Table 11).
Table 11
Volumes of Placement into Operation of Housing in the City of Moscow and Moscow Oblast in 2000-2005
year
By Moscow-headquartered construction companies in and outside Moscow (according to the Rosstat data)
By the city ofMoscow (according to the Rosstat data)
In Moscow (according to the Moscow Mayor's office)
By Moscow oblast (according to the Rosstat data)
Sq.m. Thos. As % to the prior year Sq.m. Thos. As % to the prior year Sq.m. Thos. As % to the prior year Sq.m. Thos. As % to the prior year
2000 3530.2 104.8 3342.3 109.5 33342.3 2610.9 95.7
2001 3821.5 108.3 3690.6 110.4 3706.1* 110.9 2827.8 108.3
2002 4469.6 116.9 4274.1 115.8 4310.9* 116.3 3414.8 120.7
2003 4703.2 105.2 4443.0 103.9 4441.9* 103.0 4136.4 121.1
2004 4794.7 101.9 4578.6 103.1 4576.8* 103.0 5738.2 138.7
2005 5224.1 108.9 4644.3 101.4 4644.3 101.5 5271.4 91.9
* - built in the city of Moscow by local construction companies; on 2001 the volume of newly built housing is estimated at the level of 3824,9 Thos. sq.m., accordingly the growth rate vs. 2000 r. roughly makes up 114.4%.
Source: Rossiysky statistichesky ezhegodnik. 2004: Statistics collection./ Rossta, M., 2004, p. 463; Investitsii v Rossii 2003: Statistics collection. / Rosstat, M., 2003, p. 163, 165; Investitsii v Rossii. 2005: Statistics collection. / PoccraT, M., 2005, p. 256, 258; www.mos.ru; Sotsialno-ekonomicheskoye polozhenie Rossii , 2005 god, M., Posstat, p. 365-366, the authors' computations.
Notwithstanding the above, it is possible to consider main trends. The volumes of placement of blocs of apartments in the territory of the city of Moscow have recently been on the rise and accounted for over 4.6 mn. sq.m. in 2005 alone. Meanwhile, all the sources
0
are unanimous in concluding that the growth rates of volumes of house building were clearly fading. The 2002 record-breaking increment (a. 16%) was changed by moderate (3-4%) rates hence. The 2005 increment rate of placement housing in operation proved to be yet more modest (some 1.5%). The aggregate performance results of construction companies that headquarter in Moscow and work both in the city and other regions are greater (9%). Notably, while between 2001 and 2004 the volume of their operations outside Moscow accounted for just 4-6%, the respective 2005 index made up over 11%. As for a vice versa phenomenon, construction companies that base in other regions practically did not contribute to house building in the capital in 2003-0493.
In Moscow oblast, since 2001 the growth rates of volumes of house building were steadily greater than those in the city of Moscow. In 2004 they grew by nearly 38% vs. 2021% reported in 2002-03. In 2004-05 the absolute volume of placement of housing in operation in the Oblast (in sq.m. equivalent) became greater than the respective Moscow city indicator, which has never been occurred before.
However, it should be noted at this point that starting from 2004 a drastic rise in annual volumes of house building, according to Mosoblastat and Rosstat, can be partly attributed to the transition from the accounting of the volume of house building by enterprises of the Oblast construction complex to the accounting of volumes of placement of new housing in operation in the region's territory by all the developers, including those headquartering in the capital. The latter appears adequately corresponding to the 2005 Rosstat data according to which the Moscow-headquartered building companies practically doubled the share of housing put into operation outside the city. Nonetheless, the volumes of placement of housing into operation in Moscow oblast plunged last year by 8% vs. 2004. That occurred for the first time over the past five years, and the causes for the drop will be highlighted below.
Let us briefly focus on the structure of the newly built housing94 (Tables 12 and 13).
Table 12
Volumes and Structure of Placement into Operation of Housing, by Types of Houses, in Moscow between 2002 and 2005
year Total, as sq.m. Brick Panel Monolith Cot- tages/townhouses
Thos. sq.m. Thos % sq.m. Thos % sq.m. Thos % sq.m. Thos %
2002 4469.6 88.6 2.0 2555.8 57.2 1785.0 39.9 40.2 0.9
2003 4474.4 88.7 2.0 2558.5 57.2 1786.9 39.9 40.3 0.9
2004 4597.4 45.6 1.0 2549.4 55.4 1965.6 42.8 36.8 0.8
2005 4700.0 94.0 2.0 1696.7 36.1 2876.4 61.2 32.9 0.7
Source: Mosgorstat, the authors' computations.
In Moscow, in 2002-04 over half of all the housing placed into operation fell on panel houses, while some 40% - on monolith ones. The proportion of the latter began to grow yet in 2004 (a. 43%) and, according to preliminary estimates, should rise drastically up to 61%. The proportion of panel houses fell down to 36%, while the other two categories of houses (brick and cottages) have not ever played a significant role in the aggregate volume of placement of housing into operation and their proportions accounted for 2% and
93 According to the Moscow Mayor's office, the 2001-02 volumes of placement of housing in operation in the city by local construction companies was greater than the Rosstat's respective aggregate indicator, which can be explained by deficiencies and inaccuracies in the respective accounting procedures.
94 According to the Moscow city government, in 2001-2002 volumes of placement of housing into operation by the local construction companies were greater than the aggregate housing placement indicator provided by Rosstat, which can be explained by defects and inaccuracies of the erspective accounting.
under 1% of the built volumes, respectively. Let us note that the value of placement into operation of monolith and brick housing showed nearly 1.5 and 2 times growth, respectively, in 2005 against a fall in placement into operation of panel houses and townhouses.
In Moscow oblast, in 2004 construction companies put into operation 3.23 mn. sq. m. of general area of blocs of apartments and another 2.44 mn. sq.m. - of individual houses. In 2005, the respective volumes slid to 2. 78 mn. and 2.27 mn., accordingly. Thus, the intensity of the fall in the volumes of placement of blocs of apartments into operation (nearly 14%) was twice as high as that of the volumes of individual construction (a. 7%).
Table 13
Volumes and Structure of Placement into Operation of Housing by Types of Houses in Moscow Oblast in 2002-2005
year Total, sq.m. Blocs of apartments Individual construction
Thos. sq.m. Thos. % sq.m. Thos. %
2002 3414 1783 52.2 1631 47.8
2003 4136 2022 48.9 2114 51.1
2004 5671 3231 57.0 2440 43.0
2005 5048 2776 55.0 2272 45.0
Source: Mosoblstat, auhtors' calculations.
The data of Table 13 evidence that in 2002-05 the structure of placement of housing into operation in Moscow oblast remained relatively stable, with more than a half of it falling on areas in blocs of apartments, while the rest - on individual construction. The sole exception became the year 2003 when the share of the latter accounted for 51%.
According to the announced preliminary plans for 2006, the volume of house building in the city of Moscow should remain at the prior year's level and account for 4.7 mn. sq.m. In Moscow oblast, it should be somewhat greater and reach 5.2 mn. sq.m. However, the probability of that is small, as evidenced by some statements made by representatives of the city and oblast governments.
The causes for contraction in the volume of new house building lie primarily with the consequences of the 2004 crisis on the market for new houses. The crisis triggered a customers outflow, reduction in volume of funds controlled by developers and their possibilities to continue construction, and the need to repay earlier disbursed to them loans. Plus, in the first half of 2004 Russian banks experienced the decline in their liquidity and, accordingly, they opted for reducing volumes of crediting the developers. All that brought many construction sites to a halt and got developers go bankrupt. While the processes are selective, that, nonetheless, battered volumes of construction and placement of housing into operation.
The situation was aggravated by provisions and standards of the new Town-Planning Code and the federal statute "On participation in the mutual construction of blocs of apartments and other real estate objects and on introducing amendments to some legal acts of the Russian Federation" No. 214-FZ of December 30, 2004) effective as of April 1, 2005. Aimed at regulation and development of market relations in the sector, as well as protection of both the developers and population's rights, these statutes pursue a long-term goal of giving a significant boost to growth rates of the house building and volumes of offer on the market, which should exert a constraining influence on the dynamics of the housing prices. However, the immediate effect from their adoption became deceleration of the construction process and disorganization of the developers' operations.
The law is clearly biased towards protection of interests of participants in the mutual house building and penalties and fines terms therein appear overly high. Upon canceling a
contract in unilateral order, a private investor would receive the actually paid money plus such penalties and fines that would bring him another 30-40% in interest. Thus, a unilateral cancellation of contracts under alleged pretexts for the sake of profit may mature into a real business. By contrast, the developer may cancel a contract with a participant that has failed to honor, or who unduly honor his obligations as per the contract only by appealing to the court of law.
Participants in mutual construction are pawnbrokers of a part of the mortgaged property. Banks may not possess the mortgaged mass as a whole, while crediting the mutual construction. If the developed fails to repay the loan, the bank cannot satisfy its claims at the expense of the real estate. This is one of the reasons for banks discontinuing to disburse loans to developers, while the other one is the joint responsibility of the developer and the creditor institution before participants in mutual construction.
Developers will be able to attract credits and loans only against their fixed assets or other liquid assets, which is affordable only for large developers who have a credit record and may mortgage the company's other assets. Large construction companies can fund their construction projects in full or to a great extent without attracting individual participants' funds., while smaller-sized companies are compelled to refuse them and seek banking loans under a fairly high interest rate (up to 25% annualized). All this leads to the situation in which they find themselves incapable to carry out profit-making construction operations and consequently go bankrupt.
The above negative processes and factors made financing of future projects practically impossible. Whereas the new statute tightened procedures and conditions of conclusion of contracts under which the rights for apartments in currently built houses are purchased, today developers no longer conclude agreements on mutual participation in the construction of new objects. Rather, they are keen to sell objects the permit on the construction of which was received prior to April 1. On the other hand, apartments in "newly built" houses have not been put on sale as yet, while the start of construction of some objects was put off, because of the absence of the respective permit.
The companies that cannot fund their construction operations due to various reasons, dodge the statute in question using alternative schemes of attraction of investments. The most popular dodges are a promissory note-based scheme and the one that implies conclusion of a real estate sale/purchase agreement. The promissory note-based scheme implies conclusion of a contract in which technical characteristics of an apartment, its cost and terms of registration are stipulated, but not a single word of the parties' financial obligations. Upon its conclusion the developer issues a promissory note in exchange for cash invested. The cost of the paper equals the cost of the apartment. The defect of the transaction is that there is a risk that the court of law will recognize it (for instance, on the statement of a competent government body) as a fake deal, i.e. the one that camouflages a mutual construction contract. According to a sample of the preliminary contract, there should be stipulated an obligation to conclude an agreement upon completion of the construction. Under such an agreement the developer may not receive cash funds, for it will be stipulated therein that a certain agreement under which the payment shall be effected will be concluded in the future.
It should be noted that banks will not ever support alternative schemes of attraction of investors if there arise risks of the court of law recognizing a given scheme as falling under the jurisdiction of the statute on mutual construction, or if there arise negative legal risks. The scheme will eventually batter developers and investors. Most likely, there will occur a growth in the proportion of developers that would not attract mutual participants'
cash at the stage of construction, but who would be selling real estate objects upon completion of their construction.
The amendments to the noted Statute underway (the replacement of the provision of the bank's joint responsibility with introduction of insuring terms and conditions of the contract, introduction of the developer's obligation to issue the mutual participant with documentation on the building in which he invests his money, which does not constitute commercial secret, granting the developer with the right to cancel a contract with the participant in the event the latter fails to follow payments deadlines)95 seem to lift the developers' and banks' burden, but, regretfully, they appear dispersed across confusing packages of proposals, have failed to pass through the necessary discussion procedures and even if they are enacted, the current situation would last, at least, for another half-year to year. Meanwhile, the legally set requirements to the developer to demonstrate a good credit record and the absence of debts are still there.
The situation is further aggravated because of the tsunami of scandals that involved developers. The city of Moscow and Moscow oblast have recently witnessed street protests of those who suffered from unscrupulous constriction companies' misdemeanors. Having entrusted their saving to such companies, private investors demanded not only to compensate for the losses. Rather, they sought the authorities' interference with the situation on the construction market and forewarned of the threat of emergence in the society of a new socially abused citizens - that is, cheated mutual investors as legal heirs of those cheated by the notorious financial pyramids of the mid-1990s. Overall, the construction of as many as two hundred blocs of apartments was frozen in the capital and the Oblast. According to Mr. A. Panteleev, the Oblast Vice Governor, the sum of contracts of cheated investors in Moscow oblast accounts for USD 240 mn96.
The Moscow attorney's office instituted legal proceedings against heads of a number of construction companies that failed to honor their obligations before the investors. According to the Moscow oblast attorney's office, it instituted legal proceedings against heads of 23 construction companies and local authorities that in many cases entered into bilateral contracts with legal entities and attempted to cover unscrupulous developers.
Authorities in both Subjects of RF try to find a solution by re-assigning the rights for construction to decent developers who will complete the works at their own expense. They have been promised various benefits for that. The Moscow Mayor's office established a Commission on examination of implementation of investment projects on housing construction that assumed control over the situation on the market for newly built housing. The Mayor and his team gave public promises to organize completion of currently frozen construction projects and started canceling contracts with previous investors and attracting new ones. In some cases, houses will be built using the budget funds. The prospects for remedying the situation in Moscow oblast appear less certain.
Such a situation resulted in an outflow of buyers from the market for newly built houses. They partially switched to the secondary market and partly to objects whose developers and brokers had not stained their good names (even unintentionally) with such situations. Consequent upon the above became the situation that starting from the 2nd quarter 2005 the number of objects (newly built houses) for sale began to fall. The volume of offer on the market for newly built houses in the city of Moscow in the 4th quarter 2005 made up 74% of the respective level of 2004.
95 Teper prizhmut grazhdanina?//Kvartirny ryad, 26 January-1 February 2006, No. 3(574), p. 8.
96 bez kvartir ne ostanutsya, uveryaet podmoskovnoe nachalstvo// Kvartirny ryad, 26 January-1 February 2006, No. 3(574), p. 3.
Caused by changes in the law, the contraction in offer in the primary housing market in turn also drove downward the number of objects offered on the secondary market, for because of the fall in offer on the primary one, buyers switched their demand (both the delayed since 2004 and current ones) to the secondary market. The process was complemented by realtors buying apartments for the sake of creating their own reserve, as well as the noted scandals that involved unscrupulous developers. As a result, the fall in offer on the secondary market in the 4th quarter 2005 vis-à-vis the 4th quarter 2004 was greater (nearly 40%) than on the primary one (26%)97.
The volume of offer on the Moscow oblast market for newly built housing also began to slide since the 2nd quarter 2005, while yet in the 4th quarter 2005 it was still greater than its respective index of the 4th quarter 2004 (lacking liquidity, developers put all their stock on sale). However, as early as between August and September 2005 Moscow oblast began to witness Moscow-based realtor companies buy apartments there. In parallel with that, in the 4th quarter 2005 vis-à-vis the 4th quarter of 2004 the volume of offer on the Oblast secondary market fell, too, albeit at a pace slower than that in the capital (at 13%).
Thus, it can be reckoned that the offer volume of apartments on the primary market in the city of Moscow and Moscow oblast has been declining for three straight quarters against a great demand for housing and today there is a great gap between offer and demand.
According to the 2005 preliminary estimates, the Moscow city turnover of the market for newly built housing in sq.m. Thos. equivalent exceeded the 2004 index by 2.3% against a 5.4% fall of it in Moscow oblast. It should be emphasized that the noted turnovers of the primary market were computed proceeding from the above data of volumes of construction of blocs of apartments in the capital and the Oblast, less the share of the city and local authorities that use received living area to satisfy the needs of all categories of those who are to receive free housing under the social programs. In the city of Moscow, only slightly over 50% of the newly built housing becomes available on the open market, which is why to compute turnovers of the primary market we deducted the following proportions: for the city of Moscow - 45%, and 12% for Moscow oblast (averaged across its towns).
As concerns price levels on the primary market, in the 4th quarter 2005 the average specific offer price in newly built houses in the city of Moscow was USD 2,330/sq.m. (3.5% up vs. the 3rd quarter 2005 and 14.8% up vs. the 4th quarter 2004. In Moscow oblast, the respective index in the period in question accounted for USD 895/sq.m. Meanwhile, the price rise index in the Oblast was notably greater than that in Moscow (+10.4% vs. the 3rd quarter 2005 and 19.2% vs. the 4th quarter 2004).
Thus, the last year's crisis on the real estate market coupled with the banking mi-crocrisis triggered some decline in the volume of construction and placement of new housing into operation. The process is intensified by short-term effects from the aforementioned Statute on participation in mutual construction. In addition, numerous scandals between developers, local administrations and private investors have resulted in the outflow of buyers from the "problematic" construction projects to successful ones and, partially, to the secondary market.
Summing up the above, one can state that the main tendency on the real estate market as a whole in the second half 2005 was price rise and decline in the offer volume against the backdrop of a great activity of the market. The buyers realized that real estate prices were not going to collapse, nor they were going to decline, while the government
97 At this point, it is worthwhile noting that a direct comparison of newly built housing and the number of apartments is to some extent conditional.
was not going to artificially control them. The year-long "wait-and-see" period has been over. The rise in the population's activity that started between May and June was accompanied by growing turnovers on the housing market, which resulted in washing objects out of the market, emergence of shortages, and further acceleration of the price rise rates.
These processes on the primary market were aggravated by falling volumes of construction and placement of housing into operation. Since September 2005 a cautious rise of activity and prices has also covered the market for outskirts housing. By contrast, the market for office space lease still finds itself at the stage of fluctuation stability with a tendency to an insignificant rise in the lease rates.
4.9.3. Housing as a Priority National Program
The nomination by the country's leadership of the problem of provision of housing a priority national project has become a pivotal event of 2005.
Despite an insufficient financing, the house-building sector has been displaying an impressive progress over the past five years (Table 14).
Table 14
Placement of New Houses into Operation in Russia between 1999 and 2005
Growth rates, as, %
year Sq.m. mn.of general area --—:— . „ „„„^
To the prior year_To 2000_
1999 32.0 104.2 105.6
2000 30.3 94.7 100.0
2001 31.7 104.6 104.6
2002 33.8 106.6 111.5
2003 36.4 107.7 120.1
2004 41.0 112.6 135.3
200 5_43.6_106.3_143.9_
Source: Rossiysky statistichesky ezhegodnik. 2004: Statistics collection./ Rossta, M., 2004, p. 463; Investitsii v Rossii 2005: Statistics collection / Rosstat, M., 2005, p. 256; Sotsialno-ekonomicheskoye polozhenie Rossii , 2005 god, M., Posstat, p. 365, the authors' computations.
As evidenced by the data of Table 14, after hitting the historical minimum in 2000 (30.3 mn. sq.m.) in the modern Russia's history, the placement of new housing into operation began to grow hence. As a result, in 2005 it accounted for 43.6 sq.m. mn., or at 44% more than in 2000.
Notwithstanding the results, they should not be overestimated. The economic crisis of the 1990s resulted in a considerable decline in the volumes of housing construction and intensified yet a great degree of dissatisfaction of the country's population with their living conditions. To merely reproduce the housing fund, the country has to place into operation not less than 90 mn. sq.m. annually, while to catch up with the European standards, some 200 mn. sq.m. annually is needed. The real dynamics of placement of housing into operation falls short of securing even a half of the much-needed volumes and in 2005 it roughly accounted for 71% of the pre-reform volume of housing construction (61.7 mn. sq.m. reported in 1990) and was smaller than the respective 1970 index (58.6 mn. sq.m.).
One of manifestations of Russia's uneven economic development in territorial terms became a considerable rise in the level of concentration of house building in the capital area (Table 15).
Table 15
Volumes of New Hauses in Russia, Moscow and Moscow region
between 1999-2005
Across Russia as a whole(according to Rosstat)
By the city of Moscow (according to Rosstat)
Across Moscow oblast (according to Rosstat)
By Moscow and Moscow oblast, total
year Sq.m. Thos. Sq.m. Thos. As % of placement across Russia as a whole Sq.m. Thos. As % of placement across Russia as a whole Sq.m. Thos. As % of placement across Russia as a whole
1999 32017 3052.5 9.55 2728.6 8.5 5781.1 18.05
2000 30296 3342.3 11.0 2610.9 8.6 5953.2 1 9.6
2001 31703 3690.6 11.65 2827.8 8.9 6518.4 20.55
2002 33832 4274.1 12.6 3414.8 10.1 7688.9 22.7
2003 36449 4443.0 12.2 4136.4 11.3 8579.4 23.5
2004 41040 4578.6 11.15 5738.2 14.0 10316.8 25.15
2005 43609 4644.3 10.6 5271.4 12.1 9915.7 22.7
Source: Rossiysky statistichesky ezhegodnik. 2004: Statistics collection./ Rossta, M., 2004, p. 463; Investitsii v Rossii 2005: Statistics collection / Rosstat, M., 2005, p. 256, 258; Sotsialno-ekonomicheskoye polozhenie Rossii , 2005 god, M., Posstat, p. 365-366, the authors' computations.
The specific weight of housing built in Moscow after 1999 did not sink below 10% of the placement of the newly built housing into operation nationwide. It reached its maximum in 2002 (12.6%), while the value of the index began declining between 2003 and 2005. However, the specific weight of housing built in Moscow oblast continued its permanent rise and after exceeding 10% in 2002, it hit the peak value (14%) in 200498. It was only last year that the proportion of housing placed into operation in Moscow oblast slid to 12%. As a result, the aggregate specific weight of housing built in the city of Moscow and Moscow oblast together was on the rise unbtil end-2004. Given that the 1999 share of the capital region in the volume of housing put into operation nationwide accounted for 18%, in 2001 it grew up to 20.6%, while in 2004 - up to more than one-fourth. The index sunk slightly in 2005 - down to 22.7%. For reference, in 1980 the city of Moscow and Moscow oblast together held less than 11% of the total volume of housing built nationwide, in 1990- the meager 7.5%, while in 1995 - under 12%.
To solve the challenges in the housing sphere, the government proposed the "Affordable and comfort housing - to Russia's citizens" program. In September 2005, the RF President included it into the set of priority national projects.
Its principal organizational and financial engine should become the updated and recently adjudicated Federal Targeted Program "Zhilische" ("Housing"), with the volume of funding between 2006 and 2010 worth a total of a. Rb. 640 bn. The Program provides for development of house building, engineering and communal infrastructure, provision of the "social" housing and fulfillment of the government obligations on provision of individual categories of citizens with housing, as well as stimulation of the market for housing and mortgage to the population. The updated version of the program provides for the doubling of volumes of placement of housing into operation by 2010, up to 80 mn. sq. m.
Overall, Rb. 213 bn. is provided for the project implementation in 2006-07, including 146.1 bn. to be allocated from the federal budget and 66.8 bn. - from regional and local budgets. Notwithstanding the impressions such figures make, the bulk of them is formed by government guarantees of loans that can be utilized only in the event other participants in the program fail to honor their obligations. Another main avenue of the program shall
It should be remembered that a drastic rise in the annual volumes of house construction in Moscow oblast since 2004 is partially explained by the transition from the accounting of volumes of construction by the Oblast construction companies to the accounting of the volumes of placement into operation in the region's territory of housing built by all developers.
become a financing of development of land sites designated for house building, installment of communications (in 2006, Rb. 13 bn. is to be earmarked shortly from the federal budget), including subsidizing interest rates on loans to provide the construction sites with engineering infrastructure, provided the volume of allocations from the federal budget does not exceed the respective appropriations from the regional and local budgets.
Whereas under a great demand for housing the majority of the population's effective demand is fairly low, the government has developed a series of measures to give it a boost, including:
- increasing the affordability of housing by means of an alternative housing purchasing program, using the population's own savings, housing loans, savings systems, and budget subsidies;
- boosting the volume of mortgage. In 2006 alone as much as Rb. 20 bn. should be allocated for this purpose with a projected subsequent rise to 415 bn. by 2010, which should roughly equal 1 mn. of loans;
- implementation of the 'Young Family" program. The program provides for subsidizing the first instalment. In 2006-07hosuing loans should become available to between 6 and 15% of young families, while 110,000 of them are to enjoy an opportunity to improve their housing conditions (there were only 2,000 of them in 2005). Given that the 2005 budget provided for allocation of Rb. 550 mn. for the support of young families, the 2006 budget provides for Rb. 2.1 bn., while the 2007 one - 5.3 bn. (including 4.3 bn. in subsidies to young families and 1 bn. - on insuring mortgage for young families). In the city of Moscow, the local program entitled "Affordable Housing to the Young family" contains plans to increase the volume of house building from 200,000 sq.m. in 2005 to 270,000 sq. m. in 2006, with a further annual increment of 100,000 sq.m. over subsequent years;
- fulfillment of the government obligations before individual categories of citizens. The federal targeted program known as "The State Housing Certificates" (SHC) became effective yet in 1998 and it provides for allocation from the budget of free subsidies payable to the military and other categories of l'gotniki to purchase housing. However, an insufficient efficiency of the program (associated with a low pre-set projected cost of sq.m.)99 resulted in the situation in which, according to the RF Defense Ministry, 160,000 offcers' families experience problems with housing. That is why authors of the SHC program paid a special attention to making certificate secured by cash. A considerable funding (Rb. 10 bn.) has already been allocated from the federal budget to make the program a success.
Despite the fact that the launch of the program was scheduled for January 2006, it should bring the first fruits in the part of greater volumes of house building only in a few years. As for the short term prospects, there may happen even a reverse effect - effective demand will undoubtedly be growing at a pace faster than offer volumes, which should result in shortages of housing offer and, consequently, in a price rise. The stabilization may take a few years, as even with housie building volumes progressing, it is going to take quite a time to saturate the market. The implementation of the current plans to a great degree will depend on growth rates of the population's real incomes, as well as regional and local budgets' capacity. They in turn will be affected by the progress in the area of the housing and communal reforms and implementation of provisions of the newly adopted Housing Code (primarily in the part of the transition of the housing and communal sector towards
99 The program was funded basing on the price of Rb. 11,000 /sq.m., while at the time the average housing price was Rb. 29,000/ sq.m.
funding without subsidizing and the population paying for the housing and communal services in full), among other factors.
4.9.4. Fostering Mortgage
As noted above, the mortgage arrangements are supposed to play a notable role in implementation of the national project on housing. No doubt, a rise in the volume of mortgage contracts should form a critical factor of the rise in demand and prices for housing.
The volume of mortgage loans has recently been on a stable rise across the country and in the city of Moscow, in particular. Thus, according to the Association of Russian Banks, the amount of the credits in question disbursed nationwide accounted: in 2001-USD 56 mn., 2002 - 260 mn., 2003 - some 500 mn., 2004 - 1 bn. According to some experts, this figure should further make up over 1 bn. in 2005 and nearly hit 2 bn. in 2006.
In Moscow, according to the International Academy of Mortgage and Real Estate's report entitled "An Analysis of Competitive Advantages pf Banking Mortgage Products", between 2000 and June 2005 the volume of mortgage loans was growing at an average annual rate of 46%. According to Rosregistration, the number of mortgage contracts concluded in Moscow has shown a slower growth rate since 2000.
Table 16
The Number of Mortgage Loans Disbursed in Moscow in 2000-2005
„ ... . Growth rates, as %
Year Number, as units --—:-:-'---—„„„„-
To the prior year_To 2000
2000 1364
2001 1970 1 44.4 1 44.4
2002 2753 139.7 201.8
2003 3075 1 1 1 .7 225.4
2004 4358 1 41 .7 319.5
2005 4600 105.5 337.2
Source: programma razvitiya ipotechnogo kreditovaniya v gorode Moskve na 2006-2008 gody.
As evidenced by Table 16, the annual increment rates of disbursement of mortgage loans were over 40% only in 2001 and 2004, however, overall, their number grew nearly 3.4 times over the last five years,. nonetheless.
"MIEL-Nedvizhimost" realtors report a rapid rise of mortgage transactions since the 1st quarter 2004. With the 1st quarter of 2003 as the basic period, their number grew 2.0, then 10.2 by the 3rd quarter 2005, while in the 4th quarter 2005 fell to 9.1.
The proportion of mortgage transactions in the total number of the company's transactions in Moscow was also growing rapidly in 2004 and stabilized in 2005 (Fig. 17).
18 16 14 12 10 8 6 4 2 0
1st q. 2nd q. 3rd q. 4th q. 1st q. 2nd q. 3rd q. 4th q. 1st q. 2nd q. 3rd q. 4th q. 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005 2005
%
Fig. 4. The Quarterly Dynamics of the Share of Mortgage Transactions of MIEL-Nedvizhimost in Moscow in 2003-05
In the first quarter 2004 it made up 2.5%, in the 2nd - 5.1%, 3rd - 6.7 and in the 4th quarter - 8.3%. During the first three quarters 2005 the respective index was fluctuation around the level of 10-11% of the total number of the company's transactions and finally dropped to 7.7% in the 4th quarter. Let us note that despite the fall in the share of mortgage transactions on the whole, the value of this indicator on the primary market since the 2nd quarter 2004 has been greater than that on the secondary market. In Moscow oblast, the respective value of the indicator accounted for 6-8%.
Overall, the year 2005 is characterized by the growth in the absolute number of mortgage transactions against the fall in the annual indexes of the growth of mortgage transactions both in the city Moscow and Moscow oblast vs. 2004. Mortgage-based sales on the primary market re complicated by the contracting number of MIEL's own objects, the sales of which secured the bulk of the noted transactions that involve newly built housing. Mortgage transactions on the primary market with "outside" (not being the company's property) objects are complicated by the mismatch between the documentation their sellers provide and banks' requirements to the mortgaged property.
Overall, despite a rapid rise over the last two years, the scale of mortgage in Russia has remained insignificant in the total volume of housing sales and accounted for 1% of GDP, while in UK the respective index made 62%, the US - 53%, Germany - a. 50%.
Let us remember that it was yet in 2004 that the government recognized the fostering of mortgage as a priority activity for the emergence of the market for affordable housing, which demanded a serious update of then effective legal base.
The 1st half of 2005 saw coming into force of legal acts enacted in late 2004. The acts introduced amendments to then effective law; plus, a series of new statutes that concerned mortgage came into effect.
The crucial amendments were:
• Amendments to the Civil Code of RF of December 30, 2004 (No. 213-FZ) concerning cancellation of the mandatory notary registration of mortgage contracts and using buildings located or being built on the depositor's site as a security;
• Amendments to the Federal Statute "On mortgage" of December 30, 2004 No. 216-FZ) that:
- enable one to modify the term and interest rates on mortgage loans certified by the mortgage;
- helping to spread mortgage on the land site purchased with the use of credit funds and on the land site (the rental right on it) on which the construction takes place or a living facility is purchased on credit;
- setting the possibility for execution upon the living facility and suspension of the right for the use by the former owner and his family members of the mortgaged living facility as a security against the loan on improvement of living conditions, including not only the living facility purchased at the expense of credit funds but also any other living facility;
- limiting the possibility of an ungrounded interference of guardianship bodies with the mortgage process;
- securing the legal base of the system of insuring credit risks in the housing mortgage area.
• Modifications in the Federal Statute "On credit records" of December 30, 2004 (No. 218-FZ), for the sake of creating a system of information disclosure of scrupulousness of execution of borrowers of their obligations before creditors (commercial banks) through regulation of operations of credit records bureaus.
In conjunction with enactment of this particular act, amendments were introduced to the Civil Code of RF (specification of the banking secret), in the RF Code on Administrative Abuses (provides for sanctions for breaching the procedures of conduct and storage of credit records, and procedures of spreading of information), the Federal Statute "On banks and banking activities" (sets the credit institutions' obligation to submit information to at least a sole bureau of credit records).
• Amendments to the Federal Statute "On Mortgage Securities" of December 29 (No. 193-FZ), which:
- set the procedure of sales of the mortgaged security in the event of insolvency (bankruptcy) of the issuer of bonds with mortgaged security;
- set requirements that the size of the mortgaged security of the respective bonds may exceed the volume of obligations on the bonds at not more than 20%;
- introduce the housing mortgage bonds;
- grant credit institutions with the right to issue mortgage participation certificates;
- ensures the possibility for issuing mortgage bonds with varying interest rates.
• Because of the enactment of the law on mortgage securities, there appeared amendments to the Civil Code of RF in the part of setting the value of mortgage security as the cap on the volume of bonds issuance by joint-stock companies, as well as to the federal statutes "On insolvency (bankruptcy)" and "On insolvency (bankruptcy) of credit institutions" in the part of setting the requirement to exclude from the tender mass in the event of bankruptcy of the issuer of mortgage secured bonds of the assets that form an element of the mortgage security.
• Amendments to the federal statute "On the state fee" in the part of abolition of the sate fee for the sate registration of mortgage contract, issuance of a document on the given registration and an excerpt from the register on the sate registration of the mortgage contract, which duplicates the registration fee.
However, despite the government's serious attention to and support of formation of the market for affordable housing, there exist a series of challenges that appear deter-
mined by the situation on the real estate market and exert an adverse influence on the progress in the mortgage area.
Overall, it can be noted that today the mortgage market undergoes a deceleration of its growth rates and sees its volumes fall vis-à-vis the general market for housing sales/purchases in Moscow region. Sales of newly built housing with the use of mortgage are limited only with the objects, the permits on construction of which were received prior to April 1, 2005. Other objects under construction do not meet the banks' requirements (do not have the necessary or correctly produced documentation and may not form subjects of mortgage contracts). This can force potential mortgage consumers to switch from the primary to secondary market for housing, thus increasingly fueling demand on that, which in turn does not help increase the number of mortgage contracts on the market. Under a limited offer and growing demand the housing sellers on the secondary market tend to prefer customers with all the necessary cash in full in hands.
In such a situation, the offer of apartments that can be sold under mortgage terms at large realtor companies on the market for newly built housing is limited by the objects adjudicated by banks and the companies' own newly built housing fund. Thus, by late 2005 the housing market of the city of Moscow and Moscow oblast saw a situation in which the number of borrowers adjudicated by banks was on a steady rise, while the number of actually mortgaged apartments was declining. According to "MIEL-Nedvizhimost", the quarterly indices of volumes of mortgage transactions computed relative to volumes of the respective period in prior years, have tended to fall since the 3rd quarter 2004.
The progress on the market for mortgage is also inhibited by the absence of an effective mechanism of securitization of loans, which forms the most optimal means for banks to attract capital. Securitization is broadly used overseas - for instance, in DK, the mortgage securities account for 70% of the national stock market, while in Germany -36%, and Sweden - 45%. The respective statute in Russia was enacted yet in November 2003, however, it remained idle hence, for it requires adoption of 15 by-law acts, including the following amendments:
• those that regulate insurance of mortgage loans. Today, in compliance with the law, the mortgage loan that falls under the mortgage coverage should be insured in favor of the borrower in the event of issuance of mortgage bonds. The Federal Securities Commission believes this requirements is excessive, for mortgage papers are sufficiently reliable, anyway;
• amendments that provide for the possibility to forward cash funds received from the borrower as payments on the credit to pay interest on mortgage bonds. The current law does not provide or the possibility;
• amendments that provide for the possibility of "tranching issues of mortgage securities". As of today, there is no mechanism of application and size of possible tranches stipulated in the law.
It is the Agency on Mortgage Loans (AML) that is going to pioneer in this area with the first Rb. 1.5 bn.-worth tranche of mortgage bonds in the 1st quarter 2006. Some experts forecast that by 2008 Russian banks would be able to issue annually mortgage bonds worth a total of Rb. 60 bn. and by 2010 - over 200 bn. Should such a critical instrument as secutirization emerge, that would entail a substantial decline in interest rates on mortgage loans.
In the future, the progress in the area should be fueled chiefly by the implementation of the national project "Affordable and compfortable housing to citizens of Russia". The rise in the number of issued mortgage loans should result in a substantial decline of inter-
est rates on them from the current 13-14% to 8% by 2010. On the city of Moscow level the noted national project is mirrored by the recently approved three-year mortgage development program for 2006-2008. It is planned to spend Rb. 72.4 bn. on its implementation, including 51.1 bn. out of the city budget.
As Moscow expects the mortgage volumes to double in 2006 (in particular, the subsidized mortgage, as per the priority national project), one can forecast a considerable rise in mortgage transactions on the market.
4.9.5. Prospects of the Real Estate Market
The 2005 macroeconomic situation in Russia and its impact on the real estate market on the whole appeared positive. The state and progress of the economy back-ups effective demand and secures normal conditions for operators on the market. The government can extend a vigorous support to the progress in the frame of the noted priority national project on housing, which will fuel a further rise in real estate prices.
However, macroeconomic trends bear certain challenges and risks in this respect. The most probable ones can be caused by the growing social tension. Inflation and the price rise for the housing and communal services will derail the material state of recipients of budget funds, which will result in their lower support of the current government. In parallel with that, the opening of markets to foreign capital after Russia's possible accession to WTO and appreciation of the Ruble will undermine small and medium-sized businesses' competitiveness. From the perspective of the present paper the noted challenges go beyond the horizon of forecasting - that is why they are not considered herein.
It is the market for newly build housing that will become a locomotive of the housing market in 2006. The stumbling block for the progress on the market will remain the statute "On participation in the mutual construction of blocs of apartments..."
There will be attempts to modify the statute and put off the coming into effect of the suggested standards on the developers' quarterly reporting set by Government Resolution No. 645 of October 27, 2005 "On quarterly reporting by developers on carrying out activities on attraction of cash funds from participants in mutual construction". The contours of the conflict between developers, banks, on the one hand and a number of business groups that are keen to change the balance of forces on the market by means of government agencies' intervention, on the other. Clearly, the business groups are anxious to break by means of law enforcement agencies normal rules of the game on the market. Meanwhile, neither developers, nor banks are happy with the rules of the game, as per the noted statute. The former have found it impossible to attract private investors without breaching the law, while banks are no longer able to credit developers and disburse mortgage loans (due to the aforementioned reasons). In any case, this particular factor should drive the volumes of house building and offer on the market for newly built housing down.
Notwithstanding the noted scandals, the market progress has restored its momentum. The steadily declining offer of the newly built housing with the respective permits received prior to the respective law coming into effect will be pushing prices upwards. The problems of organization of financing of new project will get new players on the market and 2006 will see numerous takeovers and mergers. It is fairly unlikely tat volumes of house building will grow under such circumstances - more than that, the earlier announced plans will likely to be adjusted towards their contraction. In the conditions of a limited offer volume, a part of consumers will switch to the secondary market for housing. The pressing on the part of the delayed demand, as well as a rising number of consumers will fuel further price rise.
The city of Moscow and Moscow oblast likewise will see the offer volumes on the primary market fall, and, given a high level of demand, we expect a 2.5-3% growth in the annual turnover of the market in natural equivalent.
Given the background, a vigorous demand for the secondary housing in the capital and the Oblast, perhaps, stirred by the negative situation on the primary market, as well as advancement of the mortgage system that leads to growth in the number of real consumers on the secondary market for housing (determined primarily by the fact that banks are more keen to extend credits against the ready housing, than otherwise) can get the 2006 sales volume to the 2004 level, or event exceed that at 3-5%, or at 84-86,000 apartments in the city of Moscow and 49-51,000 of them in the Oblast.
A high demand and the fall in the offer volume which, perhaps, are going to last until mid-2006, because of inertia, can result in a price rise for apartments on the secondary housing markets in both regions until the end of the year. Under great rates of contraction in the offer it should account for 30-35% (expert forecast 1), or, given a possible compensation for the offer shortage in the second half 2006 - 20-25% (expert forecast 2). Thus, the forecasted averafe specific price until end-2006 can reach in Moscow - USD 3,100 -3,500/sq.m., while in the Oblast - 1,350-1,500 sq.m. (Fig. 18).
Fig. 5. The Dynamics of Forecast of the Average Specific Offer Price on the Secondary Market for Housing in the City of Moscow and Moscow Oblast
With account of forecasted indices of the sales volumes in natural equivalent and the 2006 average specific offer price, one can expect a 30-45% rise in the cash volume of sales on the secondary market of the city of Moscow and Moscow oblast vs. 2005, or at USD 15.0 and 3.3 bn., respectively.
With account of the forecasted average annual prices (USD 2.265/sq.m.) and volume of the commercial house building in natural equivalent (2.460,000 sq.m.) in Moscow, one should expect a 15-20% rise in the volume of sales on the market for newly built housing in 2006 vis-à-vis 2005, or at USD 6.5 bn., and at 2.6 bn. in Moscow oblast.
Thus, the projections for the year 2006 are as follows: - fall in the volume of construction and placement of newly built housing into operation;
- fall in the offer volume of apartments in the newly built housing until the end of the year and for 3-6 months - on the secondary market, with a subsequent rise in that;
- growth in the volume of sales in natural equivalent by 2-3% on the primary and 3-5% on the secondary markets;
- a 25-30% price rise on the primary and secondary markets;
- growth in the cash turnover at 15-20% on the primary and 30-45% on the secondary markets;
- a continuous deceleration of the growth rate in mortgage transactions, however their volume on the capital market should grow soar by 60-80%.
4.10. Efficiency of Banking Operations in 2005
2005 proved to be a good year for Russian banks. Indeed by the end of the 3rd quarter return on assets (ROA) for the aggregate banking system, excluding Sberbank100 was 3.6%, while for the same period a year ago the figure stood at just 3.3% and only at 3% for 2004 as a whole. Even more impressively banks' return on equity (ROE) for the first 3 quarters of 2005 rose to 25.2% from a 19.6% base for 2004.
Though it must be admitted that the first quarter in 2005 has demonstrated somewhat weaker results than in 2004. Annualized 2005 ROA ratio stood at 2.8% for banks on average, which is lower than similar figures for 2004 and is actually closer aligned with results achieved in 2003.
At the same time, certain tendencies observed in 2004 continued throughout the last year as well. Difference in ROA, for instance, for banks of varying asset size has remained insignificant. In 2004 the climate of near-crisis and general sector decline caused some typical divergence in ROA ratios. Just as in 1998, the year of devastating financial crisis for Russia, its smaller banks proved better at weathering storms and have posted healthier profits. As can be seen from Fig. 19, in 2003 the country's smallest banks were in general losing money101. But just in the first half of 2004 these banks were able to get back into black by raising their annual ROA ratios to 2.5%. In 2005 smaller banks continued this trend and posted first quarter 2.6% ROA.
ROA figures for Russia's bigger banks too, in 2005 showed fairly strong results (please see group 1 on Figures 19-21). If in 2003 the average ROA for the aggregate banking sector stood at 2.4%, in the first 2 quarters of 2004 large banks profitability as measured by ROA rose to 2.7%. In the first quarter of 2005 large banks' ROA continued to climb to 3.1%, and exceeded the industry's aggregate figures. The progress is particularly notable given that in the past years from 1998 and onward profitability of Russia's larger banks trailed behind industry averages.
100 All relative profitability figures for a certain period refer to average size of assets in a given year. Group-wide figures are calculated as weighted averages.
101 Banks are divided into groups based on their asset size as of a certain date. Fist group are the largest 10 banks (excluding Sberbank and Vnesheconombank), second group covers the following 40, third group -the following 50, fourth group has the following 100, fifth - the following 300 and the sixth group all remaining smallest banks.
%
4 -r
3 --
2 --
1 --
rj
0
-1-1-------------------------------
1 2 3 4 5 6
Bank Groups in the Order of Size Assets as of January 1, 2004:
1 - Banks ranked 1-10;
2 - Banks ranked 11-50;
3 - Banks ranked 51-100;
4 - Banks ranked 101-200;
5 - Banks ranked 201-500;
6 - Banks ranked 501-1326.
Note: Size of assets as recorded by the end of the specified period. Average values were used for the analysis. Source: STIiK data.
Fig. 19. 2003 ROA Figures For Banks Of Varying Asset Size (Excluding Sberbank)
%
4 T
3 --
2-1 -o .J-LI-LI-LI-l_l-l_l--
-1--------------------------------
1 2 3 4 5 6
Banks Groups in the Order of Size Assets as of July 7, 2004: 1- Banks ranked 1-10;
2 - Banks ranked 11-50;
3 - Banks ranked 51-100;
4 - Banks ranked 101-200;
5 - Banks ranked 201-500;
6 - Banks ranked 501-1321.
Note: Size of assets as recorded by the end of the specified period. Average values were used for the analysis. Source: STIiK data.
Fig. 20. Annualized ROA For The 6 Months Of 2004 For Banks Of Varying Asset Size (excluding Sberbank)
% 4 T
3 --
2 --
1 --
0 --I-1—1-1—I-1—I-1—I-1—I-L.
-1--------------------------------
1 2 3 4 5 6
Banks Groups According to Asset Size as of April 1, 2005:
1 - Banks ranked 1-10;
2 - Banks ranked 11-50;
3 - Banks ranked 51-100;
4 - Banks ranked 101-200;
5 - Banks ranked 201-500;
6 - Banks ranked 501-1284.
Note: Size of assets as recorded by the end of the specified period. Average values were used for the analysis. Source: STIiK data.
Fig. 21. Anualized 1st Quarter 2005 ROA For Banks Of Varying Asset Size
(Excluding Sberbank)
%
30
25 --
20 15
10
5 0
1 2 3 4 5 6
Banks Groups as of April 1, 2005:
1 - Banks ranked 1-10;
2 - Banks ranked 11-50;
3 - Banks ranked 51-100;
4 - Banks ranked 101-200;
5 - Banks ranked 201-500;
6 - Banks ranked 501-1284.
Note: Size of assets as recorded by the end of the specified period. Average values were used for the analysis. Source: STIiK data.
Fig. 22. Annualized First Quarter Of 2005 ROE For Banks Of Varying Asset Size
(Excluding Sberbank)
Conversely, banks profitability as measured by return on equity (ROE) shows a lot more inter-group variation. Since the ratio of equity to assets has traditionally been higher for smaller and medium-sized banks than their larger-asset peers, ROE differences between smaller and larger banks fluctuate anywhere from 29% to 9%, while their ROA figures may differ little. Though for banks grouped in the 11th to 50th group, both ROA and ROE figures are below industry averages.
A review of banks' income vs. expenses in the first quarter of 2005 demonstrates that the country's largest banks had lowest ratios of financial returns on assets - 6.3% against 11.1% for smallest banks (please see Table 17). Such discrepancy is partially due to lower interest income received by large banks as well as by lesser fees and commissions (1% for 1st group vs. 3% for 6th group). Though large banks unlike their smaller counterparts do better when it comes to reining in overhead expenses as percent of their assets. It has to be noted though that overhead expenses for the Russian banking system as a whole remain quite high, which obviously negatively affects their competitiveness. Personnel expenses, lease and other overhead expenses gobble up over 7% of assets for smaller banks, thus wiping out their edge from higher interest and non-interest income they may have earned over their larger competitors.
Table 17
Annualized 1st Quarter Financial Results for Russian Banks in 2005
(as percentage of assets)
Indicators Bank Groups According to Asset Size
1 2 3 4 5 6
Net Financial Income 6.3 8.3 8.5 9.4 9.2 11.1
Net interest income 4.4 4.4 4.8 6 5.6 6.3
Interest income 7.2 7.7 7.9 10.1 9 9.2
Interest expenses 2.9 3.3 3.1 4.1 3.4 2.9
Net Non-Interest Income 1.9 3.9 3.7 3.4 3.6 4.8
Commissions 1 2 1.6 2.5 1.9 3
Capital Market Transactions -0.1 0.8 0.5 0.2 1.2 1.3
In Foreign Currency 0.2 0.2 0.6 0.2 0.6 0.7
In Precious Metals 0 0 0 0 0 0
Foreign Exchange and Derivatives -0.2 -0.2 -0.1 0 0 0
Stocks and Bonds -0.1 0.7 0 -0.1 0.6 0.6
Securities And Foreign Currency Re-Evaluation 0.4 0.6 1 0.4 0.1 0
Re-Evaluation Of Foreign Currency Reserves 0.1 0.1 0.1 0 0 0
Re-Evaluation Of Securities Portfolios 0.3 0.5 0.9 0.4 0.1 0
Leasing 0 0 0.1 0 0 0
Other Operational Income 0.6 0.4 0.5 0.3 0.4 0.4
Administrative Expenses, including: 3.1 4.3 4.3 5.4 5.6 7.6
Personnel Costs, Including Social Security Expenses 1.5 2.1 2.3 2.8 2.8 3.6
Depreciation 0.1 0.2 0.2 0.2 0.3 0.3
Lease 0.2 0.4 0.3 0.5 0.5 1
Taxes 0.1 0.3 0.2 0.3 0.3 0.4
Net Operational Income 3.2 4 4.2 4 3.6 3.4
Changes in Reserves 0 2 0.6 0.8 1.2 1
Net Figures from Non-Regular Activities -0.0 0.1 0 0.1 0.1 0.1
Pre-tax Income 3.1 2.1 3.6 3.3 2.5 2.6
Statistical Reference: Number of Banks' whose figures were 10 40 48 98 296 766
involved in the review
Source: STIiK database.
A further analysis of banks' income and expenses for 3 quarters of 2005 also shows that efficiency of banking operations is becoming less dependent on loan and deposit activities, though interest income still constitutes over half of banks' net earnings.
According to the Russian Central Bank102 in the course of 2005, interest rates banks charge on business loans have decreased from 10.5%-12.9% to 10.1 %—10.7%. Rates paid on private deposits changed even less. Thus in 2004 ruble deposit accounts with the exclusion of demand deposits offered 11.4$ in January and 9.7% in June, while in 2005 this figure stood at 10.2% in January and went down only to 8.7% for April, August and October.
Similarly insignificant changes were observed in the ratios of loans and deposits recorded in the banks' assets and liabilities. As of January 1, 2005 ratio of loans to the non-financial sector in the banks' assets stood at 54.9% and remained virtually unchanged at 54.8% by October 1, 2005. Share of individual deposits after growing in the period from 2002 to the first quarter of 2005, by the end of the 3rd quarter lapsed back to its 2004 level and constituted 16.2%, an almost negligible change from 16.1% recorded in the 1st quarter of 2005.
These insignificant changes in the banks' interest expenses and income as percentages of their assets corresponds to similarly minor adjustments in the interest rate margins. For 2004 the spread between lending and borrowing rates stood at 4.8%, for 3 quarters of 2005 the figure was 4.9%. The overall climate of declining interest rates for both loans and deposits and their steady share on banks' balance sheets have prompted the banks to reconsider their strategies for consumer vs. business markets. Thus, banks not only made more consumer loans, on which banks tend to charge higher rates than on business loans but raised the share of consumer loans in their overall loan portfolio. In 9 months of 2005, share of consumer loans grew from 12% to 15%.
Please see Fig. 23 and 24 for comparisons on banks' profitability from business vs. consumer loans.
20-r---------------------------------
15 --
10 --
5
0
1 2 3 4 5 6
Groups According to Asset Size as of October 1, 2005:
1 - Banks ranked 1-10;
2 - Banks ranked 11-50;
3 - Banks ranked 51-100;
4 - Banks ranked 101-200;
5 - Banks ranked 201-500;
6 - Banks ranked 501-1262. Source: STIiK Data.
Fig. 23. Interest-Based Income on Business Loans for Banks of Varying Asset Size (excluding Sberbank)
102 "Vestnik Bank of Russia", issue No. 66, 2005. Data for 10 months of 2005 excludes Sberbank.
452
% 20 -r
15 ._i-1__
10-5 -0
1 2 3 4 5 6
Groups According to Asset Size as of October 1, 2005:
1 - Banks ranked 1-10;
2 - Banks ranked 11-50;
3 - Banks ranked 51-100;
4 - Banks ranked 101-200;
5 - Banks ranked 201-500;
6 - Banks ranked 501-1262. Source: STIiK Data.
Fig. 24. Interest-Based Income on Consumer Loans for Banks of Varying Asset Size (excluding Sberbank)
Overhead expenses as a percentage of banks' assets stabilized at 4.5%, but as can be seen from Table 18 for smaller banks these expenses were 2.2 times higher than for their larger counterparts.
Table 18
Annualized 3 Quarter Financial Results for Russian Banks in 2005 (as percentage of assets)
Indicators Groups According to Asset Size Aupranoc
1 2 3 4 5 6 hvci auco
1 2 3 4 5 6 7 8
Net Financial Income 7.7 9.6 9.5 10.1 10.4 11.2 9.1
Net interest income 4.3 4.9 5.3 5.6 5.9 6.3 4.9
Interest income 7.4 8.3 8.6 9.3 9.5 9.2 8.2
Interest expenses 3.2 3.4 3.3 3.7 3.6 2.9 3.3
Net Non-Interest Income 3.4 4.7 4.2 4.5 4.5 4.9 4.1
Commissions 1.1 2.3 1.6 1.9 2.3 2.9 1.8
Capital Market Transactions 0.6 0.5 1 0.6 1 1.4 0.7
In Foreign Currency 0.3 0.2 0.8 0.3 0.5 0.8 0.4
In Precious Metals 0 0 0 0 0 0 0
Foreign Exchange and Derivatives -0.2 0 -0.2 0 0 0 -0.1
Stocks and Bonds 0.5 0.3 0.4 0.3 0.5 0.6 0.4
Securities And Foreign Currency ReEvaluation 1.1 1.2 1.2 1.6 0.3 0.2 1.1
Re-Evaluation Of Foreign Currency Reserves 0.1 0 0 0.1 0 0 0.1
Re-Evaluation Of Securities Portfolios 1 1.2 1.2 1.5 0.3 0.2 1
Leasing 0 0 0.1 0 0 0 0
Other Operational Income 0.6 0.7 0.3 0.3 0.8 0.4 0.6
1 2 3 4 5 6 7 8
Administrative Expenses, including: 3.5 4.5 4.4 5 6 7.6 4.5
Personnel Costs, Including Social Secu- 1.7 2.1 2.3 2.5 3 3.6 2.2
rity Expenses
Depreciation 0.1 0.2 0.2 0.2 0.2 0.3 0.2
Lease 0.3 0.4 0.3 0.4 0.6 1 0.4
Taxes 0.2 0.3 0.2 0.3 0.3 0.4 0.2
Net Operational Income 4.2 5.1 5.1 5.1 4.4 3.6 4.6
Changes in Reserves -0.1 2 1.6 1.9 1.5 1.3 1.1
Net Figures from Non-Regular Activities 0 0.1 0 0.1 0.1 0.1 0.1
Pre-Non Regular Activities Profits 4.2 3.1 3.5 3.1 2.9 2.3 3.5
Pre-tax Income 4.3 3.2 3.5 3.2 3 2.5 3.6
Statistical Reference: Number of Banks' 10 40 50 98 297 753
whose figures were involved in the review
Source: STIiK Data.
With net interest rate based income and overhead expenses remaining more or less stable, banks' overall efficiency naturally becomes quite sensitive to changes in non-interest operations. By the end of the 3rd quarter of 2005, Russian banks' income earned on non-interest activities as a percentage of assets was 10.8% higher than in the similar period in 2004 (4.1% and 3.7% respectively). Banks' operations with securities and reevaluation of their securities portfolios in particular have contributed to this change. Reevaluation of banks' securities portfolios alone for the first 3 quarters of 2005 earned banks 11% of their net income and comprised 1% of their total assets.
At the end of the day, Russia's largest banks appeared to reap the biggest profits. All other groups of banks recorded figures below aggregate averages (please see Table 18). Such variations in earnings as percentage of assets are particularly stark between the top (in terms of asset size) and bottom-ranked banks: 40.2% for the 10 largest banks against a
meager 9.1% for their smallest rivals (please see Fig. 25).
%
40 --------------------------
30-- --------------------------
20 --
10-- -- -- -- - ----
0
1 2 3 4 5 6
Groups According to Asset Size as of October 1, 2005:
1 - Banks ranked 1-10;
2 - Banks ranked 11-50;
3 - Banks ranked 51-100;
4 - Banks ranked 101-200;
5 - Banks ranked 201-500;
6 - Banks ranked 501-1262. Source: STIiK Data.
Fig. 25. Annualized 3rd Quarter ROE For Banks Of Varying Asset Size
(excluding Sberbank)
4.11. Problems of Introduction of the Municipal Reform
4.11.1. The General Characteristics of the Progress with the Reform in 2005
In compliance with the recently enacted municipal law (Federal law No. 131-FZ of October 6, 2003, "On general principles of organization of local self-governance in the Russian Federation", below referred to as law No. 131-FZ), the year of 2005 should have formed a critical period in preparation for a comprehensive introduction of the municipal reform. During the period:
• The process of setting municipal entities' borders and status should have been over (until 1 March 2006);
• Their charters and local self-governance bodies' other legal acts should have been brought in line with the new federal law (until July 1, 2005);
• The structure of local self governance bodies should have been set and municipal elections should have been conducted in the newly established municipal entities (until November 1, 2005);
• The processes of free transferring by municipal entities of their property objects under the regional and federal control and those by the Federation and regions - to municipal entities should have been complete.
In practice, however, the process of launching the municipal reform proved to be far more controversial than envisaged. Given that, 2005 can be divided into several stages.
The first one, which can be conditionally labeled as evolutionary one, lasted through June 2005. At the time, the work was under way to prepare for introduction of Law No. 131-FZ according to a timetable as per transitional provisions of the Law. All tiers of government busied themselves with completion of demarcation of municipal entities' borders and setting their status, adoption of new charters, establishment of the structures of local self-governance bodies, and holding municipal elections.
However, the summer of 2005 displayed the first signs of crisis phenomena. A group of the Duma Deputies submitted a clause to law 131-FZ (aka "Grishankov's Clause") that provided for a postponement of the reform implementation timelines. Between June and September political proponents of the reform fought for the destiny of the reform with their antagonists. On September 21, 2005, the State Duma ultimately passed the clause, albeit in somewhat moderate form. That essentially meant that the strategy of the postponement o the reform has won.
The last quarter 2005 can be viewed as a stage of regionalization and compromises. At the time the federal center was making decisions that had a considerable mitigation effect on the ideological rigidity of Law No. 131-FZ and introduced a great deal of vagueness into mechanisms of its implementation. In parallel with that regions were identifying their genuine strategies of the reform implementation in the frame of the new powers granted to them by the Grishankov's Clause (law No. 129-FZ of October 12, 2005).
Overall, the intrigue around the destiny of the municipal reform in 2005 proved that those were right who, during debates around Law No.131-FZ , had forewarned of its conceptual vulnerability and insufficient adaptation to Russian realities. However, the postponement of the reform implementation timelines cannot be perceived as a positive step which should facilitate its implementation afterwards. The postponement of the reform timelines per se does not solve critical problems that exist in its conceptual fundamentals. Recent amendments to federal laws signal the refusal of pursuing a distinctive ideology, rather than an ideological swing, which can devaluate even those elements of the original concept of the reform which may help develop local self-governance. Finally, the decision to put off the reform bears serious reputation risks both
to put off the reform bears serious reputation risks both for the federal government that has developed and vigorously promoted it and for local self-governance. Establishment of a great number of municipal entities, with their elected bodies, that have no clearly set powers and lack certain financial resources can result in a substantial discrediting of the concept of local self-governance as an institution.
4.11.2. Evolutionary Stage of the Reform Implementation
The progress in the municipal reform implementation. As long as the decisions to put the reform on hold and postpone its implementation, it is particularly interesting to analyze the preparation for a comprehensive enforcement of Law No.131-FZ in the first half 2005. In the course of the analysis we employed the following data:
First, various government agencies' reform progress reports, such as the Analytical newsletter of the State Duma staff and certain departmental documents, among others. At this point, it is worthwhile to note that data supplied by different agencies does not always appear consistent and find themselves under the impact of political factors. To exemplify this, suffice it to mention that once the decision to shift the reform timelines was made, the documents began to radiate far lesser optimism with regard to regions' level of preparedness for its implementation. Given that, however this information covers the situation nationwide, which allows to evaluate general tendencies and results of preparations for the comprehensive launch of Law No. 131-FZ.
Second, we used a huge volume of specific information received from unofficial sources, such as municipal entities homepages on the Internet, media, etc.
Finally, third, we collected a part of information by ourselves while conducting municipal research in a number of regions.
Legalregulation. During the period in question, the legislative process was rather active, with bills drafted yet in the first half 2005 being passed through the end of summer (with the peak of the process falling on June and July). The legal base of local self-governance was being amended, by and large, in two major areas.
First, the legal regulation, as per law No. 131-FZ, the RF Government Plan on development of bills needed for the sake of the municipal reform implementation103. For instance, the following had been accomplished until then:
- Federal Law No. 97- FZ "On state registration of municipal entities' charters" was developed and passed as late as in July 2005 and consequently became effective as of September 1, 2005;
- The electoral law of RF was modified, in particular with regard to specification of the status of elected local self-governance authorities;
- The possibility for setting a mixed or proportional system at municipal elections was stipulated in the law;
- A new status and procedures of formation of election commissions at municipal entities were set.
Accordingly, the respective amendments were introduced to the federal law of RF "On mass media", the Criminal Code of RF, Tax Code of RF; the Code of RF on Administrative Offenses, the Civil-Judicial Code of RF, and the federal law "On provision of constitutional rights of citizens of RF to elect and be elected into bodies of local self-governance", and a number of other statutes.
Second, the process of introduction of amendments was associated with an intense debate that started at the time with regard to the possibility to modify mechanisms of elec-
103 Order by the RF Government of March 3, 2004, No. 307-p.
456
tion of heads of municipal entities by analogy with the governors election one. That meant the transition to a system under which the municipal entity head is elected by the representative body of local self-governance upon nomination by the governor. While the principle of separation of the government power from local self-governance stipulated in the RF Constitution (self-governance bodies do not fall into the system of government bodies) did not allow to directly implant the mechanism, however, certain steps were undertaken to ensure the regional authorities' greater influence on formation of local self-governance bodies.
More specifically, on April 8, 2005, Art. 85 of the Law (i.e. transitional provisions) was amended as follows: in the event the head of administration of a municipal district or urban district is employed under contractual terms, the proportion of members of the tender commission formed by the regional government is increased from one-third to a half. As far as newly established municipal entities are concerned, should a local referendum or citizens' meeting fail to identify the structure of local self-governance bodies, the regional authorities are enjoy the right to set by their statute procedures for election of heads of the newly established municipal entities for the first term of their powers, as well as the status of the said position in the structure of local self-governance bodies.
Reforming the territorial organization of local self-governance. The shift of the timeline of the reform of territorial organization of local self-governance until March 1, 2005, enabled most regions to complete the process, by and large, within the legal framework. The setting of borders and status of municipal entities had been accomplished by the date in all the constituent members (aka Subjects) of the Federation, except for Chechen Republic and Republic of Ingoushetia. However, some regions continued to adjust their territorial structures afterwards as well, which was driven in particular by decisions of the court of law. Trials on the matter were initiated in Vladimir, Kaliningrad, Yaroslavl, Sakhalin oblasts, and some other Subjects. Trials were mostly associated with rural settlements being deprived of the right for local self-governance (resulting from the establishment of urban okrug on the basis of rural rayons), as well as towns' struggle for the right to win the status of urban okrug, rather than urban settlement^. In some regions, for instance, Orenburg oblast, such matters were resolved pre-trial.
According to the Russian Electoral Commission, as of may 2005, roughly as many as 12,000 new municipal entities had been established, of which some 10,000 were rural ones. The attribution of municipal rayons to newly established municipal entities was mostly associated with the inclusion into them earlier independent towns; the attribution of urban okrugs to newly established municipal entities occurred primarily because of the inclusion into them of additional rural territories. As of October 1, 2005, the RF Ministry of Regional Development (below referred to as 'Minregion') estimated the number of newly established entities accounting for 13,000. Thus, the number of municipal entities in RF grew slightly more than twice, with 83% of them being rural settlements.
This is a fairy considerable rise, however it appears far less than some experts' predictions of some greater, up to 5-fold growth in the number of municipalities. Major factors that have constrained the rise of the number of municipal entities vis-à-vis the forecasts were:
1) Drastic decline of the number of newly established municipal entities vis-à-vis the previously existed number of sub-municipal structures in the regions where the rayon model had been existing prior to the reform. Thus, in 9 regions, such a contraction accounted for 40 to 70%, while in most others it did not surpass 10-20%. The overall number of newly established settlements failed to equal the number of the previously
existed sub-municipal structures by one-fourth. It became possible thanks to consolidation of sub-municipal structures in the course of formation of rural settlements and integration of a number of rural territories into urban ones and urban okrugs. As concerns the regions that had created municipalities at the settlement level long prior to the municipal reform, with some rare exceptions, the number of settlement there remained practically unchanged. 2) Establishment in a number of regions of urban okrugs on the basis of rural rayons which de-facto resulted in maintaining the former one-tier model of territorial organization of local self-governance. This approach prevails, at least, in three Subjects o the Federation and it is partly employed in a few others. It should be noted that notwithstanding the enactment of amendments to Law 131-FZ in 2004 that ensured a stricter approach to the setting of borders of urban okrugs, the federal center failed to duly counteract As a result the two-tier model in the said Subjects is introduced only within single territories and at the scale of single settlements.
Shaping the system of local-self-governance bodies. The process of formation of local self-governance bodies likewise was unfolding fairly rapidly. By June 2005 over 20 Subjects (the data vary) had conducted municipal elections, while the majority of others set dates of elections. In this area, the key political issue became the selection of the position of the head of municipal entity in the system of local self-governance bodies. In compliance with Law No. 131-FZ, the municipal entity head may be elected:
• at the municipal elections and run the local administration;
• at the municipal elections and preside the representative body of the local entity;
• from members of the local legislature and head the representative body of the municipal entity.
Different regions and individual municipal entities addressed this issue in different ways. Thus, according to Minregion, in 27 Subjects o the Federation, heads of municipal entities are elected solely at municipal elections and nationwide the aggregate proportion of municipal entity heads elected by the population accounts for over 60%. Nonetheless, according to the very Ministry, heads of municipal entities will run local administrations only in 35% of municipal entities, thus meaning that the remaining 65% will contract out their heads. It often happened that decision became an unbiased choice of a give municipality, or instance, in he event there were a few conflicting groups of interest. They were keen to ensure the head of the local administration should be a compromise figure, rather than any group's protigie. However, there would occur a serious political pressure in favor of this particular model as the best match to the concept of solidifying the "power vertical", sometimes even against the local community's opinion.
This can be best illustrated by the situation in the town of Obninsk. The city council ruled to modify the structure of the local self- governance bodies and procedures of election of the local head, while the previous structure that provided for direct elections had been approved by the local referendum. The local mayor resided in protest, while a group of local residents filed a lawsuit claiming the ruling was illicit. The tag of war between the local representative body and the voters was there through the whole 2005 and the final decision has not been made as yet.
The overall assessment of results of the evolutionary stage. It can be argued that by summer 2005 the situation appeared fairly controversial.
On the one hand, the overwhelming majority of regions had been vigorously getting themselves ready for a comprehensive introduction of Law No. 131-FZ, generally orienting to the timetable set by its transitional provisions. From the formal perspective, the process
was running fairly smoothly, albeit with numerous conflicts. The regions that since 2005 had been introducing numerous mechanisms as per the said Law in the testing mode likewise generally demonstrated that the model of the municipal reform can be implemented.
On the other hand, with the reform in progress, there began to accumulate objective and subjective challenges and complexities. Accordingly, the comprehensive implementation of Law No. 131-FZ starting from 2006 began to be questioned. Generally, the challenges were quite predictable, however the authors of the reform did not pay them much attention while developing the reform implementation mechanisms. It is impossible to further evaluate the future situation around the municipal reform without considering the challenges, their causes and degree of their intensity.
4.11.3. Problems with Implementation of the Municipal Reform
The common view on challenges facing the reform usually implies fairly evident and superficial factors, as follows:
• Insufficient legal provision of the reform: thus, notwithstanding the timelines set by Law No.131-FZ, the RF Government has failed to approve procedures of property redistribution between the Russian Federation, its Subjects, municipal entities, as well as procedures of assigning property under municipalities' control between municipal rayons, settlements, and urban okrugs;
• Inadequate assignment of revenue sources between different tiers of government, which does not allow for municipal entities' financial back-up to tackle issues of local significance;
• Shortages of qualified cadres, material and technical provision to solve issues of local significance in the newly established rural settlements;
• Risks associated with the parallel implementation of other reforms, such as tax (in part of land tax), housing, etc;
• A number of institutional mechanisms provided for by Law No. 131-FZ proved to be not ready yet: this concerns, or instance, the absence of registration of municipal property, failure to complete the land reform, the tax service's failure to be ready to work with municipalities of the settlement level, etc.
Given this particular context, one can argue that the bulk of the problems, indeed, should mitigate or dissipate over time. That is why procrastination of the reform implementation period would appear quite a well-grounded strategy. This, however, is just a superficial viewpoint, for many challenges visible on the surface by their essence highlight on fundamental problems associated with the failure to duly develop numerous conceptual provisions of the Law and their insufficient adaptation to long-term institutional constraints that exist in the society.
Thus, it has not appeared evident that strict financial and staff restrictions exposed in many settlements pose a short-term and easily remedied problem. It may well happen they mirror the impracticability of attempts to spread the two-tier system of territorial organization of local self-governance throughout the country, which is one of the cornerstones of the concept of municipal reform.
A brief analysis of financial mechanisms provide for by the local self-governance reform makes the conceptual challenges yet more visible - the possibility for ensuring self-financing of a significant part of municipal entities within the frame of the mechanisms is illusive from the beginning.
Municipalities were guaranteed two main revenue sources - that is, local taxes and deductions from federal taxes and levies, while the number of local taxes is limited just by
two ones - that is, physical individual property and land taxes. Both are fixed with the settlement level and their share in the municipal entities' overall revenues appears insignificant. With these taxes, their independence is seriously limited - the federal level has set limits of modification of the tax rates and a broad list of tax benefits. Besides, as long as these particular taxes are concerned, the tax base assessment methods suffer substantial drawbacks, which cannot be remedied at the local level. At the municipal rayon level it is possible to regulate some parameters of the presumptive tax, which is a special tax regime set for small businesses, however it cannot substantially affect the volume of the respective revenues.
As concerns the share of the federal taxes and levies, given a considerable diversity of the level of economic development across municipal entities, their role can become considerable only for municipalities that enjoy the most developed tax base, primarily, large cities. Should one attempt to employ uniform standards of the share of taxes due to municipalities, which are set at the federal level, to remedy problems of the bulk of municipal entities, there would arise substantial imbalances. In the circumstances, financially self-sufficient municipalities would enjoy considerable additional revenues, which would constrain possibilities for the financial equalization between municipal entities that find themselves in a less favorable. The same situation is noted, as far as setting uniform standards of contributions on the regional level. Preliminary estimates show that while decreasing incentives to boosting tax base in the most financially self-sufficient municipal entities, the mechanism of negative transfer is incapable to seriously affect the solution of the problem.
Thus, the financial mechanism suggested in the frame of the reform could not secure a substantial level of municipalities' own revenues for the bulk of them. Thus, it was initially suggested that financial aid would inevitably lay a substantial role in financing the bulk of municipal entities.
The mass resentment against the financial mechanisms in the frame of the municipal reform can be attributed to yet another conceptual contradiction underlying it. Rather a strict regulation of the list of maters of local significance and territorial fundamentals of local self-governance was coupled with the absence of any substantial guarantee of allocation of financial aid to local budgets. If the sate sets a municipal entity's territory and powers, it would be logical to have the sate assume certain obligations with regard to their financial provision. If, on the contrary, the state stakes on the municipal entities' eagerness to boost their revenues and optimize expenditures, the state should ensure a sufficient level of freedom in formation of municipal entities, or in their powers, or territory (which appears more preferable than the first two options). Thus, a rigid uniform variant of formation of municipalities' territories and powers inevitably stirs and will further generate their parasitical mood with regard to their financing, the revival of approaches associated with financial guarantees on the basis of "uniform social standards" and other paternalist-type mechanisms in this particular sphere.
Finally, the belated federal regulation with regard to the free property redistribution between different tiers of power was as well driven both by the federal bureaucrats' failures and technical and political complexities of the process, and a high degree of probability of its immanent conflicts. Thus, in the health care, the division of powers between different tiers of government with regard to provision of primary and specialized medical and sanitary assistance has extremely complicated the matters of property redistribution, for such kinds of medical assistance were usually delivered in the frame of the same institutions. As concerns concentration of all the forms of social security of the population at the regional level, it particularly required withdrawing from the municipal control objects whose erec-460
tion was sponsored by the population. Overall, it is not evident that the mechanism of free property transfer fits the common legal pattern of property relations in Russia.
Thus, even assuming that some of the problems that arose in the course of the reform implementation can be mitigated over time, clearly it does not concern all of them.
Meanwhile, we cannot blame only objective factors, be those short-term challenges of the transitional period, or substantial conceptual drawbacks of the reform per se, for the postponement of the reform. Clearly, pursuing their political interests, regional elites played a substantial part in initiating such a decision. When Law No. 131-FZ was being passed, pressed by the federal center, they did not speak up openly against the new municipal legislation. However, the law did not match their political interests, as it implied a further decentralization of budgetary funds and property and emergence of new players in the political process whose existence will affect regional policy-making. These problems appeared yet more persistent in the regions where settlements were supposed to assume control over fairly valuable resources, such as expensive land and the respective future tax revenues. Thus, behind the eagerness to decelerate the reform pace there were both technical problems and political interests.
4.11.4. Struggling for the Reform - Results and Consequences
As noted above, the destiny of the municipal reform began being questioned since early June, when Grishankov clause was submitted to the Duma. The clause provided for postponement of the reform until January 1, 2009. Despite a fairly vigorous counteraction of a number of MPs and an ambiguous stance of the presidential Administration on the matter, on September 21, 2005, the clause was passed in the second and third readings, albeit in a somewhat moderate form.
The clause provided for a transitional period until January 1, 2009. Meanwhile, the amendments read that provisions of Law No.131-FZ in the part that did not concern powers and budgets of the newly established settlements should become effective as of January 1, 2006. As concerns the newly established settlements, during the transitional period procedures of their tackling matters of local significance should be subject to annually adopted statutes of the Subjects of the Federation. This means that matters of local significance of the newly established urban and rural settlements may be assigned, in full or in part, to the municipal rayons. Given that, it is allowed to re-channel revenue sources foxed with the settlements (including local taxes- that is, the land tax and the one on private individuals' property) to the rayon budget. In this case the settlements' revenues and expenditures may be consolidated into the municipal rayon's budget, i.e. the financing of the settlements may become estimate-based.
In addition, the financial equalization mechanisms were modified substantially. Originally, Law No. 131-FZ as well as amendments to the Budget Code of RF, suggested that subsidies both to municipal rayons and urban okrugs, and settlements should be granted primarily for the sake of equalizing their budget sufficiency. The respective provisions read that it would be just for some time that a limited and increasingly diminishing art of the subsidies might be allocated to bridge the gap between actual or projected revenues and expenditures. In accordance to the passed amendments, as far as settlements are concerned, during the transitional period the total amount of subsidies can be assigned using actual or projected revenue and expenditure indicators. As concerns municipal rayons or urban okrugs where the respective proportion should fall from 40% in 2006 to 20% in 2008, there also was introduced a new scale - in 2006, 100% of subsidies out of the re-
gional fund of financial support can be allocated to them using the noted indicators, while in 2007 - 80% and in 2008 - 50%.
The requirement of Law No. 131-FZ concerning a free property transfer in the aftermath of the reallocation of powers is still there, albeit the property transfer timeline have been put off until January 1, 2008. During thus appeared transitional period and until the registration of the right for a given property government agencies of the respective level can control this property for free, to duly exercise their powers.
The transitional provisions of the noted Law mere further modified, however, those amendments appeared less significant.
The analysis of the clauses shows that they can exert a substantial influence on the pace, vector and conditions of the reform implementation.
First, the ideology of the reform in the part of the balance of decisions to be made by the Federation and its Subjects has undergone considerable changes. Originally, Law 131-FZ read that all main parameters of the reform, including measures on preparations for its launch, were subject to the federal law, with the level of freedom of Subjects being substantially constrained. The noted modifications resulted in the situation in which , at least, for the coming 3 years the impact of decisions made at the regional level that concern allocation of powers between municipal rayons and settlements, as well as introduction of new financial equalization mechanisms becomes critical.
Second, the softening of conditions and procrastination of the transition deadlines with regard both to settlements and municipal rayons and urban okrugs will inevitably lower the municipal entities' eagerness to conduct measures that would ensure a grater efficiency of budget expenditures and the budget network restructuring, in particular. The impact of such measures can become particularly adverse, should the municipality community perceive them as the uncertainty about the adequacy of the respective conceptual approaches, rather than granting the municipal entities with extra timing to optimize their budget expenditures (which overall appears justified).
Third, the inevitable for the two-tier system rise of conflicts between settlements and municipal rayons may further aggravate with settlements seeing the formation of the local elected authority which should pursue the voters' interests, but practically would not be able to do it, as most powers and expenditure mandates have been assigned to municipal rayons. The experiences of the regions that had found themselves in such a situation pre-reform proves substantial costs associated with this particular model of municipal governance. The existence of the elected authority at the settlement level drastically changes the situation vis-avis the rayon model that prevailed in the regions prior to the start of the municipal reform, even if the settlements' powers are reduced to those once exercised by rural councils, volosts and other sub-municipal structures that had failed to obtain the status of municipal entity. Plus, their financing will be based on estimates.
4.11.5. The stage of Regionalization and Compromises
Once enacted, the amendments to the law on local self-governance armed the regional administrations with rather an ample set of policy options towards the newly established municipal settlements. There exist several basic models that differ by ways they address matters of municipal settlements' financing and powers:
1. the newly established settlements execute the complete list of matters of local significance, as per Law No. 131-FZ and form and execute their own budgets;
2. a part of such matters is assigned to the municipal rayon level, however, the settlements retain control over their budgets;
3. a part of such matters is assigned to the municipal rayon level, with the settlements being financed on the basis of estimate;
4. practically all such maters are assigned to the municipal rayon level, with the settlements being financed on the basis of estimate;
5. different models are employed for different groups of the newly established settlements within a given region.
There may also exist differences with regard to identification of revenue sources fixed with the newly established settlements in the event they have their own budgets.
According to the currently available information, quite a number of regions (47 of them) are going to fully implement Law No. 131-FZ since January 1, 2006. However, it seems that differences between them n other regions mostly should not be so great.
As concerns matters of local significance, in the latter group of Subjects (those that put off the implementation of the Law) their list is regulated by the regional law. By contrast, in pursuance of the same goal, the former group of regions those who declared a complete implementation of the Law) can jump on agreements on the transfer by the settlements of their powers to municipal rayons concluded in a mass way. Law No. 131-FZ originally provided for this particular instrument. The decision on the possibility for allocation of subsidies to settlements to finance the gap between actual (projected) revenues and expenditures makes the difference between budgetary and estimate-based financing not as much substantial as in the case for equalization of budgetary sufficiency. Thus, the real progress of the municipal reform in the pioneering regions requires a thorough monitoring.
Together with the reform regionalization processes, late 2005 saw the introduction of fairly essential modifications to its conceptual fundamentals on the federal level. It was Law No. 199-FZ of 31 December 2005 "On introducing amendments to individual statutes of the Russian Federation in conjunction with improvement of division of powers" (below referred to as Law No. 199-FZ) that contributed the most to the process. More specifically, it has made possible the following amendments to the reform concept:
First, one of the basic provisions of the concept of municipal reform was a clear division of matters of local significance between two levels of municipal settlements - that is, municipal rayons and settlements. While formally failing to break this principle, Law No. 199-FZ essentially allowed its substantial dilution.
Thus, in compliance with the Law, the settlements either retain or were additionally granted with such matters of local significance as organization of librarian services to their residents; creation of conditions for organization of leisure and provision of the local residents with services of organizations of culture; creation of conditions for development of physical culture and mass sports, local traditional folk arts; assistance to development of agricultural production; organization and implementation of measures on the work with children and the youth. In parallel with that, at the level of municipal rayons, there were added such matters of local significance as organization of librarian services to their residents by inter-settlement libraries; organization and implementation of measures of inter-settlement nature on the work with children and the youth, as well as creation of conditions for providing the settlements that form the municipal rayon with services on organization of leisure and provision of the local residents with services of organizations of culture; creation of conditions for development of local traditional folk arts; for development of agricultural production in providing the settlements that form the municipal rayon; securing conditions for development in the territory of the municipal rayon of physical culture and mass sports, etc.
Evidently, in the event, for instance, library services to the population it is yet possible to draw distinction between inter-settlement and settlement libraries (though the law does not specify such a distinction), but unlike this, it is impossible to do the same with regard to most other matters of local significance.
Secondly, the uncertainty with the division of powers compels one to question yet another conceptual provision of the municipal reform, which is, property should follow the power. In the conditions of uncertainty with division of powers there also inevitably arises with the problem of property assignment between the rayon and settlement levels. In other words, in practice this particular matter will increasingly grow political, though Law No.199-FZ is supposed to regulate a certain procedure of interaction between different parties concerned. The inconsistency of the interrelation between powers and property also manifests itself in the fact that the list of object of property that can belong to municipal entities in compliance with Art. 50 of Law No. 131-FZ has not been extended in accordance with new matters of local significance that Law No. 199-FZ has included in the municipal rayons and settlements' mandates.
Third, the original reform concept was built upon a clear distinction of matters of local significance and reassigned government powers from the perspective of sources of financing, degree of freedom and organization of solving the respective matters, etc. At this point, Law No. 199-FZ loosened the conceptual rigidity of the municipal law by reading that in the cases provide for by the law municipal entities may exercise powers the government failed to reassign to them-following their own initiative, so to speak. Law No. 199-FZ by itself granted local self-governance bodies with the right to independently introduce additional social protection and social assistance measures for individual categories of citizens without regard to the presence in federal statutes of provisions that stipulate the said right.
Law No.199-FZ also provided for additional measures aimed at simplification of the originally set mechanisms of introduction of the municipal reform. More specifically, it softened requirements to registration of municipal property. Meanwhile the adoption at the very end of 2005 of amendments to basic statutes that regulate the division of powers that came in effect as of January 1, 2006, will inevitably cause an additional disorganization in the course of the municipal reform implementation and aggravates the problem of the mismatch between municipal powers and sufficient financial sources.
Overall the amendments introduced by Law 199-FZ to the concept of municipal reform do not allow an unambiguous interpretation. On the one hand, they proceed from practical needs and enable one to soften evident conflicts and inconsistencies caused by Law No. 131-FZ. However, on the other hand, they made a substantial step towards substituting for a consistently implemented concept with fairly chaotic and conceptually untested steps caused by certain groups of interests. This can just complicates the reform implementation in the future.
Still another factor that influences the legal field and within the framework of which the municipal reform is implemented is the adoption of Law No. 198-FZ of 27 December 2005. The Law introduced amendments to the Budget Code of RF. The amendments have been debated for fairly long, which is why the given Law does not appear directly associated with the postponement o the reform, though the formally introduced amendments mostly concerned the period between 2006 through 2008. The amendments in question primarily highlighted the discussion on two fundamental issues in the area of interbudget-ary relations whose importance goes far beyond the three-year transitional period.
On the one hand, regions with the most financially prosperous municipal entities were displeased with too "liberal" approach to setting a negative transfer. The Budget Code provided for the possibility of setting such transfer only for the benefit of municipal 464
entities whose level of budgetary sufficiency was more than twice over the average one across the Subject of the Federation, with not more than 50% of the excess amount being withdrawn. The amendments in question capped the level of setting of the negative transfer at the level of 1.3 vs. the average budget sufficiency Subject-wide, while leaving the maximum level of withdrawal unchanged. The latter is a critical decision, as in the course of debates there were recommendations to increase the level up to 75 and even 100%, which would have an extremely adverse effect on incentives for such municipal entities to the boost their tax bases.
On the other hand, there arose the problem of motivating municipal entities that receive financial aid to boost their budget revenues. The possibility for the annual substitution for financial aid with rates of deductions from personal income tax as per the Budget Code did not help solve the problem. As a result the suggestion was made to grant Subjects of the Federation with the right to fix with municipal entities for the medium-term perspective (upon conciliation with them) standards of deductions from any taxes collected to the regional budget as a swap for the regional financial aid. While the first part of the suggestion - that is, the expansion of the list of revenue sources deductions from which can be fixed with municipal entities against financial aid, - was stipulated in full in the amendments, the possibility for fixing tax deductions for the term of over 1 year remained unclear. The law has set that the deductions rates should be fixed for the term of not less than one year, with no additional clarifications in the adopted amendments. Thus, the question as to whether recipient municipalities could have a possibility for the emergence of incentives to boost their tax bases has remained unanswered.
In conclusion, one can single out the following essential tendencies that arose in
2005 and which will be exerting a strong impact on the progress of he municipal reform:
- regionalization of the progress with the reform implementation, substantial interregional differences, coupled with many regions' eagerness to make the federal center believe they carry out a full-scale reform;
- retreat from the conceptual fundamentals of the municipal reform at the federal level, adaptation of the reform both to practical needs and regions' lobbyist pressures;
- the federal center's eagerness to ensure an adequate financing of municipal entities' powers, which will always come across constraints generated by the selected concept of municipal reform.
