17Section 6. Institutional Problems
6.1. Public Sector and New Privatization Policy
6.1.1. Public Sector Scope
General Dynamics in the Scope of Public Sector in 2008—2010
The currently available official, quantitative data on federal property allows one to infer that the Russian Government kept reducing its direct involvement in the national economy late in the first decade of the 21st century (Table 1).
Table 1
Dynamics of the number of organizations using federal property, and property assets registered in the federal property register in 2008 - 2010 (as units)
Date Federally-owned unitary enterprises (FOUSs) Joint-stock companies, In which the Russian Federation holds an interest as a shareholder Movable and immovable assets Land plots
as of January 1, 2008 5709a 3674a
as of January 1, 2009 3765a 3337a/3500b/3047c 1293788e1 67000e
as of January 1, 2010. 3517 a 2950a/2646 f 1276572g 126761g
May 2010.h 3124i 1704958 570 956 808 ha
a - according to the data included into privatization programs for the next year;
b - according to the data published by the Federal Agency for State Property Management with reference to the federal property register as of mid-January 2009 ;
c - the number of blocks of shares (interest, stakes) in business companies held by the federal government, according to the data reported in the Progress Report for 2008 issued by the Federal Agency for State Property Management ( net of 136 joint-stock companies which are subject to a special right - "Golden Share" - in participation in their management ) ;
d - according to the data published by the Federal Agency for State Property Management with reference to the federal property register as of mid-January 2009 ;
e - according to the data published by the Federal Agency for State Property Management with reference to the federal property register as of mid-January 2009, whereas the Progress Report for 2008 of the Federal Agency for State Property Management specifies that as of January 1, 2009 the immovable assets registered in the registry include 33,955 land plots, with a total of more than 150 land plots for which the Russian Federation has a registered land title ;
f - the number of blocks of shares in joint-stock companies owned by the Russian Federation, based on the federal property register according to the data of the Federal Agency for State Property Management ; g - according to the data of the Federal Agency for State Property Management with reference to the federal property register ;
h - according to the data The Federal Agency for State Property Management with reference to the federal property register ;
1 - the number of joint-stock companies which are managed by the federal government through the Federal Agency for State Property Management.
Source: The Forecast Plan ( Program ) of Federal Property for 2009 and the Guidelines for Privatization of Federal Property for 2010 and 2011 ; The Forecast Plan (Program) of Federal Property for 2010 and the Guidelines for Privatization of Federal Property for 2011 and 2012, the Progress Report for 2008 issued by the Federal Agency for State Property Management, M., 2009, The Forecast Plan (Program) of Federal Property and the Guidelines for Privatization of Federal Property for 2011 - 2013, www.rosim.ru,www.economy.gov.ru.
This is mostly referred to business economic agents who perform the state business function, which is basically supported by the Rosstat's (The Federal State Statistics Service) data
which reflect the composition of the public sector of the economy and its contribution in final figures of business activity (Table 2 u 3).
According to the data obtained through a Rosstat's monitoring of the public sector, the number of the economic agents monitored between mid-2008 and mid-2010 changed as follows (Table 2).
Table 2
The number of public sector organizations registered with territorial offices of the Federal Agency for State Property Management and agencies for federal property management of the constituent territories of the Russian Federation
in 2008-2010 .
Business companies in which
Date Total* SUEs, including state-owned enterprises Public agencies more than 50% of equity interest (shares) is held by public sector business the public sector companies
as of July 1, 2008* 77461** 9864 62571 3930 1089
as of Januaryl, 2009* 75878** 9144 61831 3795 1101
as of July 1, 2009* 77082** 8706 63019 4007 1350
as of 76658** 8122 63087 4089 1360
January 1, 2010.*
as of July 1, 2010.* 74867** 7230 61493 3915 2229
* - accounting of federal property is kept pursuant to the order of the Government of the Russian Federation dated July 16, 2007 "On Improving Accounting of Federal Property", No. 447 ;
** - including organizations whose state registered articles of association do not contain specific types, but net of joint-stock companies in which more than 50% of equity interest (shares) is held on the basis of joint public and foreign ownership.
Source : On the development of the public sector of the economy in the Russian Federation in H1 2008 (p. 87), in 2008 (p. 7), in H1 2009 (p. 7), in 2009 (p. 7), in H1 2010. (p. 7). M., Rosstat, 2008-2010. The estimates were made by the Gaidar Institute for Economic Policy.
It can be seen from Table 2 that over two years the total number of public sector organizations reduced (between July 1, 2008 and July 1, 2010.)1 by 3.3% (or by almost 2,6 thousand units) to total about 74,9 thousand units as of July 1, 2010.
It is the 26.7% reduction (or by more than 2,6 thousand units) in the number of unitary enterprises that was mainly responsible for the foregoing result. Much less reduction was observed in the number of agencies - by no more than 1.7% (or by almost 1,1 thousand units). As of July 1, 2010, the number of business companies in which more than 50% of equity interest was held by the public sector saw no changes over the two years, while the number of business companies in which more than 50% of equity interest (shares) was held by public sector business companies, doubled. The number of such companies grew up by more than 1140 to total more than 2,2 thousand as of July 1, 2010 thus reaching a historical maximum throughout the entire period of the 2000s.
It should be noted, however, that the foregoing trends were observed mostly within a timeframe covered in the latest statistical data (the period between mid-2009 and mid-2010), be-
1 The date of July 1, 2008 was used as the comparator, because by the moment of onset of the crisis in September 2008 as well as in mid-2008 and 2009 the total number of public sector organizations was almost equal to the number reported early in 2001 (more than 77 thousand units). At that moment, however, unitary enterprises accounted for a much bigger share against agencies in its structure. Moreover, it was not until mid-2003 when business companies in which more than 50% of equity interest (shares) was held by public sector business companies, were included into the statistical reports. 366
cause, as of July 1, 2009, the total number of public sector organizations were little different from the respective value recorded as of July 1, 2008, and it is only unitary enterprises that showed reduction among all other types of legal entities in that period.
In the meantime, the total number of public sector organizations reduced by almost 3% (or by more than 2,2 thousand units) over a year between mid-2009 and mid-2010. The number of entities reduced for all types of legal entities, except for business companies in which more than 50% of equity interest (shares) was held by public sector business companies.
It is a 17% reduction (or by almost 1,5 thousand units) in the number of unitary enterprises that was mainly responsible for such a result. Though reduction in the number of agencies was much smaller, by no more than 2.4%, it was almost the same as for unitary enterprises in absolute values. The number of business companies in which more than 50% of equity interest was held by the public sector, reduced by 2.3% (or less than 100 units). It is worth noticing that the number of business companies in which more than 50% of equity interest (shares) was held by public sector business companies, increased significantly (by almost 1,7 times), nearly 900 units.
The crisis of 2008 - 2009 made it important to answer the question on how the crisis effected the participation of the state in the economy as producer of goods (works, services). It is only in part that the Rosstat's monitoring supports the opinion about growth in the state-owned share in different final performance indicators (Table 3).
Table 3
Public sector's participation share in 2007 - 2010, %
Indicator 2007 2008 2009 H1 2010
Volume of shipped goods produced by the company, completed works and services
w\o subcontracting :
- mineral recourses production 12.8 13.5 11.5 10.2
- fuel and energy recourses production 11.8 13.2 11.3 9.0
- manufacturing sector 84 8.5 9.5 8.5
- production and distribution of electric power, gas, and water 11.4 13.0 14.0 18.0
Scope of construction works performed w\o subcontracting 4.0 3.6 3.8 3.9
Passenger turnover at transportation companies * 65.9 63.9 63.2 55.3
Volume of commercial transportation (dispatch) of cargos by transportation companies 72.9 71.1 76.6 78.2
(net of companies involved in pipeline transportation)
Commercial cargo turnover performed by transportation companies (net of companies 94.6 94.3 93.8 92.6
involved in pipeline transportation)
Communication services ** 9.8 9.9 13.9 13.9
In-house research and development costs 72.4 72.6 74.4 71.1
Volume of paid services rendered to the general public 16.4 16.3 16.5 18.8
Capital investments from all sources of financing *** 19.5/ 21.5/ 22.8/ 21.8/
15.0 15.9 17.1 15.1
Net proceeds from sales of goods, works, services (net of VAT, excise taxes and other 10.2 9.8 10.6 17.2
similar mandatory payments)
Average staffing number 24.9 24.0 24.6 24.9
* - net of companies involved in municipal passenger electrical transportation ;
** - net proceeds from sales of goods, works, services (net of VAT, excise taxes and other similar mandatory payments) ;
*** - in the numerator, net of small business entities.
Source : On the Development of the Public Sector of the Economy in the Russian Federation in 2007 (pp. 9, 42, 90-91, 92, 103, 134, 136, 143-144, 164), in 2008 (pp. 13, 43, 45-46,47, 53, 61-63, 67-68, 88), in 2009 (pp. 13, 45, 47-48, 49, 52, 60-62, 66-67, 87), in H1 2010. (pp. 13, 44, 46-47, 48, 51, 54-56, 60-61, 81). M., The Federal State Statistics Service (Rosstat), 2007 - 2010. The estimates were made by the Gaidar Institute for Economic Policy.
However, as it can be seen from Table 3, in 2009 and H1 2010, like throughout the entire period of 2000', that the public sector had an insignificant share in most indicators (no more than 10-15%), with a slightly bigger share in the field of investments (more than 15-20%) and employment (24-25%), and a substantial share only in the field of transportation (more than 60-90%, depending on an indicator) and in-house research and development costs (more than 70%).
In addition, all of the official statistical reports highlighted growth in the state-owned share in 2009 - 2010 against 2007 - 2008 in the field of production and distribution of electric power, gas and water, communication services, capital investments, paid services to the general public, and such a generalized financial indicator as net proceeds from sales of goods, works, services (net of VAT, excise taxes and other similar mandatory payments) 1 .
On the other hand, the state-owned share decreased in the field of mineral resources production (above all, production of fuel and energy resources). As a result, in H1 2010 the public sector's contribution in the field of production of fuel and energy mineral resources dropped below 10%, for the first time since 2007. The same trend has been developing in the field of passenger turnover of transportation companies and in-house research and development costs.
Taking a closer look at the situation, one can see that the public sector was dominating only in a few of the industries (railway cargo shipment and passenger transportation, forest regeneration, production of sodium carbonate) at the 2008 - 2009 year-end.
In most other cases the public sector accounted for less than 20%, save for production of sodium chloride, ethyl alcohol made of food raw material, railway broad gouge sleepers, a few types of machine building products (tractor grain drills (2008), civil helicopters (2009), long-haul freight car, radio receiving equipment), all types of paid services, where the state-owned share remained less than 50%.
The same situation was observed in H1 2010, except that the public sector's contribution in the production of sodium chloride, including sea water and saline solutions, dropped below 10%, whereas, on the other hand, production of externally powered broadcasting radio receivers, and helicopters, exceeded 50% of the total output of these types of products.
On the other hand, there are three important factors which have to be taken into account in making quantitative assessment of the public sector.
The first factor concerns completeness of accounting of the property owned by public agencies. Among the dates to be focused on is March 2010, when the Federal Agency for State Property Management published information on that the federal property register could be deemed to have been completed for the first time since 1991.
This information provides a perfect picture of the real quality of administration of the economic policy pursued by the federal government, in particular the federal government's direct functions. Suffice it to say that about 12 years have passed since the date of approval of the Provision on Accounting of Federal Property and Maintaining Federal Property Reregisters by the Order of the Government of the Russian Federation No. 6962 dated July 3, 1998, let alone the acute need in such information back in the first half of the 90s, at least by the mo-
1 However, the data on the H1 2010 must be supported by data on the current year as a whole, both for this indicator and production and distribution, electric power, gas and water, paid services to the general public.
2 The Order ceased to be in force under the Order of the Government of the Russian Federation dated July 16, 2007, No. 447, "On Improving Accounting of Federal Property" which regulates accounting of federal property under the new Provision.
ment when the cheque privatization completed in mid-1994, when the privatization process remained quite intensive. However, completeness of the registry prepared to date is questionable, because the Federal Agency for State Property Management itself admits that about 1,5 K legal entities failed to provide information on whether or not they own any assets of federal property.
The issue of completeness of federal property accounting can be well illustrated by comparing the data published by the Federal Agency for State Property Management and the Ministry of Economic Development and Trade the Russian Federation (Table 4).
Table 4
Changes in asset accounting in the federal property register
Date In hard copies including
in electronic form % of the number of assets accounted in hard copies
as of 5 September 2007 1,293,788
as of January 1, 2009 701,361 * 14,096 2.0
as of 15 February 2010. 1,304,302 1,273,759 93.9
as of 15 May 2010. 1,369,741 1,367,128 ** 99.8
as of 15 September 2010. 1,483,856 1,482,266 99.9
* - on the other hand, the Progress Report for 2008 issued by the Federal Agency for State Property Management specified that, as of January 1, 2009, the register contained information on the following assets owned by title-holders under a relevant corporeal right: 354,085 immovable assets and 240,365 movable assets (net of federally-owned business companies and joint-stock companies which are subject to a special right of participation -Golden Share - in their management ); ** - as of June 7, 2010.
Source :, www.rosim.ru,www.economy.gov.ru, The Progress Report for 2008 issued by the Federal Agency for State Property Management, M., 2009.
For example, the number of assets, which the Federal Agency for State Property Management reported as registered in the federal property register early in 2009, was registered in the same as of September 5, 2007 (since September 6, 2007, accounting of federal property, maintaining of the federal property registry and provision of information from the same have been governed by the Provision on Accounting of Federal Property approved by the Order of the Government of the Russian Federation dated July 16, 2007, No. 447), according to the data published by the Ministry of Economic Development and Trade the Russian Federation. According to the data published by the Ministry of Economic Development and Trade, a hardcopy inventory of the federal property in the state federal property database was completed by the beginning of the summer of 2010, before the Order of the Government of the Russian Federation dd. July 16, 2007, No. 447, came into force.
Over the recent few years, a lot of efforts have been made in copying the relevant information into electronic files to enter into the Automated System of Federal Property Accounting, which in 2010 allowed information in hard copies to be fully copied to e-files.
Logically, the issue of completeness in accounting can be referred to the assets owned by constituent territories of the Russian Federation and local government bodies, although it can be assumed that the very logic of the crisis, numerous functions and obligations they have to perform as a result of delineation of authorities in the mid-2000s among different levels of power must have prevented any growth in assets owned by the regions and municipalities in Russia.
The second factor concerns complexity of the assessment of state-owned share in different resulting data, because the data published by the Rosstat, which is based on the definition set
forth in the government documents, fails to provide a true picture of the situation in the Russian economy.
Based on the Order No. 1 issued on January 4, 1999 by the Government of the Russian Federation (as amended by the Order of the Government of the Russian Federation dated December 30, 2002, No. 939), it includes four types of economic agents at the federal and regional levels :
- state unitary enterprises on the basis of economic control and operating management rights (state-owned) ;
- public agencies ;
- business companies in which more than 50% of equity interest is held by the public sector ;
- business companies in which more than 50% of equity interest (shares) is held by public sector business companies.
It should be noted, however, that this definition of public sector contains a series of weak points as follows :
- it fails to cover commercial and non-profit entities in which federal and regional unitary enterprises have an interest, at least those in which unitary enterprises hold more than 50% equity interest ;
- the practice shows that there is no need to hold more than 50% equity interest (shares) in order to be able to control a business company. To be more exact, more than 50% of voting shares must be held to be able to control a company, which is relevant for the enterprises at which during the privatization campaign (1992 - 1994) 1/4 of the equity (similar to the preferences granted under option 1 during transformation into a joint-stock company) was transferred as preferred shares to the employees, but the limits imposed on privatization by the specifics of an industry (e.g., the defense industrial sector) required that the public sector retain the majority interest. As a result, the interest to be held by the government accounted for 38% of the charter capital, but more than 50% of voting shares ;1
- it fails to cover business companies in which a total of public and business companies', in which more than 50% equity interest (shares) is held by the public sector, stockholding exceeds 50% of the charter capital, although individually the public and business companies', in which a state-held share is dominating, stockholdings account for less than 50% 2 ;
- the same is true of business companies in which a total of more than 50% of the charter capital is held by the public sector and business companies in which more than 50% of
1 An example of this type is Svyazinvest, a telecommunication holding company. The structural reform of the company, which was completed as early as the first half of the 2000s, was made through consolidation of its subsidiaries by way of establishing seven trans-regional companies ( Centertelecom, Severo-Zapadny Telecom, VolgaTelecom, Uzhnaya Telecommunicatsionnya Kompaniya, Uralsvyazinform, Sibirtelecom, Dalsvyaz ) at the levels of respective federal districts and subsequent affiliation of 65 regional telecom joint-stock companies to these companies. The Holding Company holds about 51% voting shares and less than 50% of equity interest in all of these seven joint-stock companies, like in Rostelecom. Meanwhile, a small interest ( less than 10% ) was held by the federal government in the equity of three regional companies ( Centertelecom, Severo-Zapadny Telecom, Uralsvyazinform).
2 For example, the state holds the majority interest in the Gazprom's authorized capital indirectly through other companies ( Rosneftegaz and Rosgazifikatsiya ) in which the state is a shareholder, even after a scheme designed to obtain the public majority interest for 2004-2005 was implemented.
equity interest (shares) is held by public sector business companies, i.e. in which a stateheld participating interest in the charter capital exceeds 50%, although individually their stockholdings are less than 50%, as well as when control over a business company can be obtained by putting together stockholdings of public sector business companies and the business companies they control ;
- it lacks transparency with subsidiaries and affiliated companies integrated into business-groups created around public sector organizations controlled indirectly through various levels (lower-tier subsidiaries, etc.) or stockholding less than 50%.
An obvious lack of transparency in the field of proprietary rights to a company or companies, and a multiple-stage, multiple-level system of corporate control at state-owned companies (by analogy with private companies) makes it important to carry out a special applied research in the field of estimation of the state-owned share of participation in the economy.
Based on the foregoing, it is a nontrivial task to define guidelines on the extent the public sector should participate in both the economy at large and specific sectors, because of a small state-owned share, according to the recent official statistical reports, presumable concentration at low stages of "agency chains" inside specific companies, as well as a non-public nature of the proprietary right to the assets of state-owned corporations.
Finally, it is impossible yet to provide unbiased and reliable quantitative assessment of an indirect impact by state-controlled banks and development institutions acting as agents in supporting any given companies.
Let us recall that the following options of indirect strengthening of the public proprietary position through launching special programs on urgent support to Russian companies and banks in the fall of 2008 were considered:
- Vnesheconobank GC (VEB) becomes a holder of the blocks of shares pledged under a program on refinancing of external debts owed by a series of companies operating in the fuel and power sector, construction industry, transport and communication sector, metal mining industry, microelectronics, metallurgy and other industries (a total of USD 11,6 bln of loans grated to 10 companies, although the amount of loans approved at the end of Q1 2009 totaled USD 14,33 bln, while USD 50 bln was planned initially through depositing the Central Bank's foreign exchange reserves in VEB)1 ;
- upon implementation of a program on support to the stock and bond market, retain holding of the stocks and bonds acquired in the market through VEB at the expense of the National Wealth Fund (NWF) (initially, it was expected to allocate RUB 175 bln in 2008 and 2009 each, a total of RUB 350 bln) ;
- continue further expansion of state-owned corporations (regardless of partial withdrawal of allocated financial resources) ;
- transfer private assets to state-owned banks against granted loans and through direct acquisitions, continue establishing state-owned holding companies ;
- increase a state-held interest in banking capital as part of a program on the banking system recapitalization (USD 40 bln)2.
1 www.veb.ru.
2 The key question with regard to the whole package of impact on regulation of proprietary relations is what kind of policy Vneshekonombank GC (VEB), which in the fall of 2008 began to refinance external debts of a series of largest Russian private companies, is going to pursue. Due to a short-term nature of the loans granted to these companies, a question of repayment and, in case of failure to repay, not a simple choice between new lend-
Based on a series of currently available signs, one can infer that the potential of indirect expansion of the public sector through banks and development institutions acting as public agents in supporting specific companies remains outstanding to a great extent due to loyalty to them.
The foregoing can be supported by the following facts: in particular, the loans granted to such companies as Gazpromneft, Sitronics, Evraz Group, Rusal, PIK GROUP and Altimo so that they could repay their external debt were rolled over in the first half of October 2009, in December 2009, Vnesheconobank made an early repayment of a loan of RUB 175 bln to the Ministry of Finance of Russia, which was allocated in the fall of 2008 from the National Wealth Fund (NWF) to support the stock market (RUB 13,27 bln was paid as interest accrued on the deposit), and a series of Russian private companies began to repay the loans obtained from VEB GC to be able to refinance their external debt. As of the beginning of 2010, the size of the portfolio of loans granted by VEB for these purposes decreased to USD 7,8 bln.1 The recipients of the VEB's loans consolidate their debts in other banks. For example, on September 30, 2010 Sberbank granted a loan of USD 4,6 bln to Rusal till December 2013, with a 1.5-year roll-over, to refinance the debt owed to VEB. The money covers in full the outstanding debt. Let us recall that VEB granted a loan of USD 4,5 bln in November 2008 to repay the loan obtained in April 2008 from a syndicate of banks to purchase 25% + 2 interest in Norilsk Nickel2.
Hence the foregoing allows one to infer, with certain modifications, that Russia escaped counter recession nationalization in a narrow sense, while the scope of this phenomenon in a wider sense remains unclear, given the activity of economic agents with participation of the state, which excludes new assets in the treasury.
Nevertheless, most of the expert assessments agree to that a state share of participation in the Russian economy increased as a result of activities of mixed-sector companies in the corporate control market and due to the public indirect recession counter measures. In particular, indirect effect of state-controlled banks and entities acting as public agents in implementing the recession counter measures increased, however the scope of the process (and potential of further growth of public influence) remains unclear.
The data provided in Table 5 are very illustrative in terms of dynamics, but seems to be understated as applied to the scope of the public sector in Russia. According to the available estimates (Troika Dialog, 2008), the federal and regional agencies controlled about 40% of market capitalization of the Russian stock market late in 2007 against 24% in 2004. By the beginning of 2008, "the depth of concentration of state-owned property" accounted for about 40-45%, according by the Expert-400 Rating. In 2009, different experts reported this indicator in the range of 50%.
ing, debt restructuring (de facto roll-over of the loans), initiating bankruptcy proceedings or obtaining the title to the pledged assets - arose.
From a purely formal point of view, it was not an apparent nationalization, because no assets are added to the federal treasury and VEB, being a public corporation, is treated as a non-profit entity.
The largest banks with a state-held interest in their equity, which received public support, have been facing the same dilemma.
1 www.veb.ru, 20.07.10.
2 Sberbank itself considers its loan to Rusal as a business transaction in contrast to the VEB's loan. Direct investments, No. 11 (103), 2010, p. 69 - 70.
Table 5
Private sector's share in GDP in economies in transition1
Country 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 00 0 0 2 0 0 2
Central Europe Czech Republic 10 15 30 45 65 70 75 75 75 80 80 80 80 80 80 80 80 80 n/a n/a
Hungary 25 30 40 50 55 60 70 75 80 80 80 80 80 80 80 80 80 80 80 80
Poland 30 40 45 50 55 60 60 65 65 65 70 75 75 75 75 75 75 75 75 75
Slovakia 10 15 30 45 55 60 70 75 75 75 80 80 80 80 80 80 80 80 80 80
Slovenia 15 20 30 40 45 50 55 60 60 60 65 65 65 65 65 65 65 70 70 70
Baltic states
Estonia 10 10 25 40 55 65 70 70 70 75 75 75 80 80 80 80 80 80 80 80
Latvia 10 10 25 30 40 55 60 60 65 65 65 65 70 70 70 70 70 70 70 70
Lithuania 10 10 20 35 60 65 70 70 70 70 70 70 75 75 75 75 75 75 75 75
South-East Europe Bulgaria 10 20 25 35 40 50 55 60 65 70 70 70 70 75 75 75 75 75 75 75
Romania 15 25 25 35 40 45 55 60 60 60 60 65 65 65 70 70 70 70 70 70
CIS countries
Russia 5 5 25 40 50 55 60 70 70 70 70 70 70 70 70 65 65 65 65 65
Ukraine 10 10 10 15 40 45 50 55 55 55 60 60 65 65 65 65 65 65 65 60
* - the data on the Czech Republic has not been included into the EBRD's Report on Economies in Transition since 2008.
Source : European Bank for Reconstruction and Development. Transition Reports.
Hence the crisis brought up the issues of defining the scope and manageability of the public sector in the Russian economy, as well as encouraged discussion about launching a new "big privatization". In any case, intensification of the national policy in the field of privatization becomes relevant.
6.1.2. Current National Privatization Policy
The forecast plan of privatization for 2010 which was approved by the Government of the Russian Federation at the end of November 2009, included shares in 449 joint-stock companies as well as 56 assets belonging to other property in the treasury of the Russian Federation, including immovable assets, sea and river vessels.
The privatization program was extended considerably in mid-March 2010 and included 230 FOUSs for privatization, which was not the case in the original version of the document. The number of joint-stock companies whose blocks of shares would be offered for sale, increased by more than 1.5 times (up to 690 units). The number of treasury entities included into the privatization plan increased in a slightly smaller proportion (up to 74 units).
By comparing the obtained data, which describes the forecast plan (program) of privatization for 2010, with the basic parameters of privatization programs in the previous years, one may infer that the original version is not too different from the previous programs (Table 6).
1 According to the method adopted at the EBRD, "the private sector's share in the GDP" is measured on the basis of statistical data obtained from accredited (public) and unaccredited sources. The share includes income generated by registered private companies from officially accounted business activities, as well as income generated from non-accounted business activities, provided that such activities are backed up by a reliable information thereof. For the purpose of this measurement, private companies mean all companies whose majority interest is held by private individuals and legal entities.
Table 6
Comparative data on dynamics of privatization of federal state-owned unitary enterprises and federally-held blocks of shares in the H2 of the 2000s . a
FOUSs, units OJSCs, units
Period Scheduled for Privatized Scheduled for Sold blocks
privatization' privatizationc of shares in JSC ,
2006 885 383 356d
2007 368 377 911 377e
2008 440 213 404 209f
2009 235 316+256g 291 52h
a - net of blocks of shares in closed joint-stock companies, participating interest in the charter capital of LLCs and other federally-owned assets ;
b - in the originally approved versions of the forecast plans (programs) of privatization of federal property (net of the assets transferred from the plans (programs) of the previous year) ;
c - all of the preliminary measures were completed, and decisions on the terms and conditions of privatization were made ;
d - the estimated value based on the data obtained from the Federal Agency for State Property Management's Report "On Privatization of Federal Property in 2007" ;
e - net of 523 of blocks of shares which were put out to auction scheduled for 2008 ;
f - including 135 of blocks of shares which were put out for sale under the privatization program of 2007, but net of 268 sales which were scheduled for summation in 2009 ;
g - the number of FOUSs on which the Ministry of Defense of Russia made a decision on corporization, in addition to those on which the same decision was made by the Federal Agency for State Property Management ; h - including 26 of blocks of shares which were put out for sale under the privatization program of 2008, but net of 221 joint-stock companies on which privatization measures in terms of sales continue in 2010. Source : The Federal Agency for State Property Management's Report "On Privatization of Federal Property in 2007". M., 2008; The Progress Report for 2008 issued by the Federal Agency for State Property Management. M., 2009; An interview with Medvedev Y.M., the Deputy Head of the Federal Agency for State Property Management - "Rossiiskaya Gazeta" dd. March 30, 2010; The 2009 Progress Report on the Plan (Program) of Privatization of Federal Property. M., 2010.
After a short break which resulted basically from the global financial crisis, the process of privatization was reported to intensify. According to the preliminary data published by the Federal Agency for State Property Management, 132 blocks of shares (interest) of business companies were sold at RUB 22,67 bln in 2010, 125.95% of the target value (RUB 18 bln) of the forecast plan1.
Hence one can infer that from the financial point of view income from privatization of this type of assets exceeded the pre-recession level of 2006 - 2007 (less than RUB 20 bln), not to mention the values reported in the period of financial and economic downturn in 2008 - 2009. The number of sold blocks of shares increased 2.5 times against 2009. On the other hand, the final values of this indicator attained under the privatization program in 2010 were modest against those of the previous years (including 2008).
High financial performance figures attained in 2010 resulted basically from the sale of state-held interest (13.1%) in Rosgosstrakh OJSC whereby RUB 8,675 bln was transferred to the federal budget, which is probably the largest privatization transaction since 2005. It should be noted, however, that the opening and closing bids were equal2. This transaction is comparable to sale of the entire state-held interest, RUB 7,559 bln, in Mosmetrostroi OJSC, when the closing bid tripled the opening one.
1 http://www.rosim.ru, December 30, 2010 .
2 http://www.prime-tass.ru, December 13, 2010 . 374
In addition, the sale of blocks of shares in the "Institute for Research and Development of Tractors NATI OJSC (Moscow, 100%) at RUB 1278 mln, Tyretskiy Salt Mine (the Irkutsk Region, 100%) at RUB 660,667 mln, Isktimcement (the Novosibirsk Region, 25.5%) at RUB 651,858 mln, The VODGEO Scientific Research Institute (Moscow, 100%) at RUB 617,996 mln, the Large Diameter Pipe Works (25% + 1 share) at RUB 258,4 mln, "Nauka" Science and Production Association (Moscow, 20.41%) at RUB 211,134 mln, "Altai" Publishing and Printing Plant (Barnaul, 100%) at RUB 145,6 mln can be highlighted among large privatization transactions. The closing bids were either slightly higher or equal to the opening bids almost in all of the foregoing cases, save for the sale of the entire state-held interest in NATI, when the closing bid increased by almost 20% vs. the opening bid.
On the other hand, in some cases bidders demonstrated a very high activity. For example, the shares in Intour-Khabarovsk OJSC, Khabarovsk International Tourism and Commerce Company, were sold at 60% beyond the opening bid, while the shares in Suvodskiy Le-sopunkt OJSC (the Kirov Region) were sold at 90% beyond the opening bid, and 100% of shares in the Dagestan State Research and Development and Planning and Surveying Institute for Land Management OJSC were sold in the auctions which were held on September 30. In the end, The Federal Agency for State Property Management contributed RUB 118,55 mln to the budget of the Russian Federation. Furthermore, the Federal Agency for State Property Management reported the sales of the state-held interest in the Uralyuvelir-Market Trading Company OJSC (Yekaterinburg), Altaivzryvprom (Barnaul), Kotlaskhleb (the Arkhangelsk Region)1 as one of the most successful transactions in September.
A visible slump in privatization amidst the financial and economic downturn highlighted the weak points in the legal privatization arrangements and procedures, which slow down growth rates and efficiency of privatization of federal property in the period of economic upturn too.
The Ministry of Economic Development and Trade's and the Federal Agency for State Property Management's proposals on making relevant amendments to the Law of the Russian Federation, which have been developed since 2005 and focused on expansion of a time horizon of the privatization program for a scheduled period with a view to ensure continuous privatization and optimize managerial decisions in this field2, logically derive from the foregoing. The proposals were materialized in the Federal Law of May 31, 2010, No. 106-FZ, which made many important amendments to the applicable Law on Privatization3.
A new large-scale program on "big privatization" with a 5-year time horizon (for 2011— 2015), which is very unusual for the entire contemporary history of Russia, and an impressive coverage (about 900 enterprises and companies, including the largest ones) was announced in the fall of 2010. In spite of that the economy resumed to grow unlike in the previous year, when the Russian economy developed amidst the economic downturn, it was not until late November that another program of privatization was adopted, like in 20094.
1 http://www.rosim.ru.
2 See p. 5, see also the IET Annual Review "The Russian Economy in 2005. Trends and Outlooks (Issue 27)" P. 4.8.1. The Development of Modern Law on Privatization of Public and Municipal Property in the Russian Federation, pp. 499-510.
3 The package of amendments to the Law on Privatization and some other innovations are discussed in detail in section 5.1.5.
4 Normally, late in summer, early in fall over the last six years.
The Forecast Plan (program) of privatization of Federal Property and the Guidelines for Privatization of Federal Property for 2011 - 2013, which were finally approved by the Order of the Government of the Russian Federation dd. November 27, 2010, No. 2102-p, were developed by taking into account a longer effective period (from one to three years) of the forecast plan (program) of privatization of federal property based on the recent amendments made to the applicable Law on Privatization as well as the results of the work performed by federal executive agencies in terms of optimization of the structure of federal property.
The document defines privatization as a tool designed to "meet the goal of transition to innovative and socially oriented economic development".
The approved program of privatization consists of two sections.
The first section describes the basic principles and guidelines established by the federal government, as well as plans of privatization of the 10 largest companies. It is the government that will make a decision on when and how each of the companies is to be sold.
In such companies as Rosneft, Rushydro, FSK, Sovkomflot, Russian Railroads, Obyedi-nennaya Zeronovaya Kompaniya (OZK), Rosagroleasing, as well as VTB, Sberbank, Rosselkhozbank the federal government considers to reduce its equity interest by selling different sizes of blocks of shares over five years to come (2011 - 2015). It should be noted, however, that the federal government must retain corporate control of almost all of the foregoing companies while it is blocking and minority interest that are to be sold.
The second section contains a list of assets scheduled for privatization according to the normal procedure (114 SUEs, 844 joint-stock companies, including 35 closed joint-stock companies, 10 limited liability companies and 73 assets belonging to other property in the treasury of the Russian Federation, including real estate property, sea and river vessels), the in the manner which has been applied over the few recent years.
The maximum income of near RUB 1 t from privatization is estimated in the forecast plan in the period between 2011 and 2013 with due regard to the market situation and in case the Government of the Russian Federation makes special decisions on privatization of the largest companies which look very attractive in terms of investment. Without such companies, income from privatization in 2011 is estimated only RUB 6 bln, and RUB 5 bln in 2012 and 2013 each.
Today, it is hard to comment on whether or not the set targets can be met, having in mind the particular value of the federal budget revenues from privatization. It should be noted, however, that throughout the entire period of economic growth the value only once approached RUB 100 bln in 2003, although it was outrun three times (in 2003-2004 and 2007) by total income from privatization (sale) and utilization of federal property (i.e. including dividends from state-held blocks of shares, lease payments, etc.). The problem is how to avoid sale of state-owned property assets at dumping prices. One may notice a certain contradiction here: amidst the economic downturn the federal government may have a temptation to get rid of state-owned property as soon as possible, however, it only can realize good money in a favorable economic situation, while it needs no income from privatization in case of budget surplus.
Implementation of the privatization program would therefore face a serious problem in case of severe macroeconomic situation (e.g., caused by a second wave of crisis or global recession). In any case, privatization (due to a non-renewable source and one-time transactions) only can improve the budget system for a while.
6.1.3. Public Sector Structure and Key Economic Agents
Like any of the programs of privatization over the last three years, the Forecast Plan (Program) of Privatization of Federal Property and the Guidelines for Privatization of Federal Property for 2011 - 2013 approved by the Order of the Government of the Russian Federation dd. November 27, 2010, No. 2102-p contain data on the number of federally-owned unitary enterprises (of FOUSs) and joint-stock companies in which the Russian Federation holds an interest, only for the beginning of the calendar year. This is why we have no sufficient information to be able to assess the dynamics of these elements of the public sector in 2010.
Let us examine in detail the changes which took place inside the main categories of economic agents which are regarded as federal property in 2009.
Federally-owned unitary enterprises
Dynamics and the federal structure of FOUSs in 2006 - 2009 are shown below in Table 7. In 2009, the total number of federally-owned unitary enterprises reduced by 6.6% (or almost by 250 units) to reach about 3,5 thousand units by the beginning of 2010. Such a volume of reduction in the subsector of FOUSs stands in stark contrast to reduction in the number of economic agents of this business legal structure in the previous 2008, when it reduced by almost two thousand units.
Table 7
Dynamics and federal structure of federally-owned unitary enterprises in 2006-2009
as of June 1, as of January 1, as of January 1, as of January 1, as of January 1,
Industry 2006 2007 2008 2009 2010.
units % units % units % units % units %
Non-production sector 1817 25.3 1670 25.6 1151 20.2 988 26.25 1424 40.5
Production sector 1624 22.6 1539 23.55 1744* 30.5 476 12.65 653 18.55
- machine-building 660 9.2 634 9.7 292 8.3
- forestry industry 94 2.7
- light industry 187 2.6 179 2.7 59 1.7
- food-processing industry 55 0.75 51 0.8 27 0.75
- constructions materials 55 0.75 49 0.8
industry
- chemical industry 34 0.5 33 0.5 47** 1.3
- metallurgy industry 30 0.4 28 0.4 14 0.4
- other industry 603 8.4 565 8.65 120 3.4
agricultural sector 913 12.7 826 12.65 618 10.8 611 16.2 410 11.65
building industry 752 10.5 668 10.2 300 8.0 252 7.2
transport and communica- 612 8.55 536 8.2 409 7.2 249 6.6 338 9.6
tions sector
Forestry management 53 0.75 49 0.75 37 0.65
Other industries 1407 19.6 1245 19.05 1750 30.65 1141 30.3 440 12.5
Total 7178 100.0 6533 100.0 5709 100.0 3765 100.0 3517 100.0
* - production sector and building industry put together ; ** - chemical and petrochemical industries.
Source : The Forecast Plan (Program) of Federal Property for 2007 and the Guidelines for Privatization of Federal Property for 2007-2009; The Forecast Plan (Program) of Federal Property for 2008 and the Guidelines for Privatization of Federal Property for 2008-2010, The Forecast Plan (Program) of Federal Property for 2009 and the Guidelines for Privatization of Federal Property for 2010 and 2011 ; The Forecast Plan (Program) of Federal Property for 2010 and the Guidelines for Privatization of Federal Property for 2011 and 2012 ; The Forecast Plan (Program) of Federal Property and the Guidelines for Privatization of Federal Property for 2011-2013 ; The estimates were made by the Gaidar Institute for Economic Policy.
Early in 2010, non-production enterprises formed the biggest group in the sectoral structure of FOUSs (40.5% of the total number of FOUSs). The number of production sector (18.55%), agricultural sector (11.65%) and a group of other industries not included into the base classification (12.5%) was substantial. Transport and communications accounted for 9.6% and building industry for 7.2% of FOUSs.
The changes in the sectoral structure of FOUSs in 2009 mostly tended to slash in the absolute count and share of enterprises in other industries which in total accounted for 30.3% of all of the federally-owned unitary enterprises as of the beginning of 2009 against only 12.5% a year on. A share of agricultural enterprises reduced markedly (by more than 4.5 p. p.) as well. A share of the building industry reduced insignificantly from 8% to 7.2%.
On the other hand, a share of non-production industries (by more than 14 p. p.), production sector (by almost 6 p. p.), transport and communications sector (by 3 p. p.) increased considerably. It is necessary to highlight a growth (by 1,44 times or by almost 440 units) in the absolute count of non-production FOUSs and the production sector (by 1,37 times or by almost 180 units) against reduction in the same by nearly 700 and 200 units, respectively, in the group of other industries not included into the base classification, and the agricultural sector.
In the end, the absolute count of non-production unitary enterprises as of the beginning of 2010 was bigger than two years ago, while it was smaller in other industries. By comparing the number of FOUSs by industry of the production sector as of the beginning of 2010 with the number reported as of the beginning of 20071, we can see a country-wide reduction2.
Federally-owned joint-stock companies
First of all it should be noted that by the beginning of 2010 the number of federally-owned joint-stock companies reduced by 11.6% (or by almost 400 units) to total 2950 units against the beginning of 2009. Their number was found to be less than three thousand for the first time throughout the 2000s.
Let us examine in detail the changes in the number of federally-owned joint-stock companies by sector over the last few years (Table 8).
As of the beginning of 2010, non-production enterprises accounted for the biggest share (39.4% of all of the specified joint-stock companies) in the sectoral structure of federally-owned joint-stock companies, followed by the production sector (about 23%) and the agricultural sector (about 13.5%). The group of other industries, transport and communications sector, building industry accounted for less than 10%.
Referring to the changes in the sectoral structure of federally-owned joint-stock companies in 2009, one may infer with certainty that a share of non-production enterprises increased rapidly (by almost 3,5 times, from 11.5% to 39.4%). A share of the transport and communications sector increased less than 1 p. p. A share of the production sector dropped by half (from 47.5% to 22.9%), and a share of the agricultural sector (by 2.2 p. p.) and the building industry (by 1.6 p. p.) decreased a bit less. A share of the group of other industries remained unchanged in the general structure of joint-stock companies with federal interest (by nearly 10 %).
1 No industries were specified inside the sectoral structure of FOUSs as of the beginning of 2008 and 2009.
2 Except for the chemical industry on which the data as of the beginning of 2010 is provided together with the petrochemical industry. In addition, the data as of the beginning of 2010 specifies the forestry industry, which was not the case in the previous periods, when no data on the constructions materials industry was provided. 378
Table 8
Dynamics and federal structure of federally-owned joint-stock companies or subject to the special right («golden share»), in 2005 - 2008 .
Industry
as ofJune 1, 2006
as of January 1, 2007
as of January 1, 2008
as of January 1, 2009
as of January 1, 2010.
units % units %
Non-production sector 356 9.6 405 10.1
Production sector 1772 47.6 1797 44.95
- machine-building 663 17.8 632 15.8
- printing industry
- forestry industry
- light industry 27 0.7 29 0.7
- food-processing industry 141 3.8 127 3.2
- constructions materials 53 1.4 53 1.35
industry
- chemistry 98 2.6 89 2.2
- metallurgy 101 2.7 94 2.35
- other industry 689 18.5 773 19.35
transport and communica- 396 10.6 353 8.9
tions sector
building industry 380 10.2 404 10.1
agricultural sector 363 9.7 534 13.35
forestry management 99 2.7 88 2.2
Other industries 358 9.6 416 10.4
Total 3724 100.0 3997 100.0
units
%
units % units %
383 11.5 1162 39.4
1583 47.45 674 22.85
245 8.3
158 5.35
35 1.2
11 0.4
46 1.55
36 1.2
31 1.05
112 3.8
280 8.4 269 9.1
234 7.0 160 5.4
522 15.65 397 13.45
335 10.0 288 9.8
3337 100.0 2950 100.0
638 17.4 1878* 51.1
397 10.8
761 20.7
3674 100.0
* - including the production sector itself and the building industry (by 695 units or 18.9%), fuel and energy industry (597 units or 16.25%) and the military and industrial (by 586 units or 15.95%) sector. Source : The Forecast Plan (Program) of Federal Property for 2007 and the Guidelines for Privatization of Federal Property for 2007-2009 ; The Forecast Plan (Program) of Federal Property for 2008 and the Guidelines for Privatization of Federal Property for 2008-2010, The Forecast Plan (Program) of Federal Property for 2009 and the Guidelines for Privatization of Federal Property for 2010 and 2011 ; The Forecast Plan (Program) of Federal Property for 2010 and the Guidelines for Privatization of Federal Property for 2011 and 2012 ; The Forecast Plan (Program) of Federal Property and the Guidelines for Privatization of Federal Property for 2011 - 2013 ; The estimates were made by the Gaidar Institute for Economic Policy.
A triple growth in the absolute count (by almost 780 units) of federally-held non-production joint-stock companies, with their number decreasing in all of the other industries, is worth noting, with the highest decrease in the production (by 2,34 times or by more than 900 units) and agricultural sectors (by more than 120 units).
In the end, as of the beginning of 2010, the absolute count of non-production joint-stock companies with a state-held interest was found to be larger than over the previous periods, except for a period between 2003 and 2004.
With regard to other industries as of the beginning of 2010, the number of joint-stock companies with a state-held interest was less than in the preceding year. The same picture can be seen in comparing the number by industry as of the beginning of 2010 against the changes that took place as of the beginning of 20071.
Equally important characteristic of joint-stock companies with a state-held interest is how these companies can be structured based on the size of a state-held interest in the same (Table 9).
1 No industries were specified in the sectoral structure of joint-stock companies in which the federal government held an interest as of the beginning of 2008 and 2009.
Table 9
Dynamics and structure of joint-stock companies with a state-held interest in 1999-2008 (including the special right («golden share»)) based on the size of state-held interest
Total up to 25 % between 25 and 50 % between 50 and 100 % 100 % Golden Share
Date with-
units % units % units % units % units % total out shares
1999 3316/ 3896a 100 863 26.0 1601 48.3 470 14.2 382 11.5 580b
January 1, 3524c 100 1746 49.55 1211 34.4 506 14.35 61 1.7
2001
August 3949e1 100 1843 46.7 1393 35.3 625 15.8 88 2.2 542b
2001
January 1, 4407 100 2270 51.5 1401 31.8 646 14.65 90 2.05 750b
2002
January 1, 4222e 100 2152 51.0 1382 32.7 589 13.95 99 2.35 1076 118
2003
June 1, 2003 4205 100 2148 51.1 1339 31.8 600 14.3 118 2.8
October 1, 4035 100 2051 50.8 1308 32.4 552 13.7 124 3.1 640 148
2003
January 1, 3704 100 1769 47.75 1235 33.35 540 14.6 160 4.3 591 251
2004
June 1, 2004 3905 100 1950 49.9 1183 30.3 499 12.8 273 7.0
March 1, 4075/ 100 1697 44.8 1154 30.4 487 12.85 453 11.9 ... 284
2005 3791f 5
June 1, 2005 3783/ 3524g 100 1544 43.8 1093 31.0 474 13.5 413 11.7 ... 259
June 1, 2006 3724/ 3481g 100 1063 30.5 885 25.4 397 11.4 1136 32.6 . 243
January 1, 3997/ 100 932 24.4 814 21.3 368 9.6 1702 44.6 . 181
2007 3816g
January 1, 3674 100 771 21.0 645 17.6 269 7.3 1989 54.1
2008
January 1, 3337/ 100 769 23.0 510 15.3 200 6.0 1858 55.7 . 136
2009 3047h
January 1, 2950/ 100 697 23.6 358 12.1 138 4.7 1757 59.6
2010. 2646i
a - 3896 business companies (including 3611 open joint-stock companies, 251 closed joint-stock companies, and 34 limited liability partnerships and limited liability companies) in which the Russian Federation holds an interest are mentioned in the text of the Concept of State-Owned Property Management and Privatization of 1999. 3316 units is the estimated value which was estimated by totaling the number of blocks of shares (interest) of different size which was mentioned in the text of the Concept ;
b - total number of joint-stock companies which are subject to the special right («golden share»), without specifying the number of those in which the federal government holds no interest ;
c - joint-stock companies, net of 48 interest and blocks of shares in foreign companies, in addition, there is data on that Russia holds 119 shares, interest, and blocks of shares in foreign companies with a book value of USD 1,4 bln ;
d - the data of the draft program of privatization for 2002 which the Federal Agency for State Property Management submitted to the Government of the Russian Federation, whereas according to the data of the Registry of the Federal Agency for State Property Management, 4308 of blocks of shares joint-stock companies were held by the federal government as of September 1, 2001 ;
e - only open joint-stock companies, net of 118 open joint-stock companies subject to the special right («golden share») (without shares), blocks of shares in 102 joint-stock companies transferred to operating management of Rosspirtoprom FOUS, 75 closed joint-stock companies and participating interest in the charter capital of LLCs transferred under the Order of the Government of the Russian Federation dd. April 2, 2002, No. 454-p "On Cessation of State Shareholding in the Charter capital of Credit Institutions" or obtained by way of inheritance, gift, etc ;
f - 3791 units is the estimated number of joint-stock companies owned by the Russian Federation, net of 284 joint-stock companies which are subject to the special right («golden share») (without block of shares). This value was used to calculate a share of joint-stock companies with a specific equity interest to compare with the data on previous dates. For reference: as of January 1, 2005, the federal government held an interest in 3767 joint-stock companies, net of the abovementioned 284 joint-stock companies subject to the special right («golden share») and equity stakes in 24 LLCs transferred to the treasury under the Order of the Government of the Russian Federation dd. April 2, 2002, No. 454-p "On Cessation of State Shareholding in the Charter capital of Credit Institutions" ;
g - the estimated number of joint-stock companies whose shares are held by the Russian Federation, net of joint-stock companies which are subject to the special right («golden share») (without block of shares). This value was used as the basis for estimation of a share of joint-stock companies with a certain equity interest for comparison with the data on the previous dates ;
h - the number of blocks of shares (interest, stakes) of federally-owned business companies according to the data of the Progress Report for 2008 of the Federal Agency for State Property Management (net of 136 joint-stock companies subject to the special right («golden share») to their management) ;
1 - the number of blocks of shares in joint-stock companies owned by the Russian Federation, according to the federal property register, as based on the data published by the Federal Agency for State Property Management. Source : www.mgi.ru ; On the Results of Privatization in the Russian Federation in 2000, and Tasks for 2001 (based on the materials prepared for the Meeting of the Government of the Russian Federation on 08/02/2001); Materials for the Meeting of the Government of the Russian Federation dedicated to "On the Results of Privatization of State-Owned Property in 2001, and the Program of Privatization in 2002" ; Russian Economy in 2001. Trends and Outlooks (Issue 23). Volume 2. M.: IET, March 2002 p. 62; Braverman A.A. "On Measures to Improve Efficiency of Federal Property Management and Assessment Criteria Thereof // Bulletin of the Federal Agency for State Property Management. 2003, No. 1. pp. 13-14; Medvedev Y. M., Performance Results of the Federal Agency for State Property Management of Russia and Territorial Agencies Thereof in 2002 and Tasks for 2003 // Bulletin of the Federal Agency for State Property Management. 2003, No. 1. pp. 30-31; Enterprises with State-Held Interest. Institutional and legal aspects and economic efficiency. Series "Scientific Reports: Independent Economic Analysis", No. 155. M.: Moscow Social Scientific Foundation ; Association for Studies in Public Economics, 2004. p. 47; The Program of Privatization of Federal Property for 2004 (The Forecast Plan (Program) of Federal Property for 2004 and the Guidelines for Privatization of Federal Property till 2006) // Bulletin of the Federal Agency for State Property Management. 2003, No. 3. pp. 4-5. The Key Issues of Improving Effectiveness of Federal Property Management and the Dividend Policy Guidelines in the Russian Federation// Bulletin of the Federal Agency for State Property Management. 2003, No. 4. p. 8; Andrianov V. Russia in Global Economy // Society and Economy. 2003, No. 11., p. 84; The Forecast Plan (Program) of Federal Property for 2005 ; Materials related to the Meeting of the Government of the Russian Federation on March 17, 2005, "On Measures to Improve Efficiency of Federal Property Management" ; The Forecast Plan (Program) of Federal Property for 2006 and the Guidelines for Privatization of Federal Property for 2006-2008 ; The Forecast Plan (Program) of Federal Property for 2007 and the Guidelines for Privatization of Federal Property for 2007-2009 ; The Forecast Plan (Program) of Federal Property for 2008 and the Guidelines for Privatization of Federal Property for 2008-2010, The Forecast Plan (Program) of Federal Property for 2009 and the Guidelines for Privatization of Federal Property for 2010 and 2011 ; the Progress Report for 2008 of the Federal Agency for State Property Management, M., 2009 ; The Forecast Plan (Program) of Federal Property for 2010 and the Guidelines for Privatization of Federal Property for 2011 and 2012 ; The Forecast Plan (Program) of Federal Property and the Guidelines for Privatization of Federal Property for 2011 - 2013 ; The estimates were made by the Gaidar Institute for Economic Policy.
The upward trend in a interest allowing the federal government to have a full-fledged corporate governance due to the size of such interest which emerged in the mid-2000s, continued to develop in 2009.
As of January 1, 2010, the federal government could hold majority or full control in more than 64 % of the total companies against less than 62 % in the preceding year. Such a development was caused by growth in a share of full (100 %) interest from 55.7 % to 59.6%, though a share of majority interest (by more than 50% but less than 100% of the equity) in the general structure of state-held blocks of shares reduced from 6% to 4.7%. A share of blocking
interest (from 25 to 50% of the equity) reduced more (by more than 3 p. p.) whereas a share of minority (up to 25% of the equity) interest increased insignificantly.
The absolute count of blocking and majority interest reduced by some 30 - 31%. Minority and full interest reduced less, by 9.4% and 5.4% respectively.
Vertically integrated structures continued to grow actively in the year just ended. Eight of such structures were completed as early as 2009. Sixteen vertically integrated structures were expected in 2010. Such structures as Control Systems OJSC and Concern Avtomatika began to set up in the Russian defense industrial sector (Defense Industry).
The United Shipbuilding Corporation (USC) expanded considerably. Blocks of shares in 11 enterprises were contributed in the USC's charter capital as payment for its follow-on offering due to its expansion. Most of them constitute a blocking interest, and only two of them are 100% less one share. A new USC's subsidiary, the South facility, was added to the three available subsidiaries, the West, the North, and the Far East central shipbuilding and ship repairing facilities. The charter capital of the newly established subsidiary joint-stock company of the USC must be financed by contributing a blocking interest in seven open joint-stock companies and 5%-interest in the Lotos Shipbuilding Company held by the Astrakhan Region. In addition, the USC may subsequently contribute core assets owned by the United Industrial Corporation of Mezhprombank which in 2010 committed a substantial delay in payment under unsecured loans of RUB 32 bln granted by the Central Bank of Russia for the purpose of restructuring and had to pledge a majority interest in three shipbuilding companies located at St. Petersburg (Baltiiskiy Zavod (88.32%), Severnaya Verf (75.82%), Aceberg Design Engineering Bureau (64.82%)) to the Central Bank of Russia. Mezhprombank previously made efforts to sell these assets to the USC, but the deal fell through, as the parties thereto had differences in how to valuate the assets.
Besides, it should be noted that the structural policy plan contains decisions related to the electric power and communications industries.
State-held blocks of shares in 20 open joint-stock companies are planned to be contributed to the charter capital of the above mentioned INTER RAO UES OJSC, in which state-held share is allowed to be reduced down to an amount equal to a minority interest, as payment to a supplement offering by this joint-stock company due to increase in the charter capital of the same. Irkutskenergo (40%) and Enel OGK-5 (26.43%) account for the biggest share of these, while a state-held share in other companies, which are mostly represented by territorial power generating companies, is miserable, not more than 3%1.
State-held blocks of shares in Central Telegraph (21.78%) and three regional telecom companies, including Bashinformsvyaz (28.24%), Moscow Long-Distance Telephone Station No. 9 (MMTS-9) (38%) and Chukotkasvyazinform (75%) will be contributed to the charter capital of Svyazinvest OJSC, a holding company, as payment for a supplement offering by the company due to increase in the charter capital of the same. The 100% interest in Ingushelec-trosvyaz OJSC was previously transferred to Svyazinvest. These measures are in line with a plan of reorganization of the group through consolidation of trans-regional communication companies (MRK) to Rostelecom OJSC, which was approved by the Svyazinvest's Board of Director as early as 2009, Rostelecom is a subsidiary of the All-Russian telecommunication
1 This is referred to the interest which was transferred to the federal government as a result of restructuring in the
electric power industry upon winding-up of RAO UES of Russia in 2008.
holding company and will serve as the base company for setting up an integrated operator providing a complete bundle of services in the field of telecommunications.1
It is evident that active position of companies with a state-held interest in the corporate control market was limited, which is logical given the post-recession environment. It should be noted that Sberbank purchased a blocking interest in Detskiy Mir - Center OJSC from Sistema JSFC at RUB 3,4 bln2, and also may purchase a controlling interest in Troika Dialog, an investment company, and 20% in Scartel, the leading mobile telephony operator in the Wi-max network in Russia, Rostelecom may obtain another 5%. The blocking interest in Scartel is already held by Russian Technologies State Corporation3. Sberbank sold the debts and assets of bankrupt Izh-Auto to Avtovaz and the Russian Technologies State Corporation Group of Companies, though the transaction itself is scheduled for 2011 and implies that Sberbank will subsequently participate in financing investment programs of the United Automobile Group (UAG) set up by Sberbank, as the principal creditor of Izh-Auto to manage the same. In addition to UAG, the largest bank in the country has a direct relationship with other two car assembly plants which were established after the collapse of the Soviet Union: Sberbank Capital which manages non-core assets of Sberbank, holds a blocking interest in the Derways Works located at Karachay-Cherkessia, while the bank itself is a creditor of TagAz (the Rostov Region)4.
In February 2011, VTB purchased, at RUB 103 bln, an interest of 46.48% in Bank of Moscow on a sole source basis and a blocking interest in Stolichnaya Insurance Group which holds another 17% in this bank. These assets, which previously were in the municipal ownership, were transferred to the municipally controlled Central Heating Company which closed a transaction with VTB.5
In the meantime, in the year to date, no any significant actions whatsoever were reported in the field of reincorporation of state-owned companies as joint-stock companies under control of the federal government with subsequent liquidation of the companies which are subject to specific time frames in terms of operation, as was pointed out in the Message of the President of the Russian Federation addressed to the Federal Assembly in November 2009.
According to the estimates made by the representatives from the Ministry of Economic Development and Trade, the Russian Technologies State Corporation cannot be reincorporated as a joint-stock company until 2013 - 2014 when holding and subholding companies will appear inside the company. Vnesheconobank (VEB) (a state-owned company) and the Deposit Insurance Agency (DIA), after carving-out and sale of problem assets which were transferred to them amidst the crisis, will remain non-profit institutions focusing on the tasks which were set originally by the federal government at the time of their establishment6.
The Housing and Public Utilities Reformation Foundation Group of Companies will continue to operate for a period of one year, though the Group was planned to be shut down on January 1, 2012. It is obvious that liquidation of the Group will be painful from the point of view of social security, because over the recent few years the Group has been actively in-
1 www.rbc.ru, December 8, 2010.
2 http://www.prime-tass.ru, December 8, 2010.
3 www.lenta.ru, January 31, 2011.
4 Belikov D. Izh-Auto Will Drive Up to Avtovaz Through Public Financing // Commersant, No. 235P (4535) dd. 20.12.2010.
5 www.lenta.ru, February 24, 2011 .
6 www.rbc.ru, December 7, 2010 .
volved in the programs of housing stock overhaul whose format of implementation is uncertain, above all in terms of participation of the general public in such programs.
6.1.4. The Impact of the National Policy in the Field of Property Management on the Budget
The crisis which hit the Russian economy in the fall of 2008, naturally resulted in overall reduction in all of the revenue items of the federal budget in 2009, including revenues generated from the implementation of the national policy in the field of property management. A sizable growth in budget revenues which somehow are linked with state-owned property was reported in 2010 after economic growth recovery.
Let us recall that all of the federal budget revenues generated from the property owned by the public sector can be broken down into two groups according to the nature and sources of the same. The first group consists of revenues generated from utilization of state-owned property (renewable sources). The second group comprises lump-sum revenues which can be renewable due to transition of the title thereto from the federal government to other legal and physical bodies upon sale thereof, which includes the privatization process (non-renewable sources).
The (Table 10 and 11) below contains data on revenues which (with only a few exceptions) is included into the laws on the execution of the federal budget in 2000 - 2010 to the extent relating to utilization and sale of state-owned property only in the form of tangible objects1.
1 The following revenues are not included into consideration: federal budget revenues generated from payments for natural resources (which include aquatic biological resources, revenues generated from forest resources and subsurface resources management), compensations for agricultural losses which are connected with the retirement of agricultural lands, as a result of financial operations (revenues from budget allocations (revenues on federal budget balances and allocation of the same, since 2006 также revenues from management of the funds of the Stabilization Fund of the Russian Federation (in 2009 - the Reserve Fund and the National Wealth Fund), revenues from allocation of money accumulated as a result of auctions on sale of shares held by the Russian Federation), interest received from domestic federal budget loans, interest on public loans (revenues from payments of the governments and legal entities of foreign nations as payment of interest on loans granted by the Russian Federation, revenues from enterprises and organizations as payment of interest and guarantees on loans obtained by the Russian Federation from the governments of foreign nations and international financial institutions)), from the provision of paid services or compensation for public costs, transfer of profits of the Central Bank of Russia, a few types of payments due by federal and municipal enterprises and organizations (patent fees and registration dues payable for official registration of software, data warehouses and integrated circuit topographies and other revenues which prior to and including 2004 were an integral part of payments due by public organizations (apart from business revenues generated by the Vietsovpetro Joint Venture since 2001 and transfer of a share of profits of FOUSs since 2002)), revenues from execution of production sharing agreements (PSAs), revenues from disposal and sale of confiscated and other assets which are converted into public revenues (including assets which became public ownership by way of an inheritance or gift or treasure troves), revenues from lotteries, other revenues from utilization of federally owned assets and rights (revenues from exercising the rights to military, special- and double-purpose intellectual property (R&D and technological works), revenues from exercising the rights to scientific and research property owned by the Russian Federation, revenues from operation and utilization of motor roads assets, and other revenues from utilization of assets owned by the Russian Federation), as well as permitted types of activity of organizations, credited to the federal budget, revenues from sale of national stocks of precious metals and precious stones. 384
Table 10
Federal budget revenues generated from utilization of state-owned property (renewable sources) in 2000 - 2010, RUB mln
Year Total Dividends on shares (20002009) and revenues from other forms of equity interest (2005-2010) Lease payment for land owned by the public sector Revenues from lease of property owned by the public sector Revenues from of a share of profits which remains after FOUSs pay taxes and mandatory fees Business revenues generated by Vietsovpetro Joint Venture
2000 23244,5 5676,5 - 5880,7 - 11687,3a
2001 29241,9 6478,0 3916,7b 5015,7c 209,6d 13621,9
2002 36362,4 10402,3 3588,1 8073,2 910,0 13388,8
2003 41261,1 12395,8 10276,8e 2387,6 16200,9
2004 50249,9 17228,2 908,1e 12374,5g 2539,6 17199,5
2005 56103,2 19291,9 1769,2h 14521,2i 2445,9 18075,0
2006 69173,4 25181,8 3508,0h 16809,9i 2556,0 21117,7
2007 80331,85 43542,7 4841,4h 18195,2i 3231,7 10520,85
2008 76266,7 53155,9 6042,8h 1 14587,7i 2480,3 -
2009 31849,6 10114,2 6470,5h 1 13507,6 i 1757,3 -
2010 69728,8 45163,8 7451,7h 12349,2j 4764,1 -
a - according to the data published by the Federal Agency for State Property Management, no separate entries were made, just a total payment from state-owned enterprises ( RUB 9887,1 mln ) ( without specific components) was specified in the law on execution of the federal budget for 2000 ; b - the amount of payment for lease of (i) agricultural lands and (ii) urban and municipal lands ; c - the amount of revenues generated from lease of the property assigned to (i) scientific and research institutions, (ii) educational institutions, (iii) medical and healthcare institutions, (iiii) public museums, public institutions of arts and humanities, (iiiii) public archive bodies, (iiiiii) Ministry of Defense of Russian Federation, (iiiiiii) organizations subordinate to the Ministry of Railway Communication of Russian Federation, (iiiiiiii) public institutions which provide scientific and research services to academies of science and (iiiiiiiii) other revenues generated from lease of property owned by the public sector ;
d - according to the data the Federal Agency for State Property Management, no separate entries were made, the value coincided with the value of other revenues generated from payments due by public and municipal organizations, in the law on execution of the federal budget for 2001;
e - the amount of revenues generated from lease of property owned by the public sector (without specifying payment for lease of land) ;
f - payment for lease of (i) urban and municipal lands and (ii) federally-owned lands upon delineation of the state's title to land ;
g - the amount of revenues generated from lease of the property assigned to (i) scientific and research institutions, (ii) educational institutions, (iii) medical and healthcare institutions, (iiii) public institutions of arts and humanities, (iiiii) public archive bodies, (iiiiii) federal post offices subordinate to the Ministry of Communications and Infromatization of Russia, (iiiiiii) public institutions which provide scientific and research services to academies of science and (iiiiiiii) other revenues generated from lease of federally-owned assets (property) ; h - lease payment upon delineation of the state's title to land, and revenues from sale of the right to conclude agreements on lease of federally-owned land (for 2008 - 2010, save for the land plots owned by federal autonomous institutions) ;
1 - revenues generated from lease of property being under operating management by federal bodies of state authority and the entities set up by such bodies, and in operating control of FOUSs: transferred for operating management to public (i) scientific and research institutions, (ii) institutions which provide scientific and research services to the Russian Academy of Science, (iii) educational institutions, (iiii) medical and healthcare institutions, (iiiii) federal post offices subordinate to the Ministry of Communications and Infromatization of Russia, (iiiiii) public institutions of arts and humanities, (iiiiiii) public archive bodies, and (iiiiiiii) other revenue generated from lease of property being under operating management by federal bodies of state authority and the enti-
ties set up by such bodies, and in operating control of FOUSs1 (for 2006 - 2009 net of revenues from permitted types of activity and utilization of federal property located outside the Russian Federation, which are generated outside of the country and were not specified at all in the previous years2) ;
J - revenues generated from lease of property being under operating management by federal bodies of state authority and the entities set up by such bodies (save for autonomous bodies): transferred for operating management to public (i) scientific and research institutions, (ii) institutions which provide scientific and research services to the Russian Academy of Science, (iii) educational institutions, (iiii) medical and healthcare institutions, (iiiii) public institutions of arts and humanities, (iiiiii) public archive bodies, (iiiiiii) being under operating management by the Ministry of Defense and agencies which report to the same, (iiiiiiii) owned by the federal government and administered by the General Affairs Department of the President of the Russian Federation and (iiiiiiiii) other revenues generated from lease of property being under operating management by federal bodies of state authority and the entities set up by such bodies (net of revenues from permitted types of activity and utilization of federal property located outside the Russian Federation, which are generated outside of the country). Source: laws on execution of the federal budget for 2000 - 2009 ; The Report on Execution of the Federal Budget as of January 1, 2011, www.roskazna.ru; The estimates were made by the Gaidar Institute for Economic Policy.
Proceeding to a preliminary analysis of the outcomes of the budget impact on the national policy in the field of property management in 2010, as related to renewable sources, a substantial growth in revenues which constitute direct derivatives of the results of the current economic operations (dividends and transfers of a share of profits of unitary enterprises) should be focused on, above all.
Dividends on federally-held blocks of shares increased by 4,5 times against 2009, failing to catch up with the pre-recession figures of 2008 (RUB 53,2 bln), but outran the level of 2007 (RUB 43,5 bln)3. Transfers of a share of profits of FOUSs increased less (by 2,7 times) to reach the ceilings (RUB 4,76 bln) throughout the entire 2000s.
The situation with revenues from lease, which in 2009 seemed to be more favorable against decrease in revenues from current economic operations, was found to be less optimistic in 2010. Revenues from lease of federal property (RUB 12,35 bln) reduced by 8.6%, corresponding to the level of 2004. Revenues from lease of land continued to grow like in 2009 (by more than 15%), outrunning in absolute value (RUB 7,45 bln) all of the previously reached levels.
The structure of federal budget revenues from renewable sources came back to be in line with the pre-recession structure.
1 In 2008 - 2009, FSUEs were not mentioned as a source of revenues generated from lease of the property they operate, and lease of the property being under operating management by federal bodies of state authority and the entities set up by such bodies don't include the property of the federal autonomous agencies.
2 According to the data published by the Federal Agency for State Property, revenues from utilization of federal property located outside the Russian Federation (apart from the revenues generated by the Russian participant in Vietsovpetro Joint Venture), totaled RUB 315 mln in 1999 and RUB 440 mln in 2000. In the future a major role in the organization commercial utilization of the federal real estate property located outside the country стало играть FSUE "Overseas Property Management Enterprise" which reports to the Administration Office of the President of the Russian Federation.
3 It should be noted, however, that in 2007, apart from dividends on the shares of Russian joint-stock companies inside the country, the federal budget generated about RUB 10,5 bln as revenues generated by the Russian participant in the Vietsovpetro Joint Venture. However, upon completion of measures aimed at developing Za-rubezhneft OJSC whose charter capital was enriched in 2007 with a 50% interest held by the Russian participant in the Vietsovpetro Joint Venture, apart from blocks of shares of two joint-stock companies as research and development establishments, the federal budget ceased to generate revenues from this source which in 2008 - 2010 ceased to exist in the structure of revenues from renewable sources.
Like in 2008, more than half of the total revenues from the analyzed sources were comprised of dividends whose share doubled to reach 64.8% against 31.8% in 2009. Revenues from lease of federal property resumed their share at the same level (17.7% against 42.4% in 2009 and 19.1% in 2008). A share of revenues from lease of land, which surged forward in 2009 (20.3%), dropped by half to 10.7%, but nevertheless outran the figures reported in 2006-2008. (5-8% of total revenues from renewable sources). Revenues from the profits transferred by FOUSs (6.8%) outran not only the result obtained in 2009 (5.5%), but also the ceiling reported in 2003 (5.8%) during the 2000s.
Proceeding to analysis of federal budget revenues from privatization and sale of state-owned property (Table 11), it should be noted that since 1999 revenues from sale of the main share of such assets (shares, and also land plots in 2003 - 20071) became to be referred to sources of financing of the federal budget deficit.
Table 11
Federal budget revenues from privatization and sale of property (non-renewable
sources) in 2000 - 2010, RUB mln
Year Total Sale of federally-owned interest (2000-2009) and other forms of equity interest (2005-2010)a Sale of land plots Sale of different types of property
2000 27167,8 26983,5 - 184,3b
2001 10307,9 9583,9 119,6c 217,5+ 386,5+0,4 (IAs)d
2002 10448,9 8255,9e 1967,0f 226,0g
2003 94077,6 89758,6 3992,3h 316,2+10,5i
2004 70548,1 65726,9 3259,3j 197,3+1364,6+0,04 (IAs)k
2005 41254,2 34987,6 5285,7' 980,9m
2006 24726,4 17567,9 5874,2' 1284,3n
2007 25429,4 19274,3 959,6o 5195,5p
2008 12395,0 6665,2+29,6 1202,0r 4498,2+0,025 (IAs)s
2009 4544,1 1952,9 1152,5r 1438,7s
2010 18677,6 14914,4 1376,2r 2387,0+0,039 (IAs)s
a - these are referred to domestic sources of financing of the federal budget deficit, a total of RUB 29,6 mln in 2008 (according to the data included into the Report on Execution of the Federal Budget as of January 1, 2009) is referred to federal budget revenues, but not available in the law on execution of the federal budget for 2008 ; b - revenues from privatization of entities owned by the public sector which are referred to domestic sources of financing of the federal budget deficit ;
c - revenues from sale of land plots, and leasehold rights to the land plots owned by the public sector (specifying land plots on which privatized enterprises are located) which are referred to as federal budget revenues ; d - the amount of revenues generated from (1) disposal of federally-owned assets (property) which are referred to sources of internal financing of the federal budget deficit, (2) revenues (i) from sale of apartments, (ii) from sale of public productive and non-productive assets, means of transportation, other equipment and other tangible assets, as well as (3) revenues generated from disposal of intangible assets (IAs) which are referred to as federal budget revenues ;
e - including RUB 6 mln from sale of shares held by the constituent territories of the Russian Federation ; f - revenues from sale of land and intangible assets whose value was not drilled down, which are referred to as federal budget revenues ;
g - revenues from sale of assets owned by the public sector (including RUB 1,5 mln from sale of the assets owned by the constituent territories of the Russian Federation ) which are referred to sources of internal financing of the federal budget deficit ;
1 In 2003 - 2004, given sale of the leasehold right.
h - includes revenues: (1) from sale of land plots which contain immovable assets owned by the federal government prior to the alienation, to be credited to the federal budget, (2) from sale of other land plots, as well as from sale of the right to conclude agreements on lease of such land plots, (3) from sale of land plots upon delineation of state's title to land, as well as from sale of the right to conclude agreements on lease of such land plots to be credited to the federal budget which are referred to sources of internal financing of the federal budget deficit ; i - the amount of (1) revenues from sale of federally-owned assets (property) which are referred to sources of internal financing of the federal budget deficit, and (2) revenues generated from sale of intangible assets which are referred to as federal budget revenues ;
j - includes revenues: (1) from sale of land plots prior to delineation of state's title to land on which immovable assets which the federal government owned prior to alienation, are located to be credited to the federal budget, (2) from sale of other land plots, as well as from sale of the right to conclude agreements on lease of such land plots, (3) from sale of land plots upon delineation of state's title to land, as well as from sale of the right to conclude agreements on lease of such land plots to be credited to the federal budget which are referred to sources of internal financing of the federal budget deficit ;
k - the amount of (1) revenues from sale of federally-owned assets (property) which are referred to sources of internal financing of the federal budget deficit, (2) revenues (i) from sale of apartments, (ii) from sale of equipment, means of transportation and other tangible assets to be credited to the federal budget, (iii) from sale of byproducts resulting from disposal of vessels, (iiii) from sale of the property owned by SUEs, entities and military assets, (iiiii) from sale of by-products resulting from disposal of military equipment and ammunition, (3) revenues generated from disposal of intangible assets (IAs) which are referred to as federal budget revenues; l - includes revenues generated: (1) from sale of land plots prior to delineation of state's title to land on which immovable assets which the federal government owned prior to alienation, are located, (2) from sale of land plots upon delineation of state's title to land, to be credited to the federal budget, (3) from sale of other land plots owned by the public sector prior to delineation of state's title to land and not intended for residential housing construction (the latter only refers to 2006) which are referred to sources of financing of the federal budget deficit ; m - revenues generated from sale of tangible and intangible assets (net of federal budget revenues generated from disposal and sale of escheat and other property converted into public revenue), include revenues (i) from sale of apartments, (ii) from sale of the assets owned by FOUSs, (iii) from disposal of the property being in operating control by federal agencies , (iiii) from sale of military assets, (iiiii) from sale of by-products resulting from disposal of military equipment and ammunition, (iiiiii) from sale of other federally-owned assets (property), (iiiiiii) from sale of intangible assets which are referred to as federal budget revenues ;
n - revenues generated from sale of tangible and intangible assets (net of revenues generated as a state-held share in profit products in executing production sharing agreements (PSAs) and federal budget revenues generated from disposal and sale of escheat and other property converted into public revenue), include revenues (i) from sale of apartments, (ii) from sale of the assets owned by FOUSs, (iii) from disposal of the property being in operating control by federal agencies , (iiii) from sale of military assets, (iiiii) from sale of by-products resulting from disposal of military equipment and ammunition, (iiiiii) revenues generated from disposal of other federally-owned assets (property) which are referred to as federal budget revenues ;
o - revenues generated from sale of federally-owned land plots upon delineation of state's title to land, which are referred to sources of financing of the federal budget deficit ;
p - revenues generated from sale of tangible and intangible assets (net of revenues generated as a public share in profit products in executing production sharing agreements (PSAs) and federal budget revenues generated from disposal and sale of escheat and other property turned into public revenue, revenues from sale of sequestrated lumber), include revenues (i) from sale of apartments, (ii) from sale of the assets owned by FOUSs, (iii) from disposal of the property being in operating control by federal agencies , (iiii) from disposal of released movable and immovable assets of federal bodies of state authority in which military and equivalent services are provided for , (iiiii) from sale of military products from federal executive authorities as part of military and technical cooperation, (iiiiii) revenues generated from disposal of other federally-owned assets (property) which are referred to as federal budget revenues ;
r - revenues generated from sale of federally-owned land plots (save for the land plots owned by federal autonomous institutions) which are referred to as federal budget revenues ;
s - revenues generated from sale of tangible and intangible assets (net of revenues generated as a share in profit products to which the state is entitled in executing production sharing agreements (PSAs), federal budget revenues from disposal and sale of escheat and other property converted into public revenue, money generated from sale of sequestrated lumber, revenues from sale of special raw materials and fissionable materials), include revenues (i) from sale of apartments, (ii) from sale of the property being in operating control by federal agencies (save for autonomous federal agencies), (iii) from disposal of released movable and immovable assets of federal bodies of state authority in which military and equivalent services are provided for , (iiii) from sale of byproducts resulting from disposal of military equipment and ammunition, (iiiii) from sale of military products from federal executive authorities as part of military and technical cooperation (only in 2008 and 2010.), (iiiiii) from sale of byproducts resulting from disposal of military equipment and ammunition as part of the Industrial Disposal of Military Equipment (2005 - 2010) Federal Special Program, (iiiiiii) revenues generated from disposal of other federally-owned assets (property), as well as revenues generated from sale of intangible assets (IAs) which are referred to as federal budget revenues ;
Source : laws on execution of the federal budget for 2000 - 2009, The Report on Execution of the Federal Budget as of January 1, 2011, www.roskazna.ru; The estimates were made by the Gaidar Institute for Economic Policy.
Property-related federal budget revenues generated from nonrenewable sources grew by more than four times in 2010 against the previous year.
Revenues from sale of shares grew up most (by 7,6 times), and revenues from sale of different assets (property) increased almost 1,7 times. In absolute values, the revenues from the latter source decreased drastically (about RUB 2,4 bln), whereas the revenues from sale of shares (RUB 14,9 bln) doubled, reaching more than 3/4 of the 2007 level, against the 2008 revenues. Revenues from sale of land plots grew up by 19.4% to reach about RUB 1,38 bln thereby outrunning the level of 2008.
Like in 2007, revenues from sale of shares accounted for almost 80% of the total revenues generated from nonrenewable sources against 43% in 2009. Other sources were less significant: sale of different types of property accounted for about 13% (against 31.7% in 2009), while revenues from sale of land accounted for only 7.4% (against about H in 2009).
Total federal budget revenues generated from privatization (sale) and utilization of state-owned property (Table 12) grew up by more than 2,4 times in 2010 against 2009. The absolute value (RUB 88,4 bln) resumed the pre-recession level of 2008, in which case revenues from privatization (sale) of property outran it by more than 1\5 times, whereas revenues from utilization of state-owned property failed to reach this mark.
A share of nonrenewable sources in the structure of total revenues from privatization (sale) and utilization of state-owned property in 2010 increased up to 21%, which is markedly beyond the figures reported in 2008 - 2009 (12 - 14%). On the other hand, revenues from utilization of state-owned property continued prevailing to reach nearly 79%, likewise in 2001 -2002 and 2006 - 2007. In terms of absolute value, it corresponded to the level of 2006 whereas revenues from privatization and sale of different types of property were found to be lower.
Table 12
Structure of property-related federal budget revenues generated from different
sources in 2000-2009
Year
Total revenues from privatization (sale) and utilization of state-owned
Revenues from privatization (non-renewable sources)
Revenues from utilization of state-owned property (renewable sources)
RUB mln as % of total RUB mln as % of total RUB mln as % of total
2000 50412,3 100.0 27167,8 53.9 23244,5 46.1
2001 39549,8 100.0 10307,9 26.1 29241,9 73.9
2002 46811,3 100.0 10448,9 22.3 36362,4 77.7
2003 135338,7 100.0 94077,6 69.5 41261,1 30.5
2004 120798,0 100.0 70548,1 58.4 50249,9 41.6
2005 97357,4 100.0 41254,2 42.4 56103,2 57.6
2006 93899,8 100.0 24726,4 26.3 69173,4 73.7
2007 105761,25 100.0 25429,4 24.0 80331,85 76.0
2008 88661,7 100.0 12395,0 14.0 76266,7 86.0
2009 36393,7 100.0 4544,1 12.5 31849,6 87.5
2010 88406,4 100.0 18677,6 21.1 69728,8 78.9
Source: laws on execution of the federal budget for 2000 - 2009; The Report Budget as of January 1, 2011, www.roskazna.ru; The estimates were made by the Policy.
on Execution of the Federal Gaidar Institute for Economic
6.1.5. A New Stage in Implementation of the National Policy in the Field of Privatization of State-Owned Property: Basic Priorities and Objects, Actions and Risks
A New Stage of "Structural Privatization": Priorities, Objectives, and Guidelines
Privatization of state-owned property nearly 20 years has been an integral part of the economic policy in the Russian Federation. The nature, scope, and "shape" of the process used to undergo fundamental changes more than once. Goals and implementation emphases of privatization were changed markedly; legal framework of privatization1 was revised dramatically twice.
The process of privatization gradually lost its "large scale" nature: while in the first half of the 1990s the number of annually privatized enterprises ran into tens of thousands, the respective federal budget revenues have dropped almost by half (in money terms) over the recent few years. Over the recent 3-4 years, in spite of reduction in the number of entities in the public sector, the role of the latter in the national economy even became more important, including through the processes of formation and expansion of integrated entities in which the federal government has an interest.
The global economic downturn forced the Government of the Russian Federation to take urgent measures aimed at supporting various large companies and banks thereby creating extra preconditions for enlargement and strengthening of economic potential of the Russian public sector.
Declaration of having to carry out a new stage of "structural privatization" in 2010 was governed mostly by the fact that the federal government realized the three fundamental principles available when the economy recovers from a severe stage of the economic downturn :
1 The third in succession legal act which sets forth the principles and arrangements of privatization - the Federal Law dd. December 21, 2001, No. 178-FZ "On Privatization of State and Municipal Property" - is currently applicable. 390
- excessive state participation in the economy which became even more excessive in the course of the downturn ;
- insufficient competitive power of a series of large companies included into the public sector, the need for restructuring and upgrade thereof ;
- limited capability of the federal government in effective management of state-owned property.
The risk of further strengthening of state participation in the economy in the post-recession period due to uncertainty as to what to do with companies' blocks of shares which were pledged as security in providing public recession counter support, became a possible extra incentive to discuss at the government level the objectives of structural privatization.
In September - October 2009, official statements of high-rank officials1 from the Government of the Russian Federation set a clear-cut objective of structural privatization aimed at reducing the scope of direct state participation in the Russian economy, developing competition in the industries, attracting investments for long-term development of companies, improving effectiveness of large companies in which the federal government holds an interest.
Legally, the beginning of a new stage of privatization can be related to November 30, 2009 when the Government of the Russian Federation approved a new plan, the Forecast Plan (Program) of Privatization of Federal Property for 2010 and Guidelines for Privatization of Federal Property for 2011 and 20122, which set forth the following objectives for the national policy in the relevant field :
- carrying out structural reforms in relevant economic sectors ;
- forming integrated entities in the strategically important economic sectors ;
- privatization of federal property which is not involved in exercising public functions and authorities of the Russian Federation ;
- creating conditions allowing extrabudgetary investments to be attracted for the development of joint-stock companies ;
- generating federal budget revenues.
Though the general goal in the field of privatization set forth in the Forecast Plan of Privatization of Federal Property for 2010 was defined in detail - "achieve a strict compliance in the composition of state-owned property with public functions", however, both the contents and priority of privatization objectives became an evidence of the development of a new public approach towards privatization of state-owned property.
A "new vector" in the priorities of privatization can be seen clearly by comparing the forecast plans (programs) of privatization of federal property which were adopted in the period between 2002 and 20093 .
1 See, for example,: a opening statement made by the Chairman of the Government of the Russian Federation Putin V.V. at the meeting held on October 6, 2009 on the subject matter of guidelines of privatization of federal property for 2010-2012 and shortening the list of strategically important enterprises and joint-stock companies (http://premier.gov.ru/events/news/5104/); specific theses in the statement and answers to the questions, by the First Deputy Chairman of the Government of the Russian Federation I. Shuvalov as part of the report on implementation of recession counter measures at the State Duma I. Shuvalov: Russia needs new privatization // Ve-domosti, 16 September 2009. http://www.vedomosti.ru/politics/news/2009/09/16/839587; I. Shuvalov: Corpori-zation of SUEs must continue// RIA Novosti, September 16, 2009 http://www.rian.ru/economy/20090916/ 185258340.html).
2 Approved by the Order of the Government of the Russian Federation dd. November 30, 2009, No. 1805-p.
3 The Forecast Plan (Program) of Privatization of Federal Property for 2003 (approved by the Order of the Government of the Russian Federation dd. August 20, 2002 , No. 1155-p); The Forecast Plan (Program) of Privatiza-
Such objectives as privatization of property which is not involved in ensuring execution of public functions, and generation of federal budget revenues remained unchanged for all of the forecast plans (regardless of their versions). The objective of reducing the number of unitary enterprises was set in most of the plans of privatization (for 2005 - 2009)1. With regard to the forecast plan for 2010, it should be noted that at the moment of approval it contained no list of unitary enterprises subject to privatization, and only mentioned competed privatization of nearly 250 FOUSs for which relevant procedures were initiated in 2009 (as early as March 2010, however, a fairly extensive list of FOUSs subject to privatization was attached to the program).
Another general feature pertaining to all of the programs of privatization was the goal of reducing the number of state-held small blocks of shares2: each of the forecast plans contained (not among the "official" objectives though) provisions under which all of the stateheld interest were subject to privatization in the foreseeable future, save for the shares in joint-stock companies which fall under a specially stated categories - strategically important joint-stock companies, organizations participating in formation of integrated entities, enterprises in specific industries (the programs for 2003 - 2005 provided for sale of blocks of shares constituting an interest of not more than 25%, whereas the programs for 2006 and beyond allowed for sale of blocks of shares constituting an interest of up to and including 50%).
Together with the common features pertaining to the plans of privatizations under review, it is noteworthy specifying differences in the composition of the objectives set forth in the plans :
- the objective of attracting investments in the real sector, which was mentioned in the forecast plan for 2003, was not included into the plans for the subsequent six years, but appeared in the plan for 2010 ;
tion of Federal Property for 2004 and Guidelines for Privatization of Federal Property till 2006 (approved by the Order of the Government of the Russian Federation dd. August 15, 2003 , No. 1165-р); The Forecast Plan (Program) of Privatization of Federal Property for 2005 год (approved by the Order of the Government of the Russian Federation dd. August 26, 2004, No. 1124-р) ; The Forecast Plan (Program) of Privatization of Federal Property for 2006 and Guidelines for Privatization of Federal Property for 2006 - 2008 (approved by the Order of the Government of the Russian Federation dd. August 25, 2005 , No. 1306-р); The Forecast Plan (Program) of Privatization of Federal Property for 2007 and Guidelines for Privatization of Federal Property for 2007 -2009 (approved by the Order of the Government of the Russian Federation dd. August 25, 2006 , No. 1184-р); The Forecast Plan (Program) of Privatization of Federal Property for 2008 and Guidelines for Privatization of Federal Property for 2008 - 2010 (approved by the Order of the Government of the Russian Federation dd. April 29, 2007, No. 543-р) ; The Forecast Plan (Program) of Privatization of Federal Property for 2009 and Guidelines for Privatization of Federal Property for 2010 and 2011 (approved by the Order of the Government of the Russian Federation dd. 1 September 2008 No. 1272-р); The Forecast Plan (Program) of Privatization of Federal Property for 2010 and Guidelines for Privatization of Federal Property for 2011 and 2012 (approved by the Order of the Government of the Russian Federation dd. November 30, 2009 , No. 1805-р).
1 It is noteworthy that the forecast plans which contain the task in question, also contain the thesis of that all of the federal state unitary enterprises (FSUEs) which are not involved in exercising public functions, will be suggested for privatization in three years to come.
2 It should be noted that a serious progress was achieved in this respect: early in 2002 a share of blocks of shares constituting an interest of up to 50% in the total federally held blocks of shares of joint-stock companies accounted for 82%, whereas by the beginning of 2009 this share reduced almost by half down to 38%. The Russian Economy in 2009. Trends and Outlooks. (Iss. 312). - M.: IET, 2010
- the objective of structural reforms in the economy was mentions in the first and the second forecast plans (for 2003 - 2004) and the two latest (within the period under review) plans for 2009 - 2010 ;
- the objective of creating integrated entities in the strategically important industries was only set in the plans of privatization for 2009 - 20101 .
Analyzing the sectoral structure of the forecast plans approved in the period between 2002 and 2009, it should be noted that enterprises operating in the agricultural and non-production sectors accounted for a big share in each. On the other hand, some of the programs emphasized enterprises operating in other industries: military and industrial and construction sectors in 2006, the above mentioned sectors as well as design & print and fuel and energy sectors in 2007, public road sector as well as geology and precious metals and precious stones sectors in 2009.
Identification of large (major budget revenue generating) entities subject to privatization became an important 'innovation" in the plan of privatization for 2010 - this role was assigned to the blocks of shares in five joint-stock companies. In addition, a special allowance was made for privatization of a series of transportation facilities included into the list of strategically important joint-stock companies if the President of the Russian Federation made relevant decisions.
Hence the following important changes in the stated plans and "ideology" of privatization from 2010 it can be highlighted:
(1) upgrading the priority of the objective of structural reforms in industries (the objective of privatization of the property which is not involved in ensuring execution of public functions and authorities and authorities used to be ranked as top-priority) ;
(2) creating conditions allowing extrabudgetary investments to be attracted for the development of companies is defined as a priority objective;
(3) focusing on privatization of a series of the largest (major budget revenue generating) companies, on the possibility of discontinuing or reducing a state-held interest in a series of joint-stock companies which are included into the list of strategically important enterprises.
In general, the plan of privatization for 2010 is to some extent connected with the "revival" of structural approach towards privatization which was stated early in the 2000s, as well as widening of the basis for subsequent privatization of large companies in the public sector (above all, through transportation infrastructure enterprises)2.
1 It is noteworthy that in spite of that the objective of setting up integrated entities (which was included into the two latest programs only) constitutes a relative "novelty" for the forecast plans, the work on setting up such entities (above all, state-owned holding companies) with the use of privatization arrangements has been in progress over a period of 20 years, since 1992. Public active initiation of integration processes 'on the eve of' the economic downturn, in 2007 - 2008, should be focused on. During that period the federal government took part in setting up more than 30 holding companies through preparation and privatization of nearly 200 FOUSs and blocks of shares of joint-stock companies. In addition, it is important to mention about the decisions made in 2008 on transfer of the blocks of shares of about 400 joint-stock companies to Russian Technologies State Corporation (by the way, this transaction is beyond the scope of the Federal Law dd. December 21, 2001, No. 178-FZ, "On Privatization of State and Municipal Property"), a great number of which still remained to be set up
through corporization of FOUSs.
2
An important feature pertaining to the plan for privatization for 2010 became a 1/5 times increase in expected revenues from privatization in 2010 against the previously planned revenues: RUB 18 bln against RUB 12 bln provided for by the programs for 2008-2009. However, this amount was a very conventional benchmark at the moment when it was officially approved; the stated public plans related to the scope of privatization in 2010
It should be noted that the beginning of a new stage of privatization (November 2009 -March 2010) was associated clearly with a highly intensive discussion at the federal level of objectives and tools of privatization1 by focusing on structural reforms and modernization of the economy. However, later, especially since the H2 2010, the focus was gradually switched to the role of privatization in terms of generating extra revenues for the federal budget, which resulted from growing doubts in any positive prospects for the Russian economy to grow rapidly in the post-recessionary period, increase in social security budget expenditures and, as a consequence, aggravation of the problem related to federal budget deficit for the years immediately ahead.
As part of the Forecast Plan (Program) of Privatization of Federal Property and the Guidelines of Privatization of Federal Property for 2011 - 20132 approved in November 2010, the structural approach towards privatization was more evident than in the forecast plan for 2010 (TTable 13).
Table 13
Key objectives of the national policy in the field of privatization of federal property set by the forecast plans (programs) of privatization of federal property
for 2010 and 2011-2013
Forecast plan for 2010.
Forecast plan for 2011 - 2013 .
- structural reforms in the relevant industries ;
- setting up integrated entities in the strategically important economic sectors ;
- privatization of federal property which is not involved in ensuring execution of public functions and authorities of the Russian Federation ;
- creating conditions allowing extrabudgetary investments to be attracted for the development ofjoint-stock companies ;
- generating federal budget revenues
- creating conditions allowing extrabudgetary investments to be attracted for the development of joint-stock companies on the basis of new technologies ;
- reducing the public sector in the economy with a view to developing and encouraging innovative initiatives by private investors ; enhancing corporate governance ;
- encouraging the development of the stock market ;
- setting up integrated entities in the strategically important economic sectors ;
- generating federal budget revenues_
It should be noted that the forecast plan for 2011 - 2013, like the program for 2010, provides for sale of blocks of shares in a series of large and extra large companies whereby ensuring most of the budget revenues.
Hence, in spite of increased role of privatization in terms of generating budget revenues, the structural priority in the program of privatization for 2011 - 2012 is stated more explicitly and in detail than in the forecast plan for 2010, and the structural objectives of privatization acquired an explicitly innovative and modernizational trend.3
were revised more than once, both upward and downward.
1 See, for example: an interview with the Deputy Head of the Federal Agency for State Property Management E. Adashkin, RIA Novosti, on November 24, 2009 (http://www.rian.ru/interview/20091124/195316794.html); I. Zinenko, N. Govorova, A. Smirnow. Privatization Has Widended Hirizons. - Newspaper dd. February 5, 2010; documents of the "round table" dedicated to the subject matter of "Increasing the Role of Privatization as a Tool for Attracting Investments in the Russian Economy", which was held at the Ministry of Economic Development and Trade Of Russia (http://www.economy.gov.ru/minec/press/news/doc20100329_05).
2 Approved by the Order of the Government of the Russian Federation dd. November 27, 2010, No.2102-p.
3 It should be noted that the "structural element" also can be seen to an extent in the efforts which the federal authorities have been making in intensifying privatization processes at the regional level. For example, the Head of the Ministry of Economic Development and Trade Of Russia E. Nabiullina believes that privatization is needed not only to cover the budget deficit - regional programs of privatization must become an integral part of regional programs aimed at enhancing the investment climate. E. Kukol. Taxes Cast Shadows. - Rossyiskaya Gazeta, November 25, 2010.
Let us consider and assess the state practical measures in the field of privatization in 2010. We are of the opinion that it is reasonable to highlight the following basic steps (approaches) as part of the national policy in the field of privatization of federal property should:
- widening the base for privatization, which includes reduction in the number enterprises which are included into the list of strategically important enterprises ;
- developing the legal framework for privatization ;
- improving privatization planning procedures; ensuring transparency of privatization processes ;
- developing and widening the range of tools (options) of privatization for large companies ;
- improving privatization arrangements for relatively small companies and lowering the access barriers to privatization for potential buyers of privatized property (assets) ;
- defining a list of the largest companies and banks which are planned for privatization, setting terms and conditions and specific features of privatization thereof.
Widening the Base for Privatization of State-Owned Property by Way of Reducing the List of Strategically Important Enterprises and Joint-Stock Companies and Amending the Original Plan of Privatization for 2010 — 2012.
The applicable laws and regulations for privatization provide for that the President of the Russian Federation make a special list of federally-owned unitary enterprises (FOUSs) producing products (works, services), which are strategically important for the national defense and security, protection of the principles of public order and morality, health, rights and legal interests of the citizens (strategically important enterprises), as well as federally-owned open joint-stock companies and participation of the Russian Federation in management thereof ensures strategic interests of the nation, defense potential and national security, protection of the principles of public order and morality, health, rights and legal interests of the citizens (strategically important joint-stock companies)1. Strategically important enterprises and shares in strategically important joint-stock companies cannot be included into the forecast plan (program) of privatization of federal property provided unless they are excluded from the list. Therefore, the latter serves as an extra barrier for privatization of specific companies, because these are recognized as strategically important ones.
A list of strategically important companies and joint-stock companies was approved by the President of the Russian Federation in the mid-20042 - more than two years following the date on which the Federal Law "On Privatization of State and Municipal Property" came into force, which required such a list. The original version of the list included 514 FOUSs and 549 blocks of shares in open joint-stock companies. Over the six subsequent years the President of the Russian Federation made more than 100 decisions allowing for various amendments to the contents of the list (Table 14)3.
1 The Federal Law of December 21. 2001, No. 178-FZ, "On Privatization of State and Municipal Property".
2 The Order of the President of the Russian Federation dd. August 4, 2004, No. 1009, "On Approval of the List of Strategically Important Enterprises and Joint-Stock Companies".
3 Orders of the President of the Russian Federation dated 22.11.2004 No. 1470, dated 29.11.2004 No. 1483, dated 07.12.2004 No. 1502, dated 19.01.2005 No. 41, dated 26.08.2005 No. 985, dated 02.09.2005 No. 1034, dated 12.12.2005 No. 1442, dated 01.02.2006 No. 68, dated 20.02.2006 No. 140, dated 03.03.2006 No. 176, dated 27.03.2006 No. 262, dated 25.04.2006 No. 427, dated 03.05.2006 No. 456, dated 09.06.2006 No. 578, dated 22.06.2006 No. 623, dated 12.10.2006 No. 1135, dated 22.11.2006 No. 1301, dated 30.11.2006 No. 1320,
As a result, as of the beginning of 2011, the list included 148 FOUSs (by 3,5 times less than the original list) and 49 blocks of shares in open joint-stock companies (by 11 times less). Thirty unitary enterprises were included into the list upon August 2004 (or about 1/5) against 19 (or about 40% of all of the blocks of shares) open joint-stock companies. Companies with a full (100%) state-held interest (31 units or 63.3%), with a majority interest (9 units or 18.4%), with a blocking interest (8 units or 16.3%), and even with a minority interest - 1, prevail in the structure of strategically important joint-stock companies.
Table 14
Annual changes in the number of organizations included into the list of strategically important enterprises and joint-stock companies in 2004 - 2010 and the number of the orders on amendments to the list issued by the President of the Russian Federation
The number of Orders on amendments to the Strategically important FOUSs_Strategically important OJSCs
Period list issued by the President of the Russian Federation included excluded included excluded
2004 3 1 - 1 5
2005 4 2 13 - 4
2006 11+1* 2 18 4 8
2007 42 20 75 12 130
2008 20+2* 1 175 2 195
2009 12 1 23 4 16
2010 11+2* 5 93 8 174
* - the number of orders which changed the name or the format of participation (a new location was specified or a state-held interest was reduced) of a company in the list, without excluding the company from the same. Specific points of the same contents were included into the Orders of the President of the Russian Federation which made amendments to the list.
It is important to point out that it was not always the case when companies were excluded from the list for the purpose of subsequent selling the same :
dated 30.12.2006 No. 1489, dated 26.01.2007 No. 67, dated 03.02.2007 No. 122, dated 03.02.2007 No. 126, dated 03.02.2007 No. 128, dated 05.02.2007 No. 135, dated 14.02.2007 No. 164, dated 23.02.2007 No. 242, dated 21.03.2007 No. 394, dated 21.03.2007 No. 395, dated 21.03.2007 No. 396, dated 21.03.2007 No. 397, dated 21.03.2007 No. 398, dated 21.03.2007 No. 399, dated 21.03.2007 No. 400, dated 13.04.2007 No. 473, dated 27.04.2007 No. 556, dated 28.04.2007 No. 567, dated 28.04.2007 No. 569, dated 28.04.2007 No. 570, dated 27.05.2007 No. 664, dated 20.06.2007 No. 784, dated 26.06.2007 No. 805, dated 20.07.2007 No. 931, dated 03.08.2007 No. 1019, dated 06.08.2007 No. 1031, dated 10.08.2007 No. 1048, dated 11.08.2007 No. 1039, dated 11.08.2007 No. 1040, dated 27.08.2007 No. 1102, dated 11.09.2007 No. 1162, dated 18.10.2007 No. 1382, dated 20.10.2007 No. 1392, dated 03.11.2007 No. 1452, dated 19.11.2007 No. 1536, dated 21.11.2007 No. 1560, dated 21.11.2007 No. 1563, dated 21.11.2007 No. 1564, dated 26.11.2007 No. 1577, dated 06.12.2007 No. 1642, dated 19.12.2007 No. 1715, dated 28.12.2007 No. 1753, dated
28.12.2007 No. 1754, dated 20.02.2008 No. 217, dated 28.02.2008 No. 259, dated 28.02.2008 No.273, dated
01.03.2008 No. 292, dated 03.03.2008 No. 303, dated 08.04.2008 No. 460, dated 08.04.2008 No. 464, dated 11.04.2008 No. 486, dated 16.04.2008 No. 497, dated 26.04.2008 No. 592, dated 29.04.2008 No. 610, dated 27.05.2008 No. 855, dated 29.05.2008 No. 861, dated 09.06.2008 No. 917, dated 10.06.2008 No. 935, dated 12.06.2008 No. 956, dated 10.07.2008 No. 1052, dated 15.07.2008 No. 1096, dated 27.09.2008 No. 1409, dated
03.10.2008 No. 1432, dated 16.12.2008 No. 1785, dated 23.12.2008 No. 1837, dated 06.03.2009 No. 243, dated
10.03.2009 No. 260, dated 19.03.2009 No. 286, dated 20.03.2009 No. 290, dated 20.03.2009 No. 297, dated 11.05.2009 No. 526, dated 11.06.2009 No. 659, dated 24.08.2009 No. 972, dated 19.09.2009 No. 1053, dated
05.11.2009 No. 1251, dated 06.11.2009 No. 1253, dated 26.12.2009 No. 1474, dated 29.03.2010 No. 383, dated
05.04.2010 No. 419, dated 22.04.2010 No. 504, dated 23.04.2010 No. 513, dated 10.05.2010 No. 568, dated 09.06.2010 No. 696, dated 18.06.2010 No. 762, dated 21.06.2010 No. 769, dated 30.09.2010 No. 1186, dated 30.09.2010 No. 1190, dated 01.10.2010 No. 1197, dated 16.10.2010 No. 1261, dated 03.11.2010 , No. 1324. 396
- in most cases, organizations were excluded from the list due to integration processes (which includes build-up of the property portfolio of state-owned corporations). At least 500 of about 930 organizations excluded from the list at different times, were excluded due to set-up of integrated entities of different types whose number (including state-owned corporations such as Rosatom and Russian Technologies State Corporation) reached 30. In particular, integrated entities such as United Shipbuilding Corporation OJSC, "AVRORA Scientific and Production Association" Concern, "Electropribor Central Scientific and Research Institute Concern, the Center for Shipbuilding and Shipre-pairing Technology, the Russian Corporation for Rocket and Space Instrument Engineering and Information Systems, High-Precision Instrument Engineering Systems, the Center of Excellence for Farm Livestock Reproduction were included into the list of strategically important companies and joint-stock companies in 2010 ;
- since corporization of a 100% state-owned unitary enterprise means privatization of the same1, the corporization procedure (even without subsequent sale of the shares in a new joint-stock company) required that the unitary enterprise be excluded from the list (it should be noted that in some cases, the shares in open joint-companies were included into the list upon registration of the same) ;
- some of the organizations were excluded from the list due to wind-up of the same.
The list was not only shortened but also widened at the same time. Both previously existing organizations (whose strategic importance previously seemed to be insignificant or unob-vious) and newly established companies, above all, joint-stock companies resulted from cor-porization, as well as the head companies of established integrated entities were included into the list. However, the total number of added organizations (throughout the entire period of the list) is much smaller than that of excluded ones (only 63 organizations against about 930).
Since its approval in August 2004 till the end of 2006, the list underwent no drastic changes, only about 5% of changes were made in its contents over the same period. Large-scale shortening of the list began in 2007, when more than 200 organizations (almost 20% of the original contents) were excluded from the list, most of which were excluded for the purpose of setting up different integrated entities. In 2007, the President of the Russian Federation made the most of the decisions providing for such actions (more than 40 presidential orders were issued).
The most significant shortening of the list took place in 2008, when 370 organizations -more than one third of its original contents - were excluded therefrom. However, the overwhelming majority of the organizations (95%) were excluded due to integration processes (which includes the property deposit made by the Russian Federation to the Russian Technologies State Corporation).
The large-scale shortening continued in 2010, when about 270 organizations, or almost one fourth of the original contents and more than a half of the enterprises which were in the list as of the beginning of the same year, were excluded from the list.
The shortening in 2010 differed largely from the previous ones :
1 Under the regulations and provisions of the civil law, the title to the property owned by a unitary enterprise is to be vested in the state. As part of the corporization procedure, a newly established joint-stock company is to own such property while the state is to held a 100% interest in the same.
(1) it is not integration that is mainly responsible for exclusion of organizations from the list (at least no integration was mentioned in the Order of the President of the Russian Federation which contains most of the organizations which are subject to exclusion1) ;
(2) the previous large-scale shortening of the list took place in the period between 2007 and 2008. The number of the excluded unitary enterprises and joint-stock companies was almost equal. As a result, their percentage ratio in the list remained almost equal (52% against 48%, respectively) by the beginning of 2010. In 2010 joint-stock companies (the ratio of more than 2:1) prevailed among the organizations excluded from the list, which resulted in a reduction of up to 23% of the organizations of such a form of incorporation in the list.
(3) joint-stock companies in which less than 50% of equity interest was held by the Russian Federation accounted for more than 4/5 of the joint-stock companies which were excluded from the list in 2010. Such joint-stock companies accounted for nearly 2/3 of the total number of the joint-stock companies included into the list as of the beginning of 2010 against nearly 18% of those included by the end of the same year. Furthermore, the state acts as a majority shareholder in a whole range of the companies left in list, which less than 50% of equity interest was held by the Russian Federation (Transinzhstroi OJSC, Gazprom OJSC, Korolev 'Energy' Rocket and Space Corporation OJSC, Pervy Kanal OJSC)2 .
(4) examining by industry a total of the organizations excluded from the list in 2010, it is noteworthy that a large number (nearly one forth) of them are somehow connected with the transport sector and the relevant infrastructure. For example, a considerable number (almost 40) of organizations operating in the field of transportation (sea and river ports, airports, more than 10 sea and river shipping companies, an airline company, several enterprises operating in the sector of transport machinery industry, specific research and training organizations operating in the sector of civil aviation)3 were among those excluded from the list. In addition, a series of companies operating in such sectors as electronic industry and instrument engineering were excluded from the list.
The process of reducing the list of strategically important companies and organizations in 2010 was accompanied by a large-scale expansion of the original (approved in November 2009) plan of privatization for 2010. During the year the Government of the Russian Federation made 16 decisions on amendments to the forecast plan4 thereby doubling the number, from 449 to 1004, of companies subject to privatization in 2010. Unitary enterprises accounted for nearly half (250 of 557) of the companies included into the program (we remind that the original forecast plan for 2010 contained no list of FOUSs subject to privatization). In
1 The Order of the President of the Russian Federation dated June 18, 2010, No. 762. At the same time, the State Legal Directorate issued a note on the Order, which specified that "decisions have already been made on transfer of the state-held blocks of shares (74.5 to 100 percent) in specific organization to the charter capitals of different integrated entities" (http://www.kremlin.ru/acts/8098). It should be noted that until 2010 the relevant presidential orders not always contained a direct order to subsequently set up integrated entities.
2 http://www.kremlin.ru/acts/8098.
3 The shortening of the list of strategically important companies and organizations in June 2010 made it legally possible to extend the forecast plan of privatization of federal property for 2010 - 2012 in August 2010 by adding large entities operating in the field of transport and transport infrastructure.
4 Orders of the Government of the Russian Federation dated 03.02.2010, No. 132-p, dated 27.02.2010, No. 233-p, dated 17.03.2010, No. 346-p, dated 15.05.2010, No. 735-p, dated 05.07.2010 , No. 1122-p, dated 04.08.2010 , No. 1321-p, dated 13.09.2010, No. 1536-p, dated 24.09.2010, No. 1608-p, dated 14.10.2010, No. 1770-p, dated 23.10.2010, No. 1837-p, dated 11.11.2010, No. 1953-p, dated 27.11.2010, No. 2092-p, dated 03.12.2010 , No. 2165-p, dated 08.12.2010, No. 2191-p, dated 08.12.2010, No. 2206-p, dated 17.12.2010, No. 2293-p.
nearly half of the cases, however, such enterprises were included into the program as part of plans of their further affiliation with integrated entities (as a rule, Russian Technologies State Corporation). In addition, the forecast plan included 297 open joint-stock companies1, 100% interest in most of which was subject to privatization.
The Government of the Russian Federation made two decisions which are considered the most relevant in terms of widening the base for privatization2 :
(1) 467 companies were added at a time to the plan in March 20103. According to this decision, another 227 entities (above all, through a relatively small companies operating in the agricultural industry, non-production sector, construction industry) were added to the list of open joint-stock companies whose shares were planned for privatization. In 2/3 of the cases, 100% interest was subject to privatization; furthermore, the state planned to privatize the 100% interest less one share in a series of open joint-stock companies (most of which belong to the defense industrial sector). In addition, 230 FOUSs (most of which belonged to the defense industrial sector, agricultural sector, public road industry and nonproductive sector) were included into the forecast plan, 99 of which (including all of the enterprises operating in the defense industrial sector) were included for the purpose of further integration ;
(2) in August 2010, 26 fairy large joint-stock companies operating in the transport sector and the transport infrastructure4 were added to the plan of privatization: 13 sea and river ports, 11 sea and river shipping companies and two airports. Allowance was made to sell all of the remainder of state-held blocks of shares (25.5%, as a rule). It should be noted that this decision became legally applicable after the list of strategically important companies and organizations was shortened in June 2010.
Hence, as early as September 2010, regulatory support was provided for initiating privatization of a considerably larger number of companies against the beginning of 2010 thereby widening visibly the range of large companies which are planned for privatization.
Developing Regulatory Control in the Field of Privatization
Substantial modernization of privatization arrangements, the relevant regulations of the law was required to meeting the set objectives of making structural changes in the national economy, attracting investments in the development of privatized companies, reducing direct participation of the state in the economy and the scope of the public sector through privatization of state-owned property. There are several reasons for this.
First, immaturity of regulatory arrangements of the procedures for privatization of large companies. According to Clause 3, Article 13 of the previously applicable version of the Federal Law "On Privatization of State and Municipal Property", the set of tools of privatization
1 It should be noted that seven closed joint-stock companies and three limited liability partnerships were included, apart from FOUSs and open joint-stock companies, into the forecast plan for 2010.
2 Another supplement to the forecast plan for 2010 is worth mentioning: pursuant to the Order of the Government of the Russian Federation dated October 23, 2010, No. 1837-p, the blocks of shares of 20 power generating companies were added. The overwhelming majority of these blocks of shares were minority stakes (less than 1%) and included into the forecast plan, because they were to be contributed to the charter capital of Inter RAO UES OJSC.
3 The Order of the Government of the Russian Federation dated March 17, 2010, No.346-p.
4 The Order of the Government of the Russian Federation dated August 4, 2010, No.1321-p.
of large companies (fixed assets' book value of more than five million minimum wages1) was very limited to auctions, corporization of unitary enterprises, and contribution of assets to the charter capitals of strategically important joint-stock companies.
Second, lack of the possibility within the framework of privatization arrangements to define investment terms and conditions for those who buy state-owned property, as well as terms and conditions for modernization, restructuring of privatized enterprises. Tender is the sole privatization arrangement which provides for specific terms and conditions to be met by buyers of state-owned property. However, Clause 21, Article 20 of the Federal Law "On Privatization of State and Municipal Property" specifies an exhaustive list of terms and conditions of a tender, which only includes preservation of jobs, advanced training of personnel, retaining the core activity, restoration, repairing of heritage and social security sites.
Third, restrictions imposed on reduction of state-held interest in companies during additional issue of shares. Though Article 40 of the Federal Law "On Privatization of State and Municipal Property" allows a state-held interest to be reduced during additional issue of shares in accordance with the decisions made by the President of the Russian Federation, the Government of the Russian Federation, it is strictly established that :
- where a state-held interest accounts for more than 25% but not more than 50% of votes, the charter capital may grow by issuing additional shares, provided that the state retains a blocking interest (25% plus one voting share);
- where a state-held interest accounts for more than 50% of votes, the charter capital may grow, provided that the state keeps holding a controlling interest (50% plus one voting share).
Though it is obvious that the foregoing restrictions were imposed in order to prevent the risk of dilution of state-held blocks of shares, reduction of revenues from privatization, such restrictions are regarded as a serious barrier hindering companies with a state-held interest from attracting strategic investors by way of additional issues of shares, generating inflow of financial resources2 .
Forth, excessive regulatory control of a series of arrangements oriented to privatization of small enterprises, which interfered with rapid reduction in the number of public sector enterprises and raised extra barriers for access of a wide range of potential buyers, in particular small and medium-size businesses.
The first three restrictions were most significant given the stated plans of privatization of large enterprises, which include the primary entities of the transport infrastructure.
Federal Law of May 31, 2010, No. 106-FZ, "On Amendments to the Federal Law "On Privatization of State and Municipal Property"3 was adopted following a very intensive process of work-out of different approaches as part of regulatory support to a new stage of privati-
1 Since January 1, 2009, the minimum monthly wage has been established in the amount of RUB 4,330 (Art. 1 of the Federal Law 91-FZ dd. June 24, 2008 "On Amendments to Article 1 of the Federal Law "On Minimum Monthly Wage").
2 It is obvious that in certain cases it may be considered more reasonable from the economic (political, etc.) point of view to retain state control (blocking interest in) of a company than provide inflow of direct, additional investments in the development of the company, however the question at issue is that the applicable legislation leaves no room for choice.
3 A group of PMs submitted a draft law to the State Duma on March 25, 2010. After passing the first reading on April 16, 2010, the draft law was seriously amended and (a single amendment which derived from another draft law which was developed at the same time) and adopted on May 19, 2010 in the second reading, and the State Duma adopted its final version as early as May 21 .
zation,. The law includes a series of regulations which change essentially the terms and conditions and specific privatization tools. The following innovations are most relevant :
(1) transition to mid-term planning of privatization of federal property ;
(2) entitling the Government of the Russian Federation to make decisions on privatization of state-owned property beyond the scope of the "standard" procedures specified by the Federal Law "On Privatization of State and Municipal Property" ;
(3) allowing the Government of the Russian Federation to delegate the functions of buyer of federal property to legal entities ;
(4) removing restrictions as to potential arrangements of privatization of large state-owned properties whose book value is more than five million minimum monthly wages ;
(5) simplifying the application of an arrangement of privatization such as deposition of state-owned property to the charter capital of joint-stock companies ;
(6) discarding the concept of standard price of property which is subject to privatization;
(7) simplifying privatization of small federal properties, widening access for participation of potential buyers in privatization ;
(8) extending significantly requirements to transparency of privatization procedures.
Let us examine these innovations in detail.
(1) Transition to mid-term planning of privatization of federal property
While it was previously stated that the Government of the Russian Federation is to adopt the forecast plan of privatization of federal property on an annual basis, now Clause 1, Article 7 of the Federal Law "On Privatization of State and Municipal Property" specifies that the Government of the Russian Federation may approve the forecast plan (program) of privatization for a period of 1 to 3 years. In September 2010, the Government of the Russian Federation made relevant amendments to the Rules of Development of the Forecast Plan (Program) of Privatization of Federal Property1 .
Hence, the scope of privatization planning, longer, more consistent and meaningful actions and procedures for preparation of entities for privatization became wider. It should be noted that "structural" trend in privatization is supported by that the plan of privatization must contain a forecast of the impact of privatization of property on structural changes in the economy, including specific industries.
In the meantime, it should be noted that the new forecast plan of privatization of federal property for 2011 - 2012 approved by the Government of the Russian Federation in November 2010 contains the relevant section on a formal basis, because its contents are no different from the previous forecast plans (e.g., the focus is placed on breakdown by industry of companies of the public sector and entities for privatization); however, it contains no even the most general assessment of expected changes in a share of the public sector in the economy or specific industries.
(2) Entitling the Government of the Russian Federation to make decisions on privatization of state-owned property beyond the scope of the "standard" procedures specified by the Federal Law "On Privatization of State and Municipal Property"
This innovation seems to be both most "revolutionary" and arguable. Clause 2, Article 3 of the Federal Law "On Privatization of State and Municipal Property" was supplemented by paragraph 15 under which from now on this law may not be applied to relations arising during
1 The Order of the Government of the Russian Federation dd. September 13, 2010, No. 725, "On Amendments to the Rules of Development of the Forecast Plan (Program) of Privatization of Federal Property".
alienation "of federal property in accordance with the decisions which the Government of the Russian Federation makes with a view to creating terms and conditions for attracting investments, encouraging development of the stock market as well as modernization and technological development of the economy". Such a general wording seems to impose no limits to the application of this regulation, and the law neither contains requirements whatsoever to potential buyers of alienated property, nor any specific terms and conditions for the application of this arrangement.
Of course, one may suggest that this arrangement would be applied on a "custom-made" basis - to the largest and unique or very important entities. Furthermore, it should be noted that under the last paragraph in Clause 2, Article 3 of the Federal Law "On Privatization of State and Municipal Property" alienation of the property listed in this clause must be regulated by other federal laws and relevant by-laws. Hence it may be inferred that practical implementation of the given approach will require development and adoption of a relevant statutory instrument which would resolve a high level of uncertainty prevailing for the moment.
Most probably the regulation in question was introduced into the Federal Law "On Privatization of State and Municipal Property" in an effort to extend the potential of "investment-driven" privatization of large companies, in particular by way of direct sale of a federally-owned block of shares to strategic investors of a company which already hold a control interest in the same (50 - 75%)1. One of the preconditions for application of such an approach became a widely-held perception of that for fear of new investors the existing strategic investors of companies may act as a break on the process of privatization2. In this respect, it should be noted that orientation towards the existing shareholders of companies seems to be unreasonable in some cases, because at least they may not be strategic investors.
One way or another, it only may be assumed for the time being that the arrangement in question - the Government of the Russian Federation makes decisions on alienation of specific federal properties beyond the scope of the Federal Law "On Privatization of State and Municipal Property" - will be applied exclusively to direct sales of small blocks of shares to strategic investors. No regulation for this option of privatization has been established to date thereby leaving a wide range of different solutions and compromises. In this respect, it is worth mentioning a recently discussed (also at the level of high-ranking officials) possibility of placing, on a sole source basis, a state-held interest in a large entity of the transport infrastructure (Sherenetyevo Airport) in management of a strategic partner for a long-term period (20-30 years)3. In addition, the business community more than once submitted a proposal on granting to all private shareholders the priority right to buy out privatized shares in a semi-
1 See, for example: M. Tovkailo, A. Nepomnyaschiy. The Property Will Be Transferred to a Single Owner. -Vedomosti, March 3, 2010.
2 See, for example, statements made in follow up of the round table dedicated to the subject matter of "Increasing the Role of Privatization as a Tool for Attracting Investments in the Russian Economy" which was held at the Ministry of Economic Development and Trade Of Russia on March 29, 2010, as attended by the First Deputy Chairman of the Government of the Russian Federation I. Shuvalov, the Minister of Economic Development E. Nabiullina, and representatives of investment banks and business entities http://www.economy.gov.ru/ minec/press/news/doc20100329_05.
3 ibid.
public company1. It should be noted that a relevant draft law was submitted to the State Duma by a PM as early as May 20082, but the initiator withdrew the same in six months.
In our opinion, all of the above listed options contradict (maybe in different ways) the principle of fair competition and may result in undervaluation of alienated properties.
(3) Allowing the Government of the Russian Federation to delegate the functions of buyer of federal property to legal entities
This innovation is directly related to the development of instruments of "new" privatiza-tion3 .
Before that (prior to the date when the Federal Law "On Privatization of State and Municipal Property" was amended), only designated public agencies which were in the service of the Government of the Russian Federation, could act as sellers of privatized property (apart from an executing agency authorized by the Government of the Russian Federation). Under the new version of the law, clause 1 (paragraph 16), article 6 of the Federal Law "On Privatization of State and Municipal Property", the Government of the Russian Federation is entitled to commission legal entities to make arrangements for sale of privatized federal property and/or act as buyers. The Government of the Russian Federation's decision on commissioning a specific legal entity to perform such functions must specify federal properties which are subject to privatization, specific actions to be performed by the legal entity, the size of and payment procedure for a fee due to the legal entity. Under paragraph 8.1, clause 1, article 6 of the Federal Law "On Privatization of State and Municipal Property", a list of such legal entities is to be approved by the Government of the Russian Federation. A new version of clause 2, article 14 of the Federal Law "On Privatization of State and Municipal Property" specifies that the Government of the Russian Federation may decide not to set the initial price thereof in employing this type of sale of privatized property.
Neither terms and conditions for application of this arrangement, nor selection criteria for legal entities were defined. Only a series of statements made by officials on the subject matter are available, according to which legal entities are planned to be engaged only in exceptional cases related to sale of large and significant assets; large Russian and foreign investment banks are suggested to be engaged as sellers (sales managers); a sort of a 'scoring procedure' will be used in selecting a bank for a specific transaction4 .
In October 2010, the Government of the Russian Federation made a list legal entities which may be commissioned to sell of privatized property and/or act as buyers5. The list comprised 10 well-known financial institutions, in particular, VTB Capital, Vnesheconobank
1 See, for example: Titov B., Privatization: New Arrangements] http://slon.ru/blogs/titov/post/344182/.
2 Federal Draft Law No. 87293-5 «On Amendment to Article 43 of the Federal Law "On Privatization of State and Municipal Property".
3 It should be noted that the relevant initiative was launched by the decisions made in mid-November 2009 at a meeting of the Government of the Russian Federation dedicated to the improvement of the legislation with a view to enhancing effectiveness of privatization. It is until the 2009 year-end that the Ministry of Economic Development and Trade prepared a respective draft law which was sent out to the concerned agencies for approval, and early in March 2010, the Ministry published the same (as slightly amended) for independent due diligence on propensity for corruption (http://www.economy.gov.ru/minec/activity/sections/ govProp-erty/doc20100301_05). In the spring of 2010, the relevant regulation was included into a more general draft law on amendments to the law on privatization, which was adopted shortly (the Federal Law dd. May 31, 2010, No. 106-FZ, "On Amendments to the Federal Law "On Privatization of State and Municipal Property").
4 See, for example: T. Zykova. Public Sales. - Rossiyskaya Gazeta, July 29, 2010.
5 The Order of the Government of the Russian Federation dd. October 25, 2010, No. 1874-p.
Investment Company, Renaissance Broker, Credit Suisse Bank (Moscow), Deutsche Bank, Merrill Lynch Securities. Another 13 institutions were added to the list in December 20101 .
As part of preparation for the first privatization transaction under a new scheme, the Government of the Russian Federation selected Merrill Lynch Securities LLC as the seller of a 10% interest in VTB Bank, which was the sole contractor of the relevant government contract2. However, neither the decision of the Government, nor the follow-up comments by officials contained any details as to the choice3. A scheme providing for a single contractor for a government contract was used.
Basically, one may expect that by engaging investment banks and companies which have experience in this type of transactions, skilled personnel as well as well-established relations with large global investors, to take part in privatization of federal property would allow a comprehensive analysis of a to-be transaction to be made, which would take account of a privatized joint-stock company's needs for investments, technological modernization, and, in the long run, would allow effectiveness of privatization to be enhanced. On the other hand, one cannot but note a poor transparency of the processes related to compilation of a list of organizations - potential sellers - as well as selection of a specific seller for the initial transaction, and uncertainty of the relevant procedures and criteria. Perhaps, due to a "custom-made" nature of transactions which require engagement of legal entities, explicit criteria of their selection from the already approved list are not considered vital, however, the state (represented by authorized agencies) should at least explain choice it makes.
(4) Removing restrictions as to potential arrangements of privatization of large state-owned properties whose book value is more than five million minimum monthly wages
Clauses 3 and 4, article 13, under which it is understood that the portfolio of assets owned by FOUSs and federally-owned shares in open joint-stock companies whose fixed assets' book value is more than five million minimum monthly wages only could be privatized by way of five of the 10 legally established options of privatization, ceased to be in force in the new version of the Federal Law "On Privatization of State and Municipal Property"; in particular, options such as sale of property through a tender; sale of shares through a market maker in the security market, sale of shares based on trust management results were not allowed.
Hence, one of the barriers which interfered with flexibility and case-driven approaches towards privatization of large companies, was eliminated. Most importantly, there is existing possibility of a "smooth" privatization of large companies based on trust management results, because this, on the one hand, allows direct participation of the state in management of such companies to be reduced, and, on the other hand, ensure correct measurement of the results and "quality" of a new potential owner in making future decisions on alienation of state-owned property.
(5) Simplifying the application of an arrangement of privatization such as deposition of state-owned property to the charter capital of joint-stock companies
1 The Order of the Government of the Russian Federation dd. December 20, 2010 , No. 2349-p.
2 The Order of the Government of the Russian Federation dd. November 2, 2010 , No. 1928-p.
3 It was reported in mass media, with reference to public officials and representatives from VTB Bank, that Merrill Lynch Securities was selected because of the company has experience in the field of privatization of financial institutions in emerging markets, as well as support of this choice by the top management of VTB Bank. M. Tovkailo, N. Asker-zade. Who is Going to Sell VTB. - Vedomosti, November 9, 2010.
The amendments made to the Federal Law "On Privatization of State and Municipal Property" in May 2010 relaxed the restrictions imposed on contributing state-owned property to the charter capital of open joint-stock companies. Article 7 thereof was supplemented with clause 2.1 under which no amendments must be made to the forecast plan (program) of privatization for a planning period in contributing, as decided by the President of the Russian Federation and the Government of the Russian Federation, federally-owned shares in open joint-stock companies arising from corporization of FOUSs to the charter capital of open joint-stock companies. Though this amendment could have been regarded as technical one, aimed at reducing costs incurred by setting up integrated entities, in our opinion, the need in amendments to the plan of privatization at least provided an opportunity to make adjustments and updates to previously made decisions, in particular when multiple of blocks of shares are contributed.
A more important innovation was elimination of the restriction on contribution of shares in large companies (whose fixed assets' book value is more than 5 million minimum monthly wages) to the charter capital of joint-stock companies - formerly, such shares only could be contributed to the charter capital of strategically important joint-stock companies under regulations issued by the President of the Russian Federation - after clause 3 was deleted from article 6 of the Federal Law "On Privatization of State and Municipal Property". It should be noted that the explanatory note to the draft law on amendments to the Federal Law "On Privatization of State and Municipal Property" specified that the need in such an amendment was directly linked with the need to complete the processes of contribution of state-owned property to the charter capital of large companies, namely Russian Railroads OJSC and Rosselkhozbank OJSC.
Hence additional preconditions for setting up integrated entities in the course of privatization were created. This aspect seems to be very important at the moment, because contribution of blocks of shares to the charter capital of joint-stock companies constitutes a very specific way of privatization which results in short-term increase in state participation in the economy rather than its increase due to expansion and strengthening of state-controlled integrated entities in the market. Of course, it is not so simple at all: set-up of integrated entities may be related to "alignment" of efficient businesses which are assumed to be subsequently privatized. For some reasons, however, it is this option of privatization that may become most preferable for privatized companies, because it is more predictable and allows for preliminary arrangements as to the future of managers and owners of such companies.
(6) Discarding the concept of standard price of property which is subject to privatization
The concept of standard price - a minimum price at which properties can be alienated, which is to be set pursuant to the procedure establisned by the Government of the Russian Federation, was discarded from article 12 of the Federal Law "On Privatization of State and Municipal Property". Only a single option of valuation of property subject to privatization as part of article 12 thereof is left - initial price is to be set under the law on valuation. From now on the initial price of a property is to be specified (clause 2, article 14)1 in decisions on terms and conditions of privatization of state-owned property (apart from other terms and conditions) as opposed to the standard price which had to be specified in the previous years.
1 On the other hand, initial price can be set when the Government of the Russian Federation commissions legal entities to sell privatized property (under paragraph 16, clause 1, Article 6).
Hence, abolition of the standard price principle created additional preconditions for valuation of a fair market value in the course of privatization of property.
(7) Simplifying privatization of small federal properties, widening access for participation of potential buyers in privatization
A package of amendments simplifying access to participation in sale of privatized state-owned property and competition development was made to the Federal Law "On Privatization of State and Municipal Property" in May 2010.
First, e-trading may be used for privatization of property. The Federal Law "On Privatization of State and Municipal Property" was supplemented with Article 32.1 under which :
- state-owned property may be sold electronically, in which case a decision on terms and conditions of privatization of the property must contain information thereof ;
- open and free of charge access to the relevant information must be ensured in the course of e-trading; bidders may electronically submit their bids and attached documents ;
- e-trading bidders must not be charged any extra legal payments ;
- contents and terms and conditions of e-trading announcement were specified.
It should be noted that a procedure for e-trading still remains to be developed by the Government of the Russian Federation.
Through e-trading is not provided for all of the options of privatization (it is obvious that e-trading cannot be applicable to corporization (transformation into open joint-stock companies) of unitary enterprises, contribution of assets to the charter capital of open joint-stock companies, sale based on trust management results), it can be applied to auction-based options of privatization as well as tender-based sale of property, through IPO, without price quotation. According to the contents of article 32.1 of the Federal Law "On Privatization of State and Municipal Property", e-trading of state-owned property is primarily oriented towards options of privatization such as auction-based options and through IPO.
Second, the terms and conditions of sale through IPO (for reference: this option of privatization is applied when an auction has been declared void) were widely updated and improved in the new version of article 23 of the Federal Law "On Privatization of State and Municipal Property". It should be noted that sale through IPO was used in the previous years, because a large part of property was normally failed to be sold at auctions, though it was poorly protected against different types of manipulation.
Following are the most important amendments to the IPO option which focus on improvement of competition and valuation of fair market value :
- the opening bid gradually goes down as part of a single procedure (clause 5, article 23) rather than through specific periods ;
- an auction must be held when there are more than one bidder with the same bid (clause 5, article 23) ;
- property may not be sold through IPO with only one bidder (clause 6, article 23) ;
- the Government of the Russian Federation must establish the procedure for sale of property through IPO1.
1 It should be noted that late in July 2010 the Ministry of Economic Development and Trade of Russia announced that it had prepared a draft order of the Government of the Russian Federation on amendments to government acts in connection with the amendments made to the Federal Law "On Privatization of State and Municipal Property" which was sent out for interdepartmental approval, in particular of a new version of the Provision on Sale of State and Municipal Property Through IPO (http://www.economy.gov.ru/ minec/about/structure/depreal/doc20100729_07), the text of this document was not published though. 406
Third, the size of the required bid bond for auction (clause 6, article 18) or tender (clause 5, article 20) was reduced considerably : from 20% to 10% of the opening bid of privatized property.
Hence, in our opinion, preconditions for rapid and large-scale sale of small assets of state-owned property, "clearing" of the public sector composition were created in general. This may ensure a better transparency and competition in privatization transactions, extended participation in privatization as buyers of small companies.
(8) Extending significantly requirements to transparency of privatization procedures A considerable number of amendments to clause 15 of the Federal Law "On Privatization of State and Municipal Property" enhanced significantly the requirements to information support of privatization. It is worth highlighting the following most relevant amendments :
- information on all stages of privatization at all levels of ownership must be published in print and electronic media, in which case decisions made by public authorities may only supplement the requirements to contents and quantity of published information ;
- open joint-stock companies and unitary enterprises must disclose information (in accordance with the procedure and form to be approved by a regulator in the securities market or an authorized executive authority1) from the date when they are included into the forecast plan;
- provision of additional information support with regard to specific property assets.
The adopted regulations certainly deserve a positive appreciation. One cannot note, however, inconsistency and variance of public measures in this sector. Efforts have been made to provide regulatory support of the privatization process at all stages, on the one hand, while a series of the above discussed public "individual" solutions and measures in the field of privatization are extremely nontransparent, on the other hand.
In general, the following can be abolished with the regard to the completed innovations in the Federal Law on Privatization of State-Owned Property.
First. Changes in legal regulation of privatization are strictly subject to the two objectives:
(1) widen the scope and develop the tools of privatization of large and largest companies and
(2) reduce costs and restrictions for large-scale privatization of relatively small companies. Second. The innovations made as part of the second objective look very positive, promoting better transparency of privatization transactions, ensuring competition, lowering barriers to participation in privatization of property of small companies. Active privatization of small state-owned companies can "clean" the public sector out of many insignificant assets, show its real structure.
Third. As applied to large companies, the range of acceptable options of privatization was widened, which seems to be important at the stage when generation of additional budget revenues from privatization is not regarded as the sole objective.
The innovations related to privatization of the largest companies and banks seem to be most controversial. Perhaps, in an effort to reduce the required time, taking into account specific features of this type of privatization transactions, the state offered an opportunity to exclude thereof from the scope of the Federal Law "On Privatization of State and Municipal Property". Hence, on the one hand, a series of obstacles for "structural privatization" of large
1 According to the Order of the Government of the Russian Federation dd. September 8, 2010, No. 693, "On Specific Powers of the Ministry of Economic Development and Trade of the Russian Federation", the Ministry of Economic Development and Trade is entitled to approve the procedure and form of information disclosure by unitary enterprises and open joint-stock companies from the date when they are included into the forecast plan.
407
companies was eliminated, but, on the other hand, no legal frameworks for making relevant decisions were defined.
Forth. The powers vested in the Government of the Russian Federation in the field of privatization, in particular as applied to privatization of largest companies, were enlarged dramatically. In the absence of regulatory frameworks, predictability of such decisions for potential investors may be found low. To date, practical public measures in the field of privatization of the largest companies have been nontransparent and the decisions ill-founded publicly. Generally, lack of official comments and explanations is "replaced" with multiple statements in mass media which are based on "insider" information.
Specifics of the Process of Decision-Making and Update of Plans of Privatization for 2010 and Beyond
Late in 2008 and 2009, the global economic downturn resulted in a considerable decrease of potential investors' interest in purchase of state-owned property whereby revenues from privatization at the 2009 year-end hit historical lows - RUB 3,4 bln ( by 3,5 times less than planned). This fact together with numerously repeated governmental statements on prohibition of privatization at knockdown cost1 resulted in historically low planned revenues from privatization, mere about RUB 7 bln2, in the budgetary prospects for 2010 prepared by the Ministry of Finance of Russia in mid-2009 contained (see Fig. 1).
A slight recovery in the Russian economy in Q3 2009 raised considerably the degree of expectations of representatives of public authorities at to potential volumes of privatization of federal property in 2010. As a result, as early as October 2009 the Ministry of Economic Development and Trade of Russia announced a total of nearly RUB 70 bln of potential revenues from privatization in 2010, i.e. 10 times more than was expected in the budgetary prospects which the Ministry of Finance of Russia made a few months prior to that3. The Forecast Plan of Privatization of Federal Property for 2010 which was approved late in November 2009 contained a much less amount of budget revenues (RUB 18 bln) which, according to officials, was preliminary and subject to increase up to RUB 70 - 100 bln, above all, through sale of shares in a series of companies to be excluded from the list of systemic companies4. Such an optimistic forecasts for revenues from privatization were mentioned in the statements of public officials till mid-2010 roughly, until early in August the Ministry of Finance of Russia published the guidelines of the budgetary policy for 2011 and planning period of 2012 -2013, which provided for a mere RUB 7 bln of revenues from privatization for 2010, as much
1 See, for example, pronouncements made by the Chairman of the Government of the Russian Federation V. Putin at the meeting of the Presidium of the Government of the Russian Federation held on March 26, 2009 (http://premier.gov.ru/events/news/3676/), as well as at the meeting dedicated to the guidelines of privatization of federal property for 2010 - 2012 and shortening of the list of strategically important enterprises and joint-stock companies (http://premier.gov.ru/events/news/5104/).
2 See Comments made by the Minister of Finance A. Kudrin to information agencies following the meeting of the Government of the Russian Federation held on July 30, 2009 (http://www1.minfin.ru/ru/press/ speech/index.php?pg4=17&id4=7912).
G. Maslov. The State Will Generate RUB 70 bln from Privatization. - Infox.ru. October 6, 2009 (http://www.infox.ru/business/finances/2009/10/06/Gosudarstvo_zarabota.phtml).
4 See, for example: R. Falyakhov. State-Owned Property Will be Booked On the Assets Side. Gazeta.ru, November 24, 2009 (http://www.gazeta.ru/business/2009/11/24/3290513.shtml); Interview with the First Vice Prime Minister I. Shuvalov to Commersant-online on December 22, 2009 (http://www.kommersant.ru/ doc.aspx?DocsID=1297142&NodesID=4). 408
as the Ministry of Finance planned in budget prospects in the preceding year. This document forecasts revenues from privatization for a period 2011 - 2013 which exceed many times (in nominal figures) those generated at the end of any of the previous 15 years: a total of RUB 883,5 bln over three years, which includes RUB 298 bln in 2011, RUB 276,1 bln in 2012, RUB 309,4 bln in 2013. Finally, in September 2010 the Ministry of Finance of Russia assumed that within five years to come total revenues from privatization would total nearly USD 50 bln (RUB 1,5 t at the current exchange rate), which is nearly USD 10 bln (RUB 300 bln) annually1 .
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Sources : The Forecast Plan (program) of privatization of Federal Property for 2008 and the Guidelines for Privatization of Federal Property for 2008 - 2010 (approved by the Order of the Government of the Russian Federation dd. April 29, 2007, No. 543-p) ; The Forecast Plan (program) of privatization of Federal Property for 2009 and the Guidelines for Privatization of Federal Property for 2010 and 2011 (approved by the Order of the Government of the Russian Federation dd. September 1, 2008, No. 1272-p); pronouncements made by the Minister of Finance A. Kudrin to information agencies following the meeting of the Government of the Russian Federation held on July 30, 2009] (http://www1.minfin.ru/ ru/press/speech/index.php?pg4=17&id4=7912); pronouncements made by the Minister of Finance A. Kudrin to information agencies following the meeting of the Government of the Russian Federation held on September 23, 2009] (http://www.minfin.ru/ ru/press/speech/index.php?id4=8175); Maslov G.. The State Will Generate RUB 70 bln from Privatization. -Infox.ru. October 6, 2009] (http://www.infox.ru/business/finances/2009/10/06/Gosudarstvo_zarabota.phtml); R. Falyakhov. State-Owned Property Will be Booked On the Assets Side. - Gazeta.ru, November 24, 2009] (http://www.gazeta.ru/business/ 2009/11/24/3290513.shtml); A. Makryashina. Revenues from Privatization will Total RUB 100 bln in 2010. - Infox.ru, March 17, 2010 (http://www.infox.ru/authority/state/2010/03/ 17/Dohodyy_ot_privatiza.phtml); V. Silayev, E. Nabiullina. Privatization Will Generate RUB 72 bln. - Infox.ru,
June 18, 2010] (http://www.infox.ru/ business/finances/2010/06/18/Nabiullina_Privatiz.phtml); The Budget
Policy Guidelines for 2011 and the Planning Period in 2012 and 2013] (http://www.minfin.ru/common/img/uploaded/library/2010/08/ONBP_2011 - 2013.doc).
Fig. 1. Planned volumes of privatization of federal property in 2010.
1 See Comments made by the Minister of Finance A. Kudrin to information agencies at the Reuters Summit held on September 15, 2010] (http://www.minfin.ru/ru/press/speech/index.php?id4=10574).
It is important to point out that the reported "volatility" of planned volumes of privatization in 2010 resulted in lack of unified public position as to which large companies must be privatized. For example, in different periods different public officials expressed sometimes totally contradictory opinions on the issue. Among assets which were offered for privatization in 2010 were blocks of shares in the largest companies and banks, namely Rosneft, Sovkom-flot, Rosgosstrakh, Rosagroleasing, VTB Bank, Sberbank, Rosselkhozbank. In July 2010, the principal participants in the process of privatization (The Ministry of Economic Development and Trade of Russia u the Ministry of Finance of Russia) approved a tentative list of 11 companies and financial institutions whose blocks of shares must be put up for sale in the midterm perspective, namely Transneft, Sovkomflot, Rosneft, Sberbank, VTB Bank, Rosagroleasing, FGS, Rosselkhozbank, RusHydro, Rosspirtprom, and United Grain Company (however, the state planned to retain a controlling interest in all of these companies)1, and in September the list was approved in general and extended by the Chairman of the Government of the Russian Federation V. Putin2. However, it was unclear yet whether the shares in any of the listed companies (or, maybe, other large economic agents) would be privatized till the end of 2010.
A meeting of the Government of the Russian Federation was held late in October 2010, which discussed plans of privatization till 2016: as part of the program of privatization till 2013 and plans of privatization for 2013 - 2015. Following the meeting, it was announced that about 900 companies were planned for privatization and a total of RUB 1,8 t generated till and inclusive 2015. The blocks of shares in large banks and companies such as VTB Bank, Sberbank, Sovkomflot, FGS UES, Rushydro, United Grain Company were expected to be sold till 2013, and Rosneft, Russian Railroads, Aeroflot, Sherenetyevo, Rosselkhozbank, Rosagroleasing from 2013. Furthermore, it was announced that in the coming 3-4 years privatization of large companies would not be linked with decrease in a state-held share below a controlling interest, however, it was reported that the state planned to get rid of its controlling interest in Rosneft, Rushydro, VTB Bank, Aeroflot in a more distant prospect - after 2015.
It was not until the meeting of the Government of the Russian Federation on November 17, 2010 when plans of privatization of large and the largest companies became clear. The meeting approved the Forecast Plan and Guidelines for Privatization of Federal Property for 2011 - 2013 which contained, in particular, the following important provisions :
- restrictions on privatization of specific types of federal property which cease to be relevant, will continue to be abolished;
- the approved plan of privatization in the course of time will be supplemented on the basis of the results of optimization of the structure of state-owned property ;
- tight deadlines for privatization of the largest companies are not set, some time frames are set, sometimes for a more distant perspective (beyond 2011 - 2013).
A very important feature of the forecast plan of privatization for 2011 - 2013 is that it includes 10 largest companies which are leading in respective industries, whose blocks of shares will be privatized on the basis of specific decisions of the President of the Russian
1 T. Zykova. Public Sales. - Rossiyskaya Gazeta, July 29, 2010.
2 See Comments made by the Minister of Finance A. Kudrin to information agencies at the Reuters Summit held on September 15, 2010] (http://www.minfin.ru/ru/press/speech/index.php?id4=10574).
Federation and the Government of the Russian Federation (Table 15)1. Revenues from their privatization in 2011 - 2013 are estimated at a level of RUB 1 t.
Together with the above mentioned largest companies which seem to be privatized according to "custom-made" schemes, the forecast plan also provides for privatization of the blocks of shares (the value of each exceeds RUB 500 mln) of eight large companies, namely Apatit, Prosvescheniye Publishing House, Sibir Airline, Archangelsk Traiwing Port, Ulyanovsk Motor Plant, Murmansk Fishery Seaport, Vostochny Port, Almazny Mir in 2011 - 2013.
In general, total revenues from privatization in the period between 2011 - 2013 are estimated at a level of RUB 1 t. The biggest part of the revenues is linked to privatization of 10 largest companies. Net of these companies, revenues from privatization in 2011 are estimated RUB 6 bln, in 2012-2013, RUB 5 bln each year (but these revenues are also are forecasted in connection with planned privatization of eight large companies).
Table 15
Plan of privatization of the largest open joint-stock companies leading
in relevant industries
Largest privatized companies and banks State-held block of shares
As of November 1, 2010 2010 2011 2012 2013 2014 2015
VTB Bank 85.5% 75.5% 65.5% 50% +1 share
Sovkomflot 100% 100% 75% 50% +1 share <50%
United Grain Company 100% 100% 0% |
Unified National Electric Grid 79.11% 79.11% 75% +1 share
Sberbank of Russia 57.58%* 57.58% 50% +1 share
Rosneft Oil Company 75.1% 75.1% 50% +1 share
RusHydro 57.9% 57.9% 50% +1 share
Rosselkhozbank 100% 100% 75% +1 share
Rosagroleasing 99.9% 99.9% 99.9% 99.9% 50% +1 share
Russian Railroads 100% 100% 100% 100% 75% +1 share
* - owned by the Bank of Russia.
Source: the forecast plan of privatization of federal property for 2011 - 2013 and the document of the Ministry of Economic Development and Trade of Russia "Planned Sales of the Shares of Large Companies Leading in the Industries of the Russian economy, in 2011-2015" (http://www.economy.gov.ru/minec/ activ-ity/sections/investmentpolicy/doc20101123_08).
It was previously reported that the state would invest a part of the revenues from privatization in privatized companies: according to the comments made by public officials, about RUB 1 t is expected to go to the budget and RUB 800 bln to privatized companies (in particular, through IPO and SPO) of the total of revenues from privatization generated over five years (RUB 1,8 t). It remains to be seen, however, which companies and under which terms and conditions will become the recipients.
In general, the following should be highlighted with regard to work-out and approval of plans of privatization in 2010 :
1. Terms and scope of privatization of specific large companies continue to be the subject-matter of heated discussion. In particular, there is a serious contradiction between ministries and government agencies as to privatization of Russian Railroads, Aeroflot, Svyazinvest,
1 It should be noted that this list didn't include a few of the largest companies which previously were not mentioned as potential targets for privatization, namely Aeroflot and Sheremetyevo.
AIZHK, Transneft and Zarubezhneft. For example, b the Ministry of Transport of Russia insists that privatization of Russian Railroads and Aeroflot should be postponed until reorganization of these companies is completed: Aeroflot is expected to receive the shares in six airline companies, and Russian Railroads is expected to become an infrastructural company.
2. In spite of the declared principle of transparency of privatization at all stages, the processes of discussion of the list of large companies which are planned for privatization were far from being public, which, however, was compensated by numerous comments in mass media as to the decisions made and existing disagreements.
3. Generation of additional revenues to the budget progressively became the dominating issue in privatization planning while structural objectives fell by the wayside. Such a shift of emphasis was logically accompanied by focusing on privatization of expensive and liquid blocks of shares in large financial institutions, banks, oil companies.
4. In spite of planned privatization of the blocks of shares in a series of largest companies, the state tends to retain its dominating participation in the charter capital of such companies in years to come, whereupon it is needless to talk about any large-scale reduction of the stateheld share in the economy (in GDP).
Finalizing examination of actual plans of privatization, it may be reasonable to note that the federal authorities intend to initiate privatization at the regional level in 2011 - 2013, which is supposed to be comparable with the planned privatization of federal property in terms of revenues from sale of assets.
In the fall of 2010, the regional authorities were assigned to prepared and approve large-scale programs of privatization. Many regions, holding blocks of shares in major companies, are qualified for allocations from the federal budget. In the meantime, the regions own a great deal of property and assets which can be offered in the market. The Ministry of Economic Development and Trade and the Ministry of Finance of Russia have been discussing a scheme under which account will be taken of whether or not the regions have a program of privatization when they apply for transfer from the federal treasury in order to keep their budget in balance. If the regions are holding any attractive assets, they are not entitled to apply for transfers from the federal budget unless they sell such assets.
Potential Risks Arising from "New Privatization"
The development and implementation of the national policy in the field of privatization may result in a series of internal contradictions and issues. It is hard to holistically characterize such risks, because the process of development of terms and conditions and principles of "new privatization" remains to be completed, and the state measures give ground to both increase the relevance and restrict specific risks. Nevertheless, we consider the following risks as relevant.
First, the risk arising from immaturity of legislative procedures for privatization of large companies and extension of terms and conditions for the "custom-made" approach towards privatization of large state-owned properties.
This risk will remain relevant until the single issue is resolved: restrictions on options of privatization of large companies have been lifted, but new options of privatization have not been defined, even the framework, on a regulatory basis.
The gaps in the legal structures of new arrangements of privatization and disposal of property (such as sale of shares to a strategic investor on a sole source basis, tender under investment terms and conditions, or transfer of assets for management), first of all - lack of explicit 412
criteria for application thereof - extend preconditions for making "rule-of-thumb", situational decisions, lobbying and "administrative bargain". Uncertainty of to-be rules (and even nontransparent motives) makes the policy of privatization of large state-owned companies less predictable, sidelines participation of foreign investors in privatization of large Russian companies.
It should be noted that lack of explicit rules and regulations as applied to new tools of alienation of state-owned property and the "custom-made" nature of decisions may raise questions about "invalidity of privatization" in the future.
Second, the risk of imposing serious formal and informal restrictions on participation of "external" investors in privatization, providing specific buyers with preferential terms and conditions.
The basic precondition for this is that in some cases the state is not ready give up on direct participation in companies due to immaturity of regulation for a given industry. Foreign investors may find themselves to be exposed to high risks for the same reason. To avoid such risks, investors must have a clear picture of the statutory framework in which companies are operating (this is particularly true for companies operating in infrastructural industries) .
After the Government of the Russian Federation was entitled to sell specific state-owned properties outside of the law on privatization, the risk of biased, subjectively selective treatment of shareholders and potential investors became higher. Let us recall that this innovation was connected with the need to enlarge options of privatization, in particular by way of direct sale of federally-owned blocks of shares to the strategic investors of company. This is because the existing strategic investors of the company may act as a break on the process of privatization in fear of that new investors may come.
Perhaps, public representative presumed that specific large shareholders who would buy blocks of shares through direct sale would assume more strict and explicit obligations for modernization and development of a given company. It is not inconceivable that the state intends to prevent potential corporate conflicts in large companies in case of reallocation of assets in the course of privatization. As likely as not, however, the state intends to maintain a usual composition of the owners with whom it has long-term relationship.
In any case, assessment of when the Government of the Russian Federation should apply this arrangement may be found to be nontransparent and related to a subjectively "custom-made" judgment on "good" and "bad" shareholders in terms of the development of a company, incorrect assessment of the value of blocks of shares in case of direct sale.
Third, the risk of that control over large companies management may be retained and even "nationalized" in the course of privatization of the property owned by large companies. This can be manifested both directly by "inviting" representatives from public authorities at different levels to participate in boards of directors, and indirectly, e.g., through, in particular, participation of state-controlled entities in boards of directors. The main problem here is even worse transparency of public interests with regard to such companies, appearance of even greater number of preconditions for replacing public interests with narrowly-specialized interests (both bureaucratic and private interests) against the option of direct public participation in charter capital.
Forth, the risk of expansion of public and quasi-public entities in the course of privatization on the basis of contribution of state-owned property assets to the charter capital of open joint-stock companies.
It should be noted that through from outside this would look like privatization of state-owned property, shortening of the list of strategically important enterprises and companies, reduction in the number of state-owned companies, but indeed may result in strengthening of direct participation of the state in management of economic affairs in specific industries due to widening of the scope and scale of business of the remainder companies in which the state holds an interest.
Though under the law on privatization legal entities in which the state holds an interest of more than 25%, may not participate in privatization of state-owned property, this prohibition is not applied to the type of privatization such as contribution of state-owned property to the charter capital of open joint-stock companies. In addition, since the law on privatization is not applied to arrangements of alienation of state-owned property assets by the decision of the Government of the Russian Federation and transfer of property to state-owned corporations, this prohibition cannot be applied to such corporations.
Public measures in this field are very controversial. On the one hand, regulation of terms and conditions for setting up and expanding integrated entities of the public sector through contribution of federal property to the charter capital of open joint-stock companies is relaxed, whereas the need to begin and complete integration processes is used as a ground for a long-term postponement of privatization of specific large companies.
On the other hand, efforts have been made to withdraw non-core assets from state-owned companies, restrict their potential for expansion. For example, the need to sell non-core assets by the largest state-owned companies (Gazprom, Russian Railroads, Russian Technologies State Corporation, etc.) is being under discussion1. It is assumed that in 2010 the companies will prepare plans of sale of the said assets2, and begin to sell the same in 20113. In addition to this, restriction on the right of state-owned companies to set up subsidiaries (by including relevant regulations into their charters) is being under discussion.
In our opinion, in some cases, completion of the processes of establishment of large integrated entities is an important element for enhancing their effectiveness, however, explicit deadlines and scope of subsequent denationalization of such integrated entities should be set in the first place.
Fifth, the risk of limited private fundraising, shortening of "planning horizon" by new owners and managers, and utilization of public resources in privatization, state banks, including those which were assigned in the course of recession counter measures.
Since "inner-circle" potential investors have limited private resources, large state banks are likely to participate at the administrative level with a view to providing support to respective transactions. This course of events would lower considerably new owners' interest in developing the privatized business, defining explicit terms and conditions for its operation, on the other hand they act as operators governed by the principle of "behavior in accordance with informal restrictions and requirements in exchange for additional public support". Conse-
1 Such actions are formally not regarded as privatization, because the assets of state-owned companies (save for unitary enterprises) are not held by the state.
2 According to the available information, Russian Railroads Open Joint-Stock Company already prepared and submitted such a plan to the concerned agencies for approval. ( See, M. Tovkailo, A. Nepomnyaschiy. The Property Will Be Transferred to a Single Owner. - Vedomosti, March 3, 2010. ] ).
3 T. Zykova. Public Sales. - Rossiyskaya Gazeta, July 29, 2010. 414
quently, the range of large, formally private companies which nonetheless will be regarded as being in need in unconditional public support and constant care, may expand.1
Sixth, the risk of competition at the public level between different approaches towards privatization, and broadening of conditions for "under-the-counter" struggle of competing interests.
One may assume that first group of public representatives (political elite) would focus on privatization for the purpose of structural economic reconstruction, the second group on generating more budget revenues from privatization, and the third group on broadening the opportunities for state-controlled companies in order to simplify immediate public influence on specific industries. Competition between these groups may result in creation of poorly regulated compromises which would broaden the possibilities for making custom-made decisions. Hence the struggle between the groups with different points of view on the role of privatization may be found to be even less transparent.
Furthermore, very important is the risk of excessive "fiscalization" of privatization, emphasis on short-terms interests in generating budget revenues, which would inevitably relegate more relevant long-term objectives of privatization (structural reorganization, promotion of the development of enterprises and industries) to the background.
Ideology of New Privatization: Structural and Budgetary Approaches
The scale of plans of privatization in a mid-term perspective makes the main "ideologeme" of this process critically important. Analysis of a population of key events which are somehow related to making the national policy in the field of privatization, allows two system priorities to be highlighted :
(1) "structural priority" - the use of privatization as a tool for reducing direct participation of the state in the economy, providing structural reorganization in industries, developing competition, encouraging the development of companies, attracting strategic investors ;
(2) "budgetary priority" - the use of privatization for widening budget revenues, reducing the public sector as "consumer" of public resources.
Strictly speaking, the foregoing priorities are not fully "antagonistic", each of them offering advantages and weaknesses in terms of development of the Russian economy, in terms of the above considered potential risks.
As part of the "structural priority", the emphasis is placed on whether or not it is expedient that some or other companies belong to the public or private sectors in terms of development of the companies as well as relevant industries and markets. This priority imposes strict requirements to the composition of privatized companies, the size of blocks of shares offered for sale, to buyers and, above all, actions of the buyers with regard to privatized companies. This approach requires careful selection of potential buyers, preferred emphasis on sale of companies to strategic investors who are interested in their long-term development; buyers may have to meet requirements related to operation and development of privatized companies.
This priority if focused on a mid-term perspective, in combination with creation of conditions for development of privatized companies, reformation of the same, considerable reduction of public participation in the economy. However, implementation of this priority may be
1 An illustrative example of the fourth and fifth risks is sale, on a single source basis, of a nearly controlling interest in Bank of Moscow to VTB Bank in February 2011.
exposed to material risks related to low transparency of the processes of sale of property to strategic investors, inexplicit reciprocal obligations of the state and buyers, uncertainty of arrangements designed to discharge such obligations. Once again, one may get the impression of "cheap" privatization and defaulted obligations in the future.
Second, the "budgetarypriority" provides for maximization of budget revenues from sale of federal property, for a short-term period though. In implementing this priority, companies for privatization are chiefly selected on the basis of their market value. The principal point is correct valuation of assets as well as selection of the "auspicious moment" for privatization, which can be done through careful monitoring and forecasting of the market situation. This is why it is reasonable to engage specialized organizations to perform sales. In the meantime, it is inexpedient in this case to impose any requirements to buyers (except for timely discharge of obligations for payment for privatized assets), because limited circle of potential buyers may reduce budget revenues. Therefore, it also becomes reasonable to define any terms and conditions (especially those of investment nature) as to what buyers may do with the privatized property.
In general, this priority organically implies transparency of privatization, acquisition of a wide range of potential, including foreign, buyers, lowering barriers on participation in privatization, considerable reduction of the scale of "cashless privatization" (in particular, on the basis of contribution of federal property to the charter capital of joint-stock companies). The same priority may become a relevant incentive for activating privatization processes at the level of constituent territories of the Russian Federation. However, to implement the same priority, it is not important to what extent the degree of public control over large companies is reduced (at least in the short-term perspective). Neither is important privatization of many small state-owned properties. This priority is rather of short-term nature, it has almost nothing to do with the objectives of reorganization, rehabilitation of large companies which require considerable time, and is less connected with improvement of institutional terms of development of sectors and industries.
At the level of federal agencies, the Ministry of Economic Development and Trade of Russia is the principal advocate of the first, "structural" priority, whereas the Ministry of Finance of Russia acts as an advocate of the second, "budgetary" priority. Indeed, such a division of priorities "by government agency" is conditional: government officials who represent the Ministry of Economic Development and Trade pointed out many times that privatization is important for generating budget revenues1, whereas the officials from the Ministry of Finance mentioned from time to time that privatization is relevant as a tool for development of business environment and acquisition of private investments2.
The relevance of the two foregoing priorities chanted considerably in the course of creation conditions for "new privatization". The "structural" priority was more relevant for privatization late in 2009, whereas the "budgetary" priority became prevailing by H2 2010. It is noteworthy that this approach was also supported by representatives of large business associa-
1 See, e.g.: O. Redkina. The Government Will Keep Hold of Rosneft. - Infox.ru, September 29, 2009] (http://www.infox.ru/business/ finances/2009/09/29/Vlast_nye_otdast_R.phtml).
2 See, e.g., comments made by the Ministry of Finance A. Kudrin to information agencies following the meeting of the Russian-British Intergovernmental Committee for Trade and Investments held in London on November 5, 2009 (http://www1.minfin.ru/ru/press/speech/index.php?pg4=13&id4=8583).
tions which considered large-scale privatization of state-owned companies as an alternative to potential tax increase intended to generate budget revenues1.
Though both "structural" and "budgetary" priorities are relevant for decision-making in practice, compromises in the struggle between the two ideologies are currently reached at the cost of regulatory uncertainty, by increasing the role of "rule-of-thumb" decisions and broadening nontransparent, positional struggle between different parties.
In our opinion, in spite of attractiveness of the "structural" priority in terms of long-term development of the Russian economy, it is the lack of long-term and transparent "rules of the game" in interaction between the state and businesses that will become a relevant barrier. In this respect, it is the "budgetary" approach that seems to be more balanced in terms of advantages and risks in the short-term perspective.
Preconditions for strengthening the structural trend of privatization in the mid-term perspective will appear, provided that a substantial progress is gained in the development of institutional environment, harmonization in interaction between the state and businesses. It should be noted that solution of a series of principal structural objectives within privatization (e.g., drastic reduction of the public sector, the state should give up on control at the level of specific large companies) is scheduled for 2013-2015 and beyond. In the meantime, it should be made possible to define the most relevant goals and objectives of privatization, the "future" of the largest state-owned companies in the mid- and long-term perspectives.
Basic Conclusions and Recommendations
1. During 2010, privatization was one of the top-priority objectives set by the Government of the Russian Federation. In the same period, the base for privatization was enlarged considerably through both large-scale shortening of the list of strategically important companies and organizations and broadening of the forecast plan of privatization. However, shortening of the list of strategically important companies and organizations in 2010 was of a slightly different nature as compared to the previous years: (1) set-up of integrated entities was not the principal "keynote" for excluding organizations from the list; (2) joint-stock companies prevailed among those excluded from the list, in most of which the Russian Federation held less than 50% of equity interest; (3) most of the excluded organizations operate in the transport sector and related infrastructure.
2. Major amendments were made to the law on privatization. Following are listed the most relevant innovations in this field. Transition to mid-term planning of privatization of federal property; the Government of the Russian Federation was entitled to make decisions on privatization of state-owned property beyond the scope of "standard" procedures set forth in the law on privatization; the Government of the Russian Federation can decide on the possibility to authorize legal entities to act as sellers of privatized federal property; the admissible options of privatization of large companies were extended, which includes contribution of state-owned property assets to the charter capital of joint-stock companies; privatization of small state-owned property assets was simplified, access of potential buyers to participation in privatization was broadened; the requirements for transparency of privatization procedures were broadened substantially.
1 The President of the Russian Union of Industrialists and Entrepreneurs (RUIE) A. Shokhin: The Dialogue Between the Business Community and the Chairman of the Government of Russia is Highly Effective. - RUIE official webpage, May 17, 2010 (http://www.pcnn.p$/Default.aspx?CatalogId=283&d_no=8261).
Considering the innovations as part of the law on privatization, it should noted that they are well-defined for solution of the two objectives: (1) improve capability and development of tools for privatization of large and largest companies and (2) reduce costs and restrictions on large-scale privatization of relatively small companies. Judging by the approved regulations as applied to privatization of large companies, the emphasis is placed on "custom-made" decisions, however, not even general frameworks for making such decisions have been defined to date, and the role and powers vested in the powers of the Government of the Russian Federation in making such decisions were strengthened and broadened considerably.
The most controversial and uncertain is the innovation related to delegation of powers to the Government of the Russian Federation for decision-making on privatization of state-owned property beyond the scope of "standard" procedures set forth in the law on privatization, especially in cases of direct sale of blocks of shares to the existing shareholders.
3. The beginning of a new stage of privatization was closely associated with emphasis on structural reorganization and modernization of the economy, improvement of competitive environment and facilitation of investments, restructuring and development of enterprises. Later, however, in particular by the H2 2010, the focus gradually shifted towards the role of privatization in generation of additional budget revenues. This resulted from growing doubts as to the prospects of rapid post-recession growth in the Russian economy, broadening of budgetary expenditures, which includes social security expenditures, and, consequently, aggravation of the issue related to federal budget deficit in years to come.
This shift of emphasis was logically accompanied by focusing on privatization of expensive and liquid blocks of shares in large financial institutions, banks, oil companies. In spite of planned privatization of the blocks of shares in a series of largest companies, the state tends to retain its dominating participation in the charter capital of such companies in years to come. Hence solution of the objectives of considerable reduction of the state participation in the economy, structural transformation was postponed in the mid-term perspective.
4. The process of development of plans of privatization, discussion of terms and conditions of privatization of large companies seems to be very situational. Government agencies have been struggling between each other as to the terms and scopes of privatization of specific large companies. In spite of the declared principle of transparency of privatization at all stages, the processes of discussion of its expediency, effects, the list of large companies which are planned for privatization and specific options of this process remain far from being transparent, and the state fails to provide and/or hardly provides enough reasons for the decisions made.
5. Solution of structural objectives in the course of privatization are exposed to a series of material risks, which include :
- the risk arising from immaturity of legislative procedures for privatization of large companies and extension of terms and conditions for the "custom-made" approach towards privatization of large state-owned properties ;
- the risk of imposing serious formal and informal restrictions on participation of "external" investors in privatization, providing specific buyers with preferential terms and conditions ;
- the risk of expansion of public and quasi-public entities in the course of privatization on the basis of contribution of state-owned property assets to the charter capital of open joint-stock companies ;
- the risk of limited private fundraising, shortening of "planning horizon" by new owners and managers, and utilization of state banks' money in privatization ;
- the risk of competition at the public level between different approaches towards privatization, and broadening of conditions for "under-the-counter" struggle of competing interests.
6. Two system priorities - "structural" and "budgetary" - appeared in the field of implementation of the national privatization policy.
The first priority if focused on a mid-term perspective, in combination with creation of conditions for development of privatized companies, reformation of the same, considerable reduction of public participation in the economy. However, implementation of this priority may be exposed to material risks related to low transparency of the processes of sale of property to strategic investors, inexplicit reciprocal obligations of the state and buyers, uncertainty of arrangements designed to discharge such obligations.
The second priority implies transparency of privatization, acquisition of a wide range of potential, including foreign, buyers, lowering barriers on participation in privatization, considerable reduction of the scale of "cashless privatization" (in particular, on the basis of contribution of federal property to the charter capital of joint-stock companies). The same priority may become a relevant incentive for activating privatization processes at the level of constituent territories of the Russian Federation. However, to implement the same priority, it is not important to what extent the degree of public control over large companies is reduced (at least in the short-term perspective), no investments are attracted for the development of companies.
7. In spite of attractiveness of the "structural" priority in terms of long-term development of the Russian economy, it is the lack of long-term and transparent "rules of the game" in interaction between the state and businesses that will become a relevant barrier. In this respect, it is the "budgetary" approach that seems to be more balanced in terms of advantages and risks in the short-term perspective. Preconditions for strengthening the structural trend of privatization in the mid-term perspective will appear, provided that a substantial progress is gained in the development of institutional environment, harmonization in interaction between the state and businesses.
8. In our opinion, to improve a privatization-based contribution to the long-term economic development, it is important to develop and take a set of measures which go beyond the scope of privatization. In particular, much efforts should be made to enhance corporate governance. It is well known that due to weaknesses that can be found in the field corporate governance, foreign investors valuate the shares of Russian companies at a relevant discount.
In addition, the existing regulation of foreign investments in strategically important economic sectors must be improved: it is expedient to define such sectors and establish a transparent and explicit procedure for making and approval of decisions.
The policy in the field of privatization must be coordinated with the measures aimed at establishing an international financial center in the Russian Federation. Over the longer term, when decisions on discontinuing public control in specific large companies may be made, privatization of the relevant blocks of shares may become a powerful impulse for the establishment of the financial center.
9. It should be taken into account that if the state discontinues participation in the charter capital of large companies, including infrastructural companies, the lack of legislative regulation of their activity will be replaced with intervention of public officials into business deci-
sion-making. To avoid such a situation, the quality of legislative regulation in relevant business segments and industries must be improved.
It is advisable to take measures on substantial regulatory development of the option of privatization such as sale of shares based on trust management results. In our opinion, this option allows direct public control to be withdrawn from specific companies while the state retains its participating share throughout the entire period of trust management, in which case specific key objectives of business development may be defined within the framework of trust management.
10. The following measures seem to be advisable in order to avoid outgrowth of the public sector through remaining state-owned companies. First, companies in which the state holds an interest must be restricted in terms of acquiring new assets as part of privatization. Second, with regard to integrated entities whose establishment by the state is still in progress, it is advisable to decide on whether or not they can be privatized over the longer term. Third, large state-owned must be somehow held responsible for writing off non-core assets in deciding where revenues from their sale should be allocated to.
With regard to the companies whose privatization is postponed in a more distant future due to uncompleted process of restructuring thereof, these processes should be subject to strict deadlines, and managers and board members should be held responsible for observance of the deadlines.
11. Poor transparency of plans and decisions on large state-owned property assets is perfectly evident in the national policy in the field of privatization. In general, at least a general frameworks for terms and conditions for privatization of the largest companies should be gradually created. In our opinion, to ensure mitigation of risks of hidden lobbying of different decisions, it is important that ministries and agencies' opinions on these issues should be more transparent, and final decisions should be publicly reasoned.
It is obvious that when there is a need for providing support to dynamic practical decision-making in the field of privatization, launching large privatization transactions for the first time, it is not always that respective terms and conditions can be worked out in advance, concurrently with discussion of different approaches, but efforts will have to be intensified in refining rules for privatization in the future.
12. In our opinion, in order to make the national policy in the field of privatization more predictable, better coordinated with other measures, a concept of privatization for a period of 6-8 years should be developed, which would set forth key principles of privatization, specifics of alienation of different types of property, some strategy guidelines for the maximum permissible level of state (not only at the federal level) participation in the economy, including specific sectors.
13. Measures aimed at promoting privatization processes at the regional and municipal levels should be continued and intensified. In addition, legal limits on setting up new SUEs and MUEs (municipal unitary enterprises), joint-stock companies in which the sate holds an interest could be imposed at the regional level.
14. It is important that regular efforts in enhancing corporate governance at companies in which the state holds an interest should be continued along with promotion of processes of privatization of state-owned property. The policy of introducing independent directors into the management of state-owned companies must be further enhanced, requirements to such directors must be elaborated, strategic objectives and milestones in activity of key state-owned companies must be defined.
6.2. The 2006-2010 Corporate Law: Some Results and Novelties
Adopted in the mid-2000s, the Concept of development of corporate law for the period through 2008 pursued fairly ambitious objectives of reforming the emerged by then corporate law system for the sake of creation of institutional conditions of economic growth. A whole string of its fundamental provisions nonetheless formed a rationale for that conclusion regarding a radical re-orientation of the corporate regulation model towards majority shareholders. Certain moves with regard to implementation of measures provided for by the Concept became concomitant with the process of activation of the state (largest state-owned corporations') operations on the market for corporate control. This necessitates an evaluation of results of the Concept implementation in the first place. To this end, we deliberately picked the period until 1 January 2010, for, while measures of urgent anti-crisis regulation had already kicked off by then, the factor of the 2008-09 crisis had not yet affected corrections of measures provided for by the Concept.
As evidenced by Table 16 and Fig. 2, the progress in implementation of the Concept across multiple directions appeared fairly different.
Table 16
Progress in Implementation of the Concept of Development of Corporate Law for the Period through 2008*
Key directions of development of corporate law Spheres of modification of regulation Specific weight of novelties of the block in the Concept's general structure, as % Specific weight of legislative implementation of proposed measures of the block, as %
Block I - prevention of corporate conflicts and their regulation 1) 2) 3) Solving corporate disputes; Public registration of legal entities; Account of securities 25 60
Block II - development of the corporate governance system 1) Structure of corporate management bodies and allocation of competences between them; 2) Responsibility of individuals engaged in management bodies; 3) Conflicts of interests (prevention and regulation); 4) Profit allocation; 5) Non-arm's length transactions and large transactions 44 33
Block III - organizational and legal forms of legal entities 1) 2) Commercial organizations; Non-profits 15 18
Block IV - development of integrate business structures (IBS) 1) 2) 3) 4) Reorganization of legal entities; Peculiarities of regulation of IBSs; Tax regulation of a group of affiliated entities; Affiliated entities 16 34
* Quantitative assessments presented in Table 16 and Fig. 2 are exclusively of estimated and illustrative nature
It was measures aimed at regulation and prevention of corporate conflicts that enjoyed the greatest demand (the level of their implementation accounts for more than 60%). Meanwhile, despite their impressive volume (slightly under 50% of all the novelties in the Concept), the measures on development of corporate governance were implemented in a volume of roughly 1/3. The measures on development of IBSs likewise were implemented in roughly the same volume, while those in the area of organizational and legal forms of legal entities were implemented in a volume less than 1/5. That said, the levels of legislative implementation of new legal norms differ substantially across the spheres of regulation.
Fig. 2. Implementation of the Concept of Development of Corporate Law for the Period through 2008 across Directions of Regulation by 1 January 2010.
Out of measures the RF Government planned and approved in the frame of the Concept in 2006 practically untouched remained novelties that concern:
- Conflicts of interests;
- Non-profits; Regulation of integrate business structures; Tax regulation of affiliated entities;
- Profit allocation.
So, the changes to the least extent affected the most controversial and potentially lucrative for fixers directions of the corporate governance law reform1.
1 As to tax regulation of affiliated entities' operations, because of numerous large corporations' increasingly complex financial standing between late 2008 and 2009, the problem was once again became a pressing one. In May 2009, the RF Ministry of Finance unveiled a concept of the bill on consolidated group of taxpayers. By July 210 the bill had been passed in the first reading at the State Duma and was set to be passed, together with bill on transfer pricing, in the second reading; however, as of March 2011, the bills failed to be signed into law. The bill introducing changes into the law on affiliated entities was presented by the RF ministry of Economy in February 2010. The document provides for a broadening of the concept of affiliation and its introduction into the 422
Meanwhile, some directions of development of corporate law underwent insignificant changes, with individual mechanisms, which today are capable of protecting the largest creditors, being improved, while fundamental objectives left for the future. Specifically, measures in the sphere of responsibility of persons sitting on management bodies were implemented with a great deal of selectivity. The month of July 2009 saw implementation of the mechanism of collective lawsuits, which provides for the possibility for one person to file a lawsuit on behalf of a whole group of entities concerning corporate disputes in particular. The sizes of fines for economic offenses were slightly changed too (in February 2009). Since June 2006 the clause of the Labor Code, which caps the amount of recovery of losses resulted from individuals sitting on management bodies of an economic company causing damage to the company, has no longer applicable to the individuals in question. Meanwhile, a string of challenges remained untouched, such as:
- Reasons for the torts liability of individuals who hold positions in management bodies, including the right to claim for compensation of losses;
- Matters relating to insurance of individuals who hold positions in corporate management bodies;
- The shareholders' right to disqualify directors and managers by judicial means;
- Development of the procedures of regulation of collateral actions.
The securities accounting system was modified solely with regard to definition of the nature and volume of responsibility of the registrar and issuer for breaching the procedure of running the register and fixing ways of protection of the rights of owners of securities, the rights to which are proved by making an entry into the account in the event of an unpermitted write-off. At this point, likewise, numerous problems remained unresolved, including:
- Identification of the securities' status;
- Insurance of the registrar's professional responsibility;
- Exclusion of a possibility for withdrawal of original documents on accounting of rights to securities.
In the frame of the registration system of legal entities, requirements to the application forms for registration of legal entity were tightened slightly: now they should be certified by a notary. In addition, a new justification for refusal of public registration was introduced -namely, disqualification of an individual having the right to act on a legal entity's behalf without the power of attorney (December 2008).
Regulation of commercial companies' operations was modified by tightening requirements to disclosure of information (in December 20071 and in April 20 092 -with regard to foreign
3
investors), improvement of the institution of joint-stock agreements (in June 2009 ). Prior to
Civil Code of RF; introduction of the parent company's presumption of innocence with regard to a daughter one, provided the former has the right to control 50%-plus of the latter's equity or shares, etc. As of March 2011, the bill failed to be signed into law.
1 Federal Act of 06.12.2007 № 334-FZ "On introducing amendments to the Federal Act "On investment funds" and individual legislative acts of Russian Federation".
2 Federal Act of 28.04.2009 № 74-FZ "On introducing amendments to the Federal Act "On securities market" and art. 5 of the Federal Act "On protection of rights and legal interests of investors on the securities market".
3 Federal Act of 03.06.2009 № 115-FZ "On introducing amendments to the Federal Act "On joint-stock companies" and art. 30 of the Federal Act "On securities market".
that (in July 20061), the Government imposed a ban on issuance by joint-stock companies of obligations in an amount exceeding their authorized capital in the event there are no external guarantees or a letter of comfort.
That the 2000s saw an objective trend towards a gradual improvement of corporate law, including certain aspects of corporate governance in a narrow sense of the word, to the benefit of a broad circle of agents concerned, cannot be challenged. That said, the government's recent vigorous activity on the market for corporate control (in the form of obtaining control over the largest assets, establishment of public corporations, boosting state-owned equity) was unfolding in parallel with the stagnation in promoting the institution of property and corporate law.
The only exception became "S.W.A.T" measures aimed at preclusion of corporate conflicts - a new procedure of consideration of corporate disputes and some measures aimed at countering stripping bankrupt and indebted corporations of their assets, which - and this is typical of recent years, proved too late to implement. Adoption of systemic measures on a further development of the institution of property and corporate law was postponed.
Let us now more thoroughly consider typical novelties of the late 2000s.
The general public economic policy, one of manifestations of which since mid-2000s has been the state's more pro-active direct intervention in the economy, emerged as the most significant factor that determined the nature of modifications in the corporate law (as the corporate governance's regulative base) between 2006 and 2010. The corporate governance's advancement in the period in question was to a significant extent determined by pursuance of tasks on securing the public and quasi-public interests on the market for corporate control.
All that lied at the core of establishment of a new legal base on reorganization of corporations in 2006, which to a significant extent helped amalgamate hundreds of companies into 7 public corporations and a number of large holdings. The process had been complete by and large by 2008.
According to FAS's assessments made in 2008, enjoying the political and administrative resources and greater financial capacity, public corporations can exert a critical influence on general conditions of circulation of goods on respective commodity markets. Threats to competition arising due to the rise of public corporations lie in mandating to them some public functions and powers in respect to pursuance of the public policy. Plus, the state created exclusive conditions for the public corporations' economic operations, which makes it impossible for private corporations to compete with them. Finally, seeking collective domination, the
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public corporations are keen to create horizontally or vertically integrated structures .
Inspections the legal enforcement agencies ran in 2009 afforded ground to conclude the public corporations failed to accomplish their functions and mandate; what's more, their operations appeared inconsistent with objectives set in federal acts on their creation, and their
1 Federal Act of 27.07.2009 № 138-FZ "On introducing amendments to the Federal Act "On securities market" and some other legislative acts of Russian Federation.
2 To solve these challenges FAS believes it is appropriate to: 1) strengthen the anti-trust control over public corporations; 2) return to the state the public functions currently exercised by public corporations; 3) broaden the use by public corporations of tender-based mechanisms in the course of procurement of goods, works, services from private Russian companies; 4) secure transparency in the public corporations' operations; 5) impose a moratorium on founding new public corporations; 6) exclude the possibility of a government's permanent financial support of public corporations. See: Report of the RF Federal Anti-Monopoly Service "O sostoyanii konku-rentsii", www.fas.gov.ru.
use of public assets and financial resources assigned to them was inappropriate or inefficient. The examination of the public corporation's operations resulted in filing more than 20 criminal cases; as well, the results became yet another argument in favor of their gradual reorganization and liquidation. The head of the presidential Control Department has reckoned recently that the Government was tasked to develop proposals until 1 March 201 on transformation of operating in the competitive environment public corporations into other organizational and legal forms, including, in particular, joint-stock companies.
In addition, as early as since 2004 the Government began undertaking legal measures aimed at protection, retention and simplification of tasks of consolidation of new assets. More specifically, such measures were undertaken in the areas of corporate regulation, bankruptcy, anti-monopoly law1. The problem of conflict of interests the government faced as the regulator and an active player on the M&A market became evident already in 2006-08. A greater attention to interests of public companies and backbone corporations (with the latter entities being a fuel for expansion of the former ones) entails the deterioration of the quality of the general state regulation of the corporate sphere, for narrow and bespoke provisions designated for servicing the public sector's interests expanded to encompass all the economic agents.
The provision of the state relief to companies between late 2008 and early 2009 in the frame of the combat with effects of the financial crisis by loans-for-shares means demanded for creation of mechanisms which would enable one to easily acquire the companies in question and control them. That gave rise to new, more flexible levers of allocation and pawns involving shares in limited liability companies, changes in assignment of powers between the companies' management bodies towards simplification of critical decisions concerning company management practices. For instance, Federal Act of 30 December 2008 № 306-FZ "On introducing amendments to some legislative acts of RF in connection with improvement of the procedure for the levy of execution on pledged property" established a mechanism of the extrajudicial reassignment of rights to Russian corporations' pledged stakes and other assets. The procedure for, and conditions of, exit of participants from LLCs and/or pledging their shares were fundamentally modified, too. As well, one can reference to a much disputed 2009 bill "On financial rehabilitation" which in the first place was set to meet the interests of the largest groups that had amassed sizeable debts.
The need to secure interests of the banks that are mostly controlled by the state dictated unprecedented limitations of timelines for attempts to challenge decisions made by management bodies of economic companies and a drastic reduction of the list of rationales for filing respective suits, and of introduction of much-needed proceedings measures which help an efficient consideration of corporate disputes.
Against that background the government implemented measures developed and proposed back in 2008 in the Concept of development of corporate law through 2008. That said, while key players on the market for corporate control saw their interests be promoted quite flawlessly, the said measures had enjoyed no demand whatsoever until recently.
The acts adopted with regard to LLCs partly helped close the gap between the respective legislation and the urgent needs and the company legislation. Meanwhile, the introduction of
1 See, for example: Radygin A., Entov R., Apevalova E. et al. Vnutrenniye mekhanizmy korporativnogo uprav-leniya: nekotorye prikladnye problem. M., IEPP, 2009; Apevalova E., Radygin A. Razvitiye institute bankrot-stva.- V: Ekonomika perekhodnogo perioda: ocherki ekonomicheskoy politiki postkommunisticheskoy Rossii. Ekonomichesky rost 2000-2007. M., Delo, 2008, p. 463-497.
simplified mechanisms of change of owners in the conditions of a limited access to financial resources and the "dictatorship" of banks, which was born by the state, constitutes an assets redistribution lever.
The government and the group of controlled by it banks' active operations on the financial market between late 2008 and early 2009 were backed by measures on modification of circulation of marketable securities. Specifically, there arose and was legitimized a new concept of "qualified investors". They became eligible for an access to a broader array of securities, while benefiting from more lenient requirements to transparency of such operations, for they no longer are subject to the concept of public offer and respective information disclosure requirements.
In anticipation of a rise in corporate raids in the regions against the backdrop of crisis and
a drastic fall in costs of assets1, the government took a pro-active stance with regard to modi-
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fications of the law in the corporate disputes area. Made in July 2009 , the most significant changes in this particular sphere determined:
a) Special procedures of consideration by arbitration courts of this particular category of cases, including such disputes being subject to exclusive locus standi of the court of law at a given legal entity's location;
b) Special provisions that concern employment of interlocutory injunction, which is supposed to preclude the nuisance and collective lawsuits;
c) Obligation to disclose information oon the initiated dispute or preparations thereto;
d) The ban on extension of the limitation period with regard to suits on annulment of corporate acts.
That said, not adopted remained a string of modifications that concern the "healing" of the legal entity founded or reorganized in contravention of the law, the ban on extension of the period of limitations with regard to lawsuits on annulment of acts of the public registration of legal entities.
In 2009, arbitration courts witnessed a drastic growth in the number of cases on failure to honor obligations, which became one of the reasons behind the implementation in July 2010
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of the act on mediation, which came into effect on 1 January 2011 . The document provides for the possibility for a dispute regulation mechanism, with an independent entity playing a mediator. The procedure can be applied to disputes arising from civil relationships, including entrepreneurial or other economic activities, as well as to disputes engendered by labor of family legal relations. As to other categories of disputes, it can be applied only in the event the federal law provides for that.
The exercise of the mediation procedure is voluntary and confidential, and it is run on the basis of an agreement between the sides. It can be employed to a dispute that arose both prior
1 Addressing the Collegiums of the Attorney General's Office, Pres. Medvedev asserted that corporate raiding could spark social tensions in urban areas. Mr. V. Pligin, Chairman of the State Duma Committee for constitutional law and nation-building prognosticated a possible rise of the so called "raider captures" ( Rossiyskaya Biznes-gazeta, 09.12.2008) and by Yu. Korotky, the First Deputy Head of Rosfinmonitoring (Rossiyaskaya fi-nansovaya razvedka opasayetsya vspleska reyderstva na fone krizisa, 14.4. 2009. - http://www.raudspb.ru/ node/45), ti name a few.
2 Federal Act of 19.07. 2009. № 205-FZ "On introducing amendments to individual legislative acts of Russian Federation". The amendments in question took effect on 21. 10.09.
3 Federal Act of 27.07. 2010. № 193-FZ "On the alternative procedure for regulation of disputes with the participation of the intermediary (the procedure for mediation)".
to or after applying to the court of law or the arbitration court and can be initiated, in particular, per the judge or the arbiter's suggestion. To run the procedure the sides agree upon and pick one or several mediators. Should the sides turn to an organization that carries out operations on securing the conduct of the mediation procedure, such organization can recommend mediator/mediators or appoint them. The procedure per se is set by the agreement on conduct of the mediation procedure. The mediation agreement is made in writing and should contain information on the parties thereto, the subject of the dispute, the mediation procedure implemented, the mediator, as well as the obligations mutually agreed upon, and timelines for their implementation. The meditative agreement the parties arrive at the end of the mediation process should be executed voluntarily and in good faith. In addition, it can be approved as an amicable settlement by the court of law or the arbitration court, should the mediation takes place after the case was brought to the court. As to mediators, they can be both professionals, that is, having a profile higher education and taking a special training course in mediation, and amateurs. Some experts believe that, for instances, lawyers and notaries can handle mediation quite efficiently, for ex officio they often resort to amicable settlement and conciliation methods in their work.
Another large block of modifications was formed by change in the procedure for conclusion of large transactions and non-arm's length transactions, which was caused by the necessity to prevent siphoning off assets mostly of corporate debtors and corporate bankrupts. In July 20091, it was established that a large transaction or a non-arm's length one might be recognized as an invalid one only providing its negative consequences for the company or a shareholder, which should be proved in the court of law. The novelty clearly is a pro-majority one, and it will considerably diminish the number of transactions in question which the court of law renders ineffective.
Plus, the amended legislation specified the list of entities that have interest in effect of transactions and have a possibility to influence their completion; as well, the Board of Directors hence has enjoyed the possibility (along with the general meeting) to approve future transactions.
Lastly, a number of transactions are no longer subject to a special procedure for their conclusion (interest). This novelty concerns:
a) transactions whose conclusion is binding for the company, per the law;
b) transactions in which all the participants are interested, which are entered into by an LLC,;
c) transactions effected by companies consisting of the sole participant who concurrently exercises the functions of the one-man executive body;
d) relations arising in the course of the assignment to the company of a stake or its share in the company's authorized capital2.
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Earlier on, in July 2006 , out of the procedure for approval of large transactions and non-arm's length transactions were taken transactions conditioned by the decision on reorganization; as well, the procedure was specified for finding by the Board of Directors of the market
1 Federal Act of 19.07.2009 № 205-FZ.
2 Pp."c" and "d" were adopted in December 2008 with Federal Act of 30.12. 2008 № 312-FZ " On introducing amendments to Section One of the Civil Code of Russian Federation and individual legislative acts of Russian Federation".
3 Federal Act of 27.07.2006 № 146-FZ "On introducing amendments to the Federal Act 'On joint-stock companies".
value of the alienated or purchased assets with regard to such transactions. The modifications concerned joint-stock companies' operations. In July 2009, they were also implemented with regard to LLCs in respect to taking away non-arm's length transactions1.
It is also worth noting a temporary cancelation of, or limitations put on, the effect of a number of legal provisions, mostly through 1 January 2011 (in the frame of an urgent response to liquidity shortages). In the focus of such a crisis narrowing of the legal environment in the joint-stock area were banks, which faced the following meaningful changes:
1) requirements to the procedure for completion of non-arm's length transactions did not en-
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compass the subordinated unsecured loans extended by VEB and the ones CBR disbursed to Sberbank, which combined stood at Rb. 500 bln., with the term to maturity be-
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ing 31 December 2019 and the interest rate being 6.5% annualized ;
2) in compliance with the CBR decision, the requirement to diminish the company's author-
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ized capital until 1 January 2011 did not encompass banks ;
3) Requirements to the procedure for exercise of the mandatory offer for sale of equity or other issuable securities by the entity that has purchased 30%-plus of the company's equity (art. 84.2 of Federal Act of 26.12.1995 №208-FZ "On joint-stock companies"5) had not concerned until 1 January 2011:
- Credit organizations, should they acquire property rights for joint-stock companies' equity that form collateral;
- Third parties that purchased from credit organizations property rights for joint-stock companies equity that formed collateral, including auctioned off ones;6
- Since 20 July 2009, the Federal Act "On joint-stock companies" has been in effect as it pertains to banks in respect to issuance and circulation of issued by banks securities to the extent that it does not contravene Federal Act of 18.07.2009 № 181-FZ "On using public treasuries to raise the banks' capitalization".
1 Federal Act of 19.07.2009 № 205-FZ.
2 - to open-end joint-stock company "Bank VTB" in an amount not in excess of Rb. 200 bln. with the term to maturity being 31 December 2019 and the interest rate being 6.5% annualized (as amended in Federal Act of 27/07.2010 № 206-FZ);
- to open-end joint-stock company "Rosselkhozbank" in an amount not in excess of Rb. 25bln. with the term to maturity being 31 December 2019 and the interest rate being 6.5% annualized (as amended in Federal Act of 27/07.2010 № 206-FZ);
From the date of enactment of Federal Act of 13.10.08 № 173-FZ and through 31 December 2009 <the aforementioned banks> have the right to extend unsecured subordinated credits (loans) to credit organizations, should they comply with the following conditions (as amended in Federal Act of 27.07.2010 № 206-FZ):
a) In the event the credit organization has the long-term credit scoring not less than the set minimal level as of the date of applying for the credit (loan);
b) The credit organization received after 1 October 2008 subordinated credits (loans) and (or) amounts to pay the contribution to the said credit organization's authorized capital.
3 P. 2 art. 6 of Federal Act of 27.10.2008 № 173-FZ "On additional measures on support of the financial system of Russian Federation".
4 P. 8 art. 7 of Federal Act of 27.10.2008 № 173-FZ "On additional measures on support of the financial system of Russian Federation".
5 As amended in Federal Act of 03.11.2010 № 292-FZ "On introducing amendments to art. 84.2 of the Federal Act "'on joint-stock companies".
6 Federal Act of 30.12.2008 № 306-FZ "On introducing amendments to some legislative acts due to improvement of the procedure for the levy of execution on pledged property".
To what degree the above measures were justifiable one can judge only in the context of the anti-crisis strategy as a whole. That said, the peril of an uncontrolled and opaque redistribution of the largest assets under the said legal framework appears significant.
Yet another direction of development of legislation is formed by systemic novelties that considerably changed the standing of minority shareholders and creditors to corporations. This refers to the introduction of mechanisms whose ultimate objective is to lower the level of corporate raiding and limiting possibilities to challenge transactions and decisions made by a company's management bodies.
The milestone development back in June 2009 became enactment of the bill (Federal Act of 03.06.2009 № 115-FZ) that changed the then existing balance of forces within the "shareholders - Board of Directors - company head" triangle. The critical peculiarity and, at the same time, the most profound challenge facing the Russian corporate governance model is the Board having no independence and exercising the will of the controlling shareholder. Meanwhile, other shareholders have no real instruments at hand to influence the company's management.
The new Act solidified the shareholders' interests by granting them the right to initiate and terminate the company head (one-man executive body's) powers before an extraordinary shareholder meeting. Such a meeting can be convened by initiative of a shareholder who holds more than 10% of voting shares. The extraordinary meeting at the same time considers the issue of an early termination of the Board members and election of its new composition (sp 6, 7, art. 69 of FA "On joint-stock companies"). Besides, shareholders owning more than 2% of voting shares were granted the right to nominate the candidacy of the company head at the extraordinary shareholder meeting (p. 2 art. 53 of FA "On joint-stock companies").
Plus, the corporate law saw the introduction therein of the institution of "shareholder agreement" that constitutes an agreement between shareholders, which can obligate the parties to vote in a certain way at the general meeting, buy and sell equity at a certain price or not to sell them until certain circumstances arise, etc. Such an agreement forms the mechanism of coordination of shareholder's will and, in this sense, theoretically, can help regulate corporate conflicts.
Given Russia's peculiarities (a high concentration of equity, a special position held by the government as a shareholder and by companies it controls, a low level of legal culture and corporate governance), though, the mechanism in question can be equally employed for a latent increase in the level of control over corporations' operations by the government, state-controlled banks, public corporations and other large proprietors.
Changes in regulation of the corporate dividend policy adopted in December 2010 (FA of 28.12.2010 № 409-FZ1) to some extent consolidated the shareholders' influence. The changes provide for introduction of a three-year timeline for realization of the right to appeal to the court of law with the request to pay announced dividends. The company's Charter can extend the timeline up to 5 years.
In addition, it was legislatively set that "the company has no right to grant a preference in respect to payment of dividends to individual owners of shares of the same category (type). The payment of announced dividends by shares of each category (type) shall be effected concurrently to all the owners of shares of a given category").
1 Federal Act of 28.12.2010 № 409-FZ "On introducing amendments to individual legislative acts of Russian Federation with regard to payment of dividends".
As noted above, novelties of the period in question affected rights of creditors to reorganized legal entities. (FA of 30.12.08 № 315-FZ1). The creditors' rights were de-facto narrowed: while earlier they had a possibility to choose between demanding from the reorganized entity for termination or an early fulfillment of its obligations, presently the termination of obligations and reimbursement of thus arising losses can be possible only in the event of the impossibility to early fulfill the obligations.
That said, even such castrated rights of creditors of reorganized companies are not applica-
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ble to creditors to public corporations Rosavtodor , Rosnanotekhnologii , Rosatom, as well as
FPUEs and FPEs whose property complexes are assigned as the RF's contribution to Rosa-
4
tom and FSUEs whose assets form the contribution to Rosnanotechnologii and Rosatom.
Now creditors are entitled for demanding from the reorganized company for an early fulfillment of obligations or termination of obligations with the recovery of losses through court action only, providing the reorganized legal entity, its participants or third parties' failure to ensure a sufficient collaterization.
This implies a string of technical novelties which should protect creditors' rights in the event of reorganization, including:
a) Making an entry on reorganization of the company in the register of legal entities;
b) The legal entity's obligation to notify tax authorities of reorganization within three days from the moment of taking the decision thereof;
c) The company's obligation to publish the statement on reorganization;
d) Additional requirements to the statement of reorganization, including procedures for, and conditions of, laying by creditors of reorganized companies their claims, information of entities that are going to provide collaterization to the creditors, among others (p. 61 Art. 15 of FA "On joint-stock companies).
The requirements may not be applicable to the aforementioned public corporations, except for Rosnanontecknologii.
As to credit organizations, in addition to notifying their creditors of reorganization by posting the respective information on their homepages in the Internet, publication in media or notifying each creditor in writing, they are obligated to disclose information on substantial facts of their financial and economic operations during the whole period of reorganization, including facts and transactions that resulted in an increase or diminishment of the value of their assets by more than 10%; acquisition by an entity of a 5% -more stake in the credit organization, etc.5
1 Art. 2, 3 of Federal Act of 30.12.2008 № 315-FZ "On introducing amendments to the Federal Act "On banks and banking" and some other legislative acts of Russian Federation".
2 P. 2 Art. 41 of Federal Act of 17.07. 2009 № 145-FZ "On public company "Rossiyskiye avtomobilnye dorogi" and on introducing amendments to individual legislative acts of Russian Federation".
3 P. 1 Art. 5 of Federal Act of 27.07. 2010 № 211-FZ "On reorganization of the Russian corporation of nanotechnologies".
4 P. 10 aArt. 37 and p.2 Art. 41 of Federal Act of 1.12. 2007 № 317-FZ "On public corporation on nuclear power Rosatom".
5 For more details, see Art. 23.5 of FA of 2.12.1990 №395-1 "On banks and banking" as amended in FA of 30.12.2008 № 315- FZ "On introducing amendments to the federal Act "on banks and banking" and some other legislative acts of Russian Federation".
The mitigation of the level of protection of creditors' rights continued in December 2009 (FA of 27.12.2009 № 352-FZ1). Whilst considering lawsuits brought by creditors of companies wherein a decision was made to reduce a company's authorized capital, the court of law was granted the right to reject a claim in the event:
- The creditors' rights are not abused due to reduction in authorized capital;
- Collaterization appears sufficient to ensure a due fulfillment of obligations (Art. 30 of FA "On joint-stock companies").
Such novelties provide significant opportunities for abuse due to the dominating formal approach to consideration of cases by the courts and a low level of development of relationships and control in the property appraisal area.
Meanwhile, the company is obligated to report to tax authorities on the decision to reduce its authorized capital and to publish the information in media. The rights of creditors of companies wherein the decision to reduce the authorized capital was made were regulated in a manner analogous to the regulation of the rights of creditors to the aforementioned reorganized companies.
Plus, the Act has no longer held the obligation to identify the cost of the company's net assets (to present it to the general shareholders meeting) on the basis of the annual balance sheet or results of the financial audit. Instead, the Board of Directors should include in the annual report subject to submission to the general shareholders meeting "indicators that characterize the dynamic of changes in the value of assets and the authorized capital over the three years", "findings of the analysis of causes for, and factors of" such state of affairs, and the list of measures the Board is going to undertake.
All the measures stipulated in the Act may not be applicable to credit organizations founded in the form of joint-stock company.
In July 2009 (FA of 19.07.2009 № 205-FZ2), the company law was enriched by the arsenal of measures aimed at minimizing possibilities for cancelation and challenging of rulings by management bodies of joint-stock companies and encouraging prevention and amicable settlement of corporate conflicts.
Specifically, the procedure for convening an extraordinary shareholder meeting was modified. Now it can be held only through a court proceeding, rather than by the shareholders' initiative (Art. 55 of FA 'On joint-stock companies"). As well, the new Act establish solidary responsibility of the company and the registrar for losses caused to the shareholder, with exoneration of the debtor who compensated for losses to another debtor in a volume of ^ of the amount due (p. 4 Art. 44 of FA "On joint-stock companies").
Both the uncertainty with regard to the sphere of the registrar's responsibility and the previous mechanism of holding extraordinary shareholder meetings were sore spots that were actively used in the course of corporate raiding in the 2000s.
As to reduction of possibilities for challenging the company's management bodies' rulings, the following novelties are worth noting:
1 Federal Act of 27.12.2009 № 352-FZ "On introducing amendments to individual legislative acts of Russian Federation with regard to revision of limitations for economic companies in the course of formation of authorized capital, revision of means of protection of creditors' rights under reduction of authorized capital, changes in requirements to economic companies in the event of authorized capital failing to match the cost of net assets, revision of restrictions associated with the exercise by economic companies of issuance of obligations".
2 Federal Act of 19.07.2009 № 205-FZ "On introducing amendments to individual legislative acts of Russian Federation".
1) 2-fold contraction (from 6 to 3 months) of the period of appeal of the general shareholders meetings' decisions (p. 4 Art. 44 of FA "On joint-stock companies");
2) Imposition of the ban on recovery of the default to a limitation period on claims on annulment of large transactions and non-arm's length ones (p. 6 Art. 79 and p.1 Art 84 of FA "On joint-stock companies"), as well as on claims to recognize the general shareholders meetings' decisions nude/illicit;
3) Introduction into the law of grounds for the court to reject a discharge of claims on annulment of large transactions and non-arm's length ones;
4) Specification in the law of cases in which the general shareholders meeting and the Board of Directors' rulings have no effect without the verdict rendered by the court of law (p. 10 Art. 49 and p. 8 Art. 68 of the Federal Act "On joint-stock companies"). To all intents, this implies conditions of nullity of decisions made, but if implemented, these provisions can spark greater conflicts between shareholders;
5) Encouragement of the joint consideration of disputes on large transactions and non-arm's length ones that involve challenging the general shareholders meeting, the Board of Directors' decisions (p.p. 7,8 Art. 68; p. 3 Art. 70, p. 4 Art. 77 of the Federal Act "On joint-stock companies").
All these measures substantially complicate the return of assets the company sold and stimulate their re-selling from an intermediary to a "bona fide purchaser". Meanwhile, the question of the constitutional legitimacy of the clause on the ban on extension of the default to a limitation period remains unanswered.
Besides, the shareholders' rights were extended - they were granted the right to challenge the Board of Directors' ruling in the court of law, provided the decision abused the company or the shareholder's rights and/or legal interests; they also were granted the right to claim, in a judicial proceeding, "coercion of the company" to place the question on the agenda of the general shareholders meeting or to include a nominee in the list of candidacies (p. 6 Art. 53 of FA "On Joint-stock companies").
A logical continuation of the policy aimed at lowering the level of corporate transparency became the enactment in October 2010 (FA of 04.10.2010 № 264-FZ1) of an Act that allows joint-stock companies, following the ruling of their general shareholders meetings, to apply to FSFM for discharge of the obligation to disclose or submit information per the Act on securities (Art. 92.1 of FA "On joint-stock companies"). Such a decision should be passed by the margin of % of shareholders' voting, with holders of preferred shares also having the voting authority. The provision came into effect on 1 January 2011.
In 2009-10 non-for-profit organizations (NPOs) likewise saw notable changes in the legal regulation of their operations. In July 2009 (FA of 17.07.2009 № 170-FZ2), a simplified reporting procedure was introduced for non-for-profits whose founders (participants, members) are not foreign citizens (organizations) or apatrides. As well, the Ministry of Justice's powers with regard to public registration of NPOs were limited - the Ministry hence has no right to demand for submission of documents other than those stipulated in the Act.
1 Federal Act of 4.10.2010 № 264-FZ "On introducing amendments to the Federal Act "On market for securities" and individual legislative acts of Russian Federation".
2 Federal Act of 4.10.2010 № 264-FZ "On introducing amendments to the Federal Act "On market for securities" and individual legislative acts of Russian Federation".
In April 2010 (FA of 05.04.2010 № 40-FZ1), the legislator introduced the notion of the "socially oriented non-for-profit organization". Those are organizations which exercise activity to tackle social problems, development of the civil society, protection of environment, etc. As amended, the Act on NPOs provides for measures of the state support of such organizations, including engaging such NPOs in delivery of supplies, works and services for the government's and municipal needs; granting the NPOs benefits, including tax ones, etc.
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In addition, in December 2010 (FA of 28.12.2010 № 401-FZ2 and of 03.11.2010 № 292-FZ3, respectively):
1) The circle of transactions recognized as large ones and requiring their completion following a special procedure was slightly broaden;
Under the category of large transactions now fall transactions whose completion is obligatory for the society in compliance with the federal law or other legal acts of RF and settlements by which are made using prices and tariffs set by the Government.
Perhaps, the legislator believes that complicating the procedure for completion of the "obligatory" transactions should strengthen control over them; however, the mechanism of completion of large transactions, together with non-arm's length ones, has proved the most inefficient one in the effective corporate law, so no positive changes should be anticipated in this regard;
2) The area of effect of legal norms on the obligatory offer of the company's equity (Art. 84.2. of FA "On joint-stock company") continued to shrink.
The list of cases below constitutes those ones under which one is discharged of the duty to put forward a public offer in the event of buying a 30% stake in the company:
A) Acquisition of equity as a result of the Government's contribution with them to the authorized capital of a JSC in which the Government has been or is going to be an owner of more than a 50% stake.
B) Acquisition of equity with which the Government contributes to the payment of placed by means of closed subscription for supplement shares of JSCs included in the list of backbone corporations and JSCs approved by the RF President.
While these measures can be tagged as anti-crisis ones, they can also be regarded as new ways of solidification of the Government and/or its individual representatives' position on the market for corporate control.
The novelties of the period between October 2008 and 2010 in the first place changed the balance of forces within a company by strengthening the shareholders' positions, granting them the right to elect/dismiss the company head, the right to early termination of the Board of Directors' powers, and the right to conclude shareholder agreement, etc. In addition the following agents saw their possibilities be cut substantially:
- Creditors to reorganized companies;
- Creditors to companies that made the decision to diminish their authorized capital;
1 Federal Act of 05.04.2010 № 40-FZ "On introducing amendments to individual legislative acts of Russian Federation on the matter of support of socially oriented non-for-profit organizations.
2 Federal Act of 28.12.2010 № 401-FZ "On introducing amendments to the Federal Act "On electric power sector" and individual legislative acts of Russian Federation".
3 Federal Act of 03.11.2010 № 292-FZ "On introducing amendments to Art. 84.2 of the Federal Act "On joint-stock companies".
- Entities intending to challenge large transactions and non-arm's length transactions concluded by joint-stock companies;
- Current and former shareholders of companies consolidated into public corporations and large holdings the Government created recently.
It is shareholders, "old" owners, as well as new ones, including the Government that has bolstered its corporate presence in 2007-08, state-controlled banks which provided loans for assets, including equity, and their affiliated structures, which acquired those assets, that have become beneficiaries resulting from such novelties. Between 2003 and 2009 it was corporations owned by financial structures that most often played the role of buyers of other companies - their share in the aggregate amount of M&A deals accounted for 26% (and 33% of the total amount of funds spent on those)1.
It can be assumed that the problem of acquisition by the Government (the companies its controls) of new assets was replaced by the problem of obtaining an actual corporate control and negotiation of existing conflicts by more or less legal means. The list of the "victims" of the novelties comprises creditors to Rosnanotechnologii, Rosavtodor, Rosatom, FSUEs and FSIs consolidated into these corporations, as well as management (members of boards of directors and heads of companies, including those consolidated into state-controlled holdings).
It goes without saying, pluses of the novelties are associated with constraining the company management's arbitrariness and strengthening of shareholders' position, introduction of the obligation to hold extraordinary shareholder meetings only through a court proceeding. They will be instrumental for all the parties concerned; however, it is not excluded that once the "new" shareholder changes the "old" management, the legislator's strategy in the corporate regulation area may change once again.
2
In July 2010, the Federal Act was promulgated, which established criminal responsibility for:
- Falsification of the Single State Register of Legal Entities or the Register of Securities Owners, particularly for entering into the latter knowingly inaccurate data. Such abuses are punished by the fine amounting from Rb. 100,000 to 300,000 or by deprivation of liberty for the term of up to two years with the fine of up to Rb. 100,000. In the event of falsification of the Single State Register of Legal Entities or the Register of Securities Owners with the use of violence or the threat of its use the punishment is deprivation of liberty for the term between three and seven years and the fine of up to Rb. 500,000;
- falsification of a decision of the general meeting of shareholders (participants) of the economic company or a decision of the Board of Directors (Supervisory Board) of the economic company. Such abuses are punished by the fine amounting from Rb. 100,000 to 500,000 or by deprivation of liberty for the term of up to five years with the fine of between Rb. 100,000 to 300,000. Such a penalty is provided for in the event the falsification was committed by means of intimidation of a company's shareholder, participant in the limited liability company, member of the Board of directors of the economic company to make him/her vote in a certain way or refuse to vote, along with a blackmail or threat to use violence or destroy or to cause damage to one's property;
- entering in single state registers knowingly inaccurate data1.
1 Rossiyskaya ekonomika v 2009 g.: tendentsii i perspektivy, M., IEPP, 2010, p. 575.
2 Federal Act of 01.07.2010 № 147-FZ "On introducing amendments to the Criminal Code of Russian Federation and Art. 151 of the Criminal-Procedural Code of Russian Federation".
In tandem with the adopted corporate regulation measures, the above novelties can be regarded as quite anti-raiding ones. The regulation of problems in the area of running the shareholder registers, holding extraordinary shareholder meetings may basically block opportunities to try certain ways of seizure of corporate assets, but there remain other means and ways. Besides, the measures in question should have been implemented long ago, for it was in the early 2000s that the respective challenges were really pressing. Retention of the opacity of corporate governance across a number of directions (the problem of conflict of interest, regulation of operations of groups of companies, in particular, in the tax sphere, affiliated entities, profit allocation, to name a few) also gives no grounds to assert there has been any notable progress in this particular sphere.
6.3. Land Use and Land Market in Russia: Situation, Legal Framework, Problems and Outlook
Land use remains such a sector of Russian economy with significant development and improvement capacity - at the expense of private property segment growth including onerous acquisition of land plots from the state; state and municipal revenues growth due to improvements in state lands management; increase in housing provision to citizens, etc.
Efficient comprehensive change in regulation and control of land resources turnover seems to have very low probability in the current environment due to both systemic problems in this sphere and to the scale of issues remaining unresolved for many previous years. However, even if only certain changes are implemented with regards to granting the right of ownership for land plots, expansion of permitted use, etc., they may provide for tangible results and multiplier effect.
6.3.1. Land Titles and Land Plots Turnover Structure
As of January 1 2010, Russian citizens owned 123,190.7 thousand ha (7.205%) of land. 10,286.9 thousand ha (0.602%) was owned by legal entities (Tables 17 and Table 18).
Table 17
Russian Federation Lands Profile - by Form of Ownership, thousand ha
Owned by private titleholders, thousand ha Owned by the state and by municipalities, thousand ha
Year Total area, including:
thousand ha Total Owned by individuals Owned by legal entities
1 2 3 4 5 6 7
Russia 2008 1,709,824.2 132,939.7 124,273.7 8,666.0 1,576,884.5
2009 133,477.6 123,190.7 10,286.9 1,576,346.6
Central Federal District 2008 65,020.5 24,488.2 21,988.4 2,499.8 40,532.3
2009 24,518.8 21,364.9 3,153.9 40,501.7
Moscow Region 2008 4,579.9 1,241.5 787.1 454.4 3,338.4
2009 1,259.9 765.1 494.8 3,320.0
Moscow 2008 109.1 2.2 0.1 2.1 106.9
2009 2.2 0.1 2.1 106.9
North-Western Federal 2008 168,696.8 4,931.8 4,510.8 421.0 163,765.0
District 2009 4,949.6 4,484.4 465.2 163,747.2
Saint-Petersburg 2008 139.9 23.6 4.7 18.9 116.3
2009 24.2 5.3 18.9 115.7
Southern Federal District 2008 59,131.5 23,487.7 22,219.3 1,268.4 35,643.8
(2009) 2009 23,821.3 22,370.9 1,450.4 35,310.2
1 Gosduma prinyala zakon o borble s reiderstvom.,- Rossiyskaya gazeta, 16.06.10.
(continued) table 17
1 2 3 4 5 6 7
Southern Federal District 2008 42,087.6
(2010) 2009 19,205.6 18,048.7 1,156.9 22,882.0
Northern-Caucasus Federal 2008 17 043.9
District 2009 4 615.7 4 322.2 293.5 12,428.2
Privolzhsky Federal Dis- 2008 103,697.5 35,650.0 33,025.6 2,624.4 68,047.5
trict 2009 35,783.2 32,553.4 3,229.8 67,914.3
Urals Federal District 2008 181 849.7 9,851.7 9,388.2 463.5 171,998.0
2009 9,910.4 9,391.0 519.4 171,939.3
Siberian Federal District 2008 514 495.3 32,168.8 30,910.2 1,258.6 482,326.5
2009 32,122.1 30,818.0 1,304.1 482,373.2
Far-East Federal District 2008 616 932.9 2,361.5 2,231.2 130.3 614,571.4
2009 2,372.2 2,208.1 164.1 614,560.7
% oftotal area
Russia 2008 7.775 7.268 0.507 92.225
2009 7.807 7.205 0.602 92.193
Central Federal District 2008 37.662 33.818 3.845 62.338
2009 37.709 32.859 4.851 62.291
Moscow Region 2008 27.108 17.186 9.922 72.892
2009 27.509 16.706 10.804 72.491
Moscow 2008 2.016 0.092 1.925 97.984
2009 2.016 0.092 1.925 97.984
North-Western Federal 2008 2.923 2.674 0.250 97.077
District
2009 2.934 2.658 0.276 97.066
Saint-Petersburg 2008 16.869 3.360 13.510 83.131
2009 17.298 3.788 13.510 82.702
Southern Federal District 2008 39.721 37.576 2.145 60.279
(2009)
2009 40.285 37.832 2.453 59.715
Southern Federal District 2008
(2010)
2009 45.632 42.884 2.749 54.368
Northern-Caucasus Federal 2008
District
2009 27.081 25.359 1.722 72.919
Privolzhsky Federal Dis- 2008 34.379 31.848 2.531 65.621
trict
2009 34.507 31.393 3.115 65.493
Urals Federal District 2008 5.417 5.163 0.255 94.583
2009 5.450 5.164 0.286 94.550
Siberian Federal District 2008 6.252 6.008 0.245 93.748
2009 6.243 5.990 0.253 93.757
Far-East Federal District 2008 0.383 0.362 0.021 99.617
2009 0.385 0.358 0.027 99.615
Source: Federal Service of State Registration, Cadastral Records and Cartography.
The following changes in the land property profile took place in 2009: the total area owned by individual citizens decreased, as well as the area of land in state and municipal ownership; the total area of land owned by legal entities increased respectively - overall by 1,620.9 thousand ha versus the preceding year (see Table 17). The share of land owned by individual citizens (percentage to the total area) decreased from 7.268% in 2008 down to 7.205% in 2009. Nevertheless, the total area of privately owned land increased in 2009 by 537.9 thousand ha, i.e. by 0.4% versus 2008.
Overall during the 11-year period 11.1 mln ha of agricultural land were allotted and registered as private, state or municipal property (see Table 18).
Table 18
Land of reorganized agricultural enterprises transferred to individual citizens with a title for individual share in land
No. 1998 2009 1998 vs. 2009
(— decrease)
1 Overall area of individual shares in land (mln ha) 115.4 104.3 -11.1
2 Number of citizens holding titles for individual shares in land (mln) 11.8 9.8 -2.0
Source: Federal Service of State Registration, Cadastral Records and Cartography.
In 2009 the number of land plots related transactions between individuals and legal entities in the RF grew by 25.37% versus 2008 (see Table 19). Only in Siberian Federal District the decrease made 31.54%.
Table 19
Number of transactions with land registered as private property in 2009 (number of agreements, second in line - growth /decrease
of the indicator in % to 2008)
Selling land plots by individuals and organizations Transfer by way of gift Inheritance Pledge Total transactions between individuals and legal entities
The Russian Federation 520,209 117,776 314,556 43,921 996,462
9.94% 60.60% 44.13% 46.29% 25.37%
Central Federal District 161,573 43,543 138,806 12,264 356,186
6.90% 80.33% 77.67% 126.90% 37.62%
North-Western Federal 68,077 9,748 27,203 5,724 110,752
District 237.37% 44.31% 74.89% 28.54% 135.94%
Southern (combined) 81,799 14,218 30,356 2,128 128,501
Federal District 13.92% 43.86% 11.53% -15.22% 15.34%
Southern (2009) Federal 42,013 5,822 16,934 1,274 66,043
District
Northern-Caucasus Fed- 39,786 8,396 13,422 854 62,458
eral District (2009)
Privolzhsky Federal 104,234 28,497 77,558 9,293 219,582
District 22.96% 96.03% 7.26% 43.08% 23.29%
Urals Federal District 46,421 6,633 19,494 3,416 75,964
2.46% 11.87% 52.34% 21.91% 13.66%
Siberian Federal District 47,283 12,814 14,210 9,498 83,805
-48.97% 12.98% 36.23% 18.89% -31.54%
Far-East Federal District 10,822 2,323 6,929 1,598 21,672
47.56% 213.07% 282.40% 331.89% 111.27%
Source: Federal Service of State Registration, Cadastral Records and Cartography.
In 2008 selling of land had the leading share in the profile of all transactions associated with land plots (44.19% of total area subject to transactions), but in 2009 the majority of land transactions were transfer by way of gift (56.41%) (Table 20). The total area of land plots subject to transactions between individuals and legal entities grew 7.77 times in 2009 (TTable 20).
Table 20
Area of privately owned land subject to transactions by Federal Districts of the Russian Federation in 2009, ha
Selling land plots by individuals and organizations Transfer by way of gift Inheritance Pledge Total transactions between individuals and legal entities
The Russian Federation 3,159,634.4 10,582,962.53 4,116,337.8 902,674.9 18,761,609.5
Central Federal District 577,856.6 9,481,825.912 1,262,307.1 235,325.9 11,557,315.5
North-Western Federal 439,585.9 24,262.80 26,357.3 23,432.5 513,638.6
District
Southern Federal District 487,155.1 107,301.52 29,356.6 25,417.1 649,230.3
Northern-Caucasus Federal 27,312.3 5,635.76 8,747.3 1,988.0 43,683.4
District
Privolzhsky Federal 842,604.571 821,371.50 863,658.9 451,968.244 2,979,603.2
District
Urals Federal District 394,632.8 28,112.89 144,160.1 15,103.9 582,009.6
Siberian Federal District 385,329.8 113,943.30 1,777,307.683 122,758.1 2,399,338.9
Far-East Federal District 5,157.2 508.85 4,442.8 26,681.3 36,790.1
Private land transactions 16.84% 56.41% 21.94% 4.81% 100.00%
profile in 2009, %
Private land transactions 44.19% 13.87% 24.69% 17.25% 100.00%
profile in 2008, %
Incremental area in private 2.96 31.59 6.90 2.17 7.77
land transactions in
2009,%_
1 including 593.27 thousand ha in Orenburg Region, out of which 581.00 thousand ha was agricultural lands;
2 including 9,371.59 thousand ha in Moscow Region;
3 including 1,721.90 thousand ha in Kemerovo Region, out of which 1,433.59 thousand ha were agricultural lands;
4 including 241.97 ha in Penza Region, из которых 239.81 ha were agricultural lands.
In total, 350,685 plots of state and municipal land of overall area of 610.74 thousand ha were sold in the Russian Federation in 2009 (see Table 21). The number of sold land plots increased by 57,838 plots versus 2008 (their area was 106.93 thousand ha).
Table 21
Profile of land transactions in the Russian Federation
Types of transactions 2006 Number of transactions, transactions (area, ha) 2007 2008 2009
1 2 3 4 5
1. Lease of state and municipal lands, 3,737,574 3,628,109 3,677,315 3,514,594
including: (104,827,034) (114,103,370.5) (114,531,856.7) (113,081,763.97)
1.1 Transactions closed in the reporting 522,487 472,732 441,842 410,676
year (5,775,551) (19,941,4501) (15,698,127.8) (26,274,903.12)
2. Selling tenancy rights for state and 7,068 13,835 15,684 22,412
municipal lands (124,954) (149,275.9) (315,888.9) (326,358.96)
3. Selling state and municipal lands, 176,751 233,706 292,847 350,685
including: (262,791) (369,382.7) (503,813.3) (610,740.26)
3.1. via tender 10,793 16,337 22,916 41,868
(57,406) (138,019.6) (164,477.7) (133,028.02)
Total effective transactions with state 3,921,393 3,875,650 3,985,846 3,887,691
and municipal lands, (105,214,779) (114,622,029.1) (115,351,558.9) (114,018,863.19)
including closed in the reporting year 706,306 720,273 750,373 783,773
(6,163,296) (20,460,108.6) (16,517,830) (27,212,002.34)
4. Sales and purchase of land by indi- 400,075 405,670 473,190 520,209
viduals and legal entities (467,686) (560,285.5) (1,067,302.6) (3,159,634.35)
5. Transfer by way of gift 43,437 49,715 73,334 117,776
(70,355) (126,596.4) (335,042.22) (10,582,962.53)
6. Inheritance 165,847 162,151 218,244 314,556
(524,352) (336,091.7) (596,197.3) (4,116,337.75)
(continued) table 21
1 2 3 4 5
7. Pledge 14,388 25,907 30,024 43,921
(169,437) (198,856) (416,637.0) (902,674.90)
Total transactions between individuals 623,747 643,443 794,792 996,462
and legal entities (1,231,830) (1,221,829.6) (2,415,179.1) (18,761,609.533)
Total transactions in the reporting year 4,545,140 4,519,093 4,780,638 4,884,153
with account of all effective leases (106,446,090) (115,843,858.7) (117,766,738.0) (132,780,472.72)
out of them - 1,330,053 1,363,716 1,545,165 1,780,235
closed during the reporting year (7,395,126) (21,681,938.2) (18,933,009.1) (45,973,611.87)
1 In 2007 significant areas of agricultural lands occupied mainly by deer pastures were leased in Nenetsky Autonomous District (6,350.8 thousand ha) and in Yamalo-Nenetsky Autonomous District (6,824.0 thousand ha).
2 In 2008 significant areas were transferred by way of gift in Orenburg Region - 98,998.5 ha, and in Krasnoyarsk Region - 71,950.2 ha.
3 In 2009 the number of transactions between individuals and legal entities increased significantly: major part of land transferred by way of gift was in Moscow Region - 9,371,592.88 ha; significant areas of inherited land were in Kemerovo Region - 1,721,897.97 ha.
Source: Federal Service of State Registration, Cadastral Records and Cartography.
According to Federal Service of State Registration, Cadastral Records and Cartography1 in 2009 citizens of Russia bought out 243,000 land plots with total area of 160.37 thousand ha for individual homes construction, for personal subsidiary farming, gardening and animal breeding, including 234,677 land plots with total area of 158.18 thousand ha in residential boroughs. 40,132 plots more were sold to individuals versus 2008; the average area of land plot bought by an individual increased from 0.15 ha up to 0.66 ha.
In 2009 17,041.9 thousand transactions closed by both individuals and legal entities were registered at land auctions. The prices at the auctions were in the great majority of cases higher than when lands were bought out of state and municipal property according to the norms (Table 22).
Table 22
Average prices for state and municipal land plots sold to individuals and legal entities in 2009 (RUR / sq. m), and average prices increment versus the preceding year (%)
To citizens and their associations for:
Federal Districts
building individual homes
personal subsidiary farming, gardening and animal breeding
To legal entities for using in industrial and other special purposes
To farms and husbandries and to other agricultural organization
in residential boroughs
outside in residen- outside in residen- outside residential tial bor- residential tial bor- residential boroughs oughs boroughs oughs boroughs
in residen- outside tial bor- residential oughs boroughs
1 2 3 4 5 6 7 8 9
Russian 58.10 6.39 34.15 4.62 162.57 13.48 3.92 1.44
Federation
2009/2008 0.49 0.72 2.86 0.82 3.50 1.94 0.13 1.01
Central Fed- 39.35 3.92 56.88 6.57 963.76 13.66 5.49 1.26
eral District
2009/2008 0.54 0.51 3.51 0.76 20.39 0.84 0.08 1.48
North-Western 125.09 8.21 47.78 4.08 15.11 29.62 0.99 0.94
Federal District
2009/2008 0.21 0.88 1.15 0.43 0.46 6.03 0.25 0.40
1 State (National) Report about the status and use of land in the Russian Federation in 2009 Economic Development, Federal Service of State Registration.
- the RF Ministry of 439
(continued) table 22
1 2 3 4 5 6 7 8 9
Southern 135.76 0.44 121.43 2.76 160.71 10.62 2.27 7.64
(combined)
Federal Dis-
trict
2009/2008 1.04 0.00 5.70 1.42 1.89 2.27 0.36 16.26
Southern 26.49 0.44 16.66 2.59 16.23 8.78 0.93 7.29
Federal Dis-
trict
2009/2008
Northern- 109.27 0.00 104.77 0.17 144.48 1.84 1.34 0.35
Caucasus
Federal Dis-
trict
Privolzhsky 22.75 18.76 9.53 9.52 32.93 40.05 1.11 0.53
Federal Dis-
trict
2009/2008 0.96 2.19 1.87 0.98 0.81 12.48 0.21 0.19
Urals Federal 52.27 2.04 5.35 2.33 44.21 5.53 1.47 0.15
District
2009/2008 3.15 2.83 4.05 4.31 1.54 4.57 0.78 3.00
Siberia Fed- 38.13 17.72 6.11 5.25 38.81 6.02 0.60 0.86
eral District r
2009/2008 0.88 43.22 1.20 0.75 0.91 0.93 1.22 0.58
Far-East 51.45 0.00 26.08 6.43 45.00 2.37 19.38 0.17
Federal Dis-
trict
2009/2008 4.52 0.00 7.81 64.30 1.85 1.74 193.80 5.67
Source: Federal Service of State Registration, Cadastral Records and Cartography
In 2009 the area of land plots at pawn (mortgaged) increased 2.17 times versus 2008, and the number of transactions increased by 31.64% (Fig. 3). The average area of mortgaged land plot increased from 13.9 ha up to 20.56 ha.
■a c
1000 900 800 700 600 500 400 300 200 100 0
- 50 000
145 000
- 40 000
- 35 000
- 30 000
- 25 000
- 20 000
- 15 000
- 10 000
- 5 000
1- 0
(D
2005
2 006
2 007
2 008
2 009
Area, thousand ha
Number of transactions
Source: Federal Service of State Registration, Cadastral Records and Cartography.
Fig. 3. Dynamics of land mortgage
In 2009 the area of mortgaged land plots in Russia was on the average of 0.68% of the total area of privately owned land (by individuals and legal entities) - compare vs. 0.31% in 2008 (Fig. 4). The majority of land plots mortgaged in 2009 (86.88%) are agricultural lands (85.55% in 2008).
Source: Federal Service of State Registration, Cadastral Records and Cartography
Fig. 4. Land mortgage by Federal Districts
According to Federal Service of State Registration, Cadastral Records and Cartography, in 2010 the number of registry entries with regards to real property and transactions therewith increased by 4%. The Federal Service of State Registration, Cadastral Records and Cartography made 26 mln entries. The number of titles registered as per simplified procedure ("dacha amnesty" program) decreased a little bit versus 2009. 2.125 mln titles were registered under this program, which is about 17% less than in 2009, but 43% more than in 2008. In total 7.121 mln titles were registered under this program starting from 2006.
6.3.2. The Problems of Land Relations in Russia
Speaking about the problems of land relations in Russia it is extremely important to set the system's "benchmarks" - the key parameters of this sphere and in adjacent spheres having the key impact on absolutely all processes.
Given the huge territory of the country (1,709.8 mln ha), the amount of land suitable for life-sustaining activities is not that big. According to expert evaluation, the major portion of land in the country is not suitable for inhabitation and life-sustaining activities, because such lands are located in the regions of the Extreme North and equivalent areas.
In addition the following needs to be taken into account:
- the area of land covered with water and marshes made 225.0 mln ha (13.2% of the total land resources of the Russian Federation) as of January 1 20091.
- the area of land covered with woods made 802 mln ha (47% of the total land resources of the Russian Federation);
- the area of low-yielding tundra land made over 10%.
As per the most optimistic estimates, the "good" land share does not exceed 1/3 of the country's territory. Only 13% of land area of Russia is used for agricultural purposes (plough lands, gardens, hay-fields, pastures). The share of the most valuable land (plough land) makes only 7.7% of the total area of the country. More than half of the plough land (52%) is located in the black soil areas ("chernozem"). About 80% of all farming products of Russia are produced here. And it is the sphere of use and turnover of agricultural land where the biggest problems are experienced.
The value of the most portion of Russian land is extremely small, only 1.9% of territory accounts for 82% of cadastral value of all the lands (the land of residential boroughs). All the other lands have extremely low level of infrastructure development.
With that, the level of land resources registration and management is extremely poor. In the vast majority of the country state and municipal lands are not delineated between the respective levels of government. By the beginning of 2010 only circa 302 mln ha (i.e. 19.1%) of all the lands being in state and municipal property were delineated. The average annual rate of growth of delineated land made only 1.6% over the last several years. Given such rate, 50 more years will be required to complete delineation of state and municipal lands.
In Russia the procedure of acquisition of titles (buying out land from the state) has inherent contradictions for not delineated land. On one hand, it stipulates for the need to register the state title; on the other hand, it allows for the possibility to dispose the land owned by the state without such registration (paragraph 10 of Article 3 of the Federal Law No.137-FZ "On Enactment of the RF Land Code" of October 25, 2001).
Such regulation allows for voluntary decision-making in the sphere of land disposal and is highly corruption-prone.
The regions seeking for preservation of control over all the land have lawful right to deprive local self-government bodies of the right to dispose of the non-delineated land in the administrative centers of the RF constituent entities. And such lands are of the biggest value.
The State Real Property Cadastre system is not functioning in a robust manner, the plan is to complete it by the end of 2011. The Federal Law "On State Real Property Cadastre"2 came into force in March 2008. It stipulates for consolidation of two registration systems: Federal Agency for Real Property Cadastre ("Rosnedvizhimost") and Bureau of Technical Inventory (BTI). The new cadastre should create the legal framework for state registration of the real property entirety and define the concept of the tax assessment basis as certain percentage of the cadastre value of a land plot. The provision of this Law about setting up a unified federal information system comprising the State Real Property Cadastre and the Unified State Register of Real Property Rights and Transactions Therewith in the electronic format is coming into effect starting from January 1, 2012.
1 72.1 mln ha covered with water (rivers, streams, lakes, water reservoirs, ponds, man-made water bodies, irrigation and drainage canals, etc.), 152.9 mln ha covered with marshes.
2 Federal Law No.221-FZ of July 24, 2007 442
The following issues are currently relevant for the state cadastre system functioning1:
a) poor quality of government services provision;
b) lack of electronic document management practices.
The consequence of this - long "lines" and long time required for registration, a big number of intermediaries and additional costs of title registration.
According to E.S. Nabiullina, the RF Minister for Economic Development, the immediate tasks that need to be resolved in this sphere are the following:
On one hand - decreasing the title registration costs for individuals and organizations, as well as reducing the risk of unlawful forfeiture of real property titles;
On the other hand - the possibility of fact and efficient resolution of number of major political issues (affordable housing construction, real estate tax introduction, national projects implementation, construction of facilities for Olympics and APEC, infrastructure projects).
In the situation when the majority of Russian lands lack cadastre documents, the definition of the plot boundaries remains very difficult, and that is reflected in the sphere of land taxa-tion2.
Cadastral valuation remains the tool actively applied by the regions to increase budget revenues. In a number of regions the cadastral value of lands occupied by certain facilities -especially in cities and towns with population exceeding 10,000 persons, is evidently a "scarecrow", meaning it is set to prevent privatization of such land plots. Mainly it pertains to lands occupied by garages and parking lots, multi-storey apartment buildings, educational institutions and organizations. The motivation behind such decisions deserves special attention and analysis.
For example, in Primorsky Region the cadastral value of land occupied by multi-storey apartment buildings in residential boroughs with population exceeding 10,000 persons is more than 9 times higher the cadastral value of land occupied by individual homes (RUR 603.41 per sq. m versus RUR 65.13 per sq. m)3. The cadastral value of land occupied by educational institutions and organizations, garages and parking lots is slightly lower, but still one of the highest in the Region (RUR 597.18 and 566.89 per sq. m respectively). Similar situation may be observed in Khabarovsk and Kamchatka Regions, in Sakha Republic (Yakutia). In Moscow Region the cadastral value of land occupied by multi-storey apartment buildings exceeds the value of land occupied by individual homes more than 10 times (RUR 7,465.55 versus RUR 734.77 per sq. m).
Shares in land remain one of the most important problems. This legal regime of agricultural land use does not provide for ownership/disposal/usage transparency. And 83.2% of all privately owned land falls under shares in land status (circa 110.6 mln ha, i.e. about 6.5% of all the land).
The "weak points" in using shares in land from the agricultural land use regulation standpoint are as follows:
1 See here and further on: Key point of presentation by E.S. Nabiullina, the RF Minister for Economic Development, on February 12, 2010, in the Russian Government Service Academy with the President of the Russian Federation at the all-Russian conference on the outcomes of activities of the Federal Service of State Registration, Cadastre Records and Cartography - http://www.economy.gov.ru/minec/press/news/doc20100212_03.
2 See details in: E. Apevalova. The Issues of Land Relations and Their Legal Regulation.//Transition Economy. Outline of Economic Policy in Post-Communist Russia. Economic Growth in 2000-2007, M. Delo Publishers, 2008, pp.612-613.
3 Section 228 of the State (National) Report about the status and use of land in the Russian Federation in 2008.
- The right to dispose of shares in land is limited due to the difficulty (in some cases - impossibility) to allocate a separate land plot in lieu of the share in land, without which divestment of land to somebody not being a participant in the share is impossible.
- The fact of a land plot having multiple owners impedes the decision-making on the title and land use.
In reality many owners of shares in land lease them or transfer them in trust, etc. In the current conditions multiple schemes are applied for actual transfer of property rights for shares in land without appropriate registration leading to uncontrolled concentration in the agricultural lands market, violation of rights of owners of shares in land and actual owners of such lands, data about the actual situation with agricultural land use becoming non available for the government, etc.
In May 20081 the legislator amended the procedure of land plots allotment in lieu of shares in land within the common title providing for the mechanism of possible agreeing of a location of a portion of land plot subject to allotment in case there is no resolution of the general meeting of the owners of shares in land. According to this new procedure, in case there is no resolution of the general meeting about location of a portion of land plot subject to allotment, the owner of the share willing to separate the land plot shall be entitled for either publishing in the media or for notifying other owners of shares about his/her intention for such separation listing the specific location. In case no objections are received within 30 days, the location of such land plot shall be deemed agreed (paragraphs 3, 4 of Article 13 of the Federal Law "On Turnover of the Agricultural Land")2.
Formally this simplifies the process of separating a land plot in lieu of shares in land for regional authorities and for those capable of implementing this mechanism in accordance with the legislative language. However, poor level of legal culture, lack of organizational and financial capabilities for getting any assistance in exercising their rights will become the critical factors impeding the residents of rural areas in using this right. So in reality this mechanism of agricultural land redistribution in favor of the state means that either major agricultural holding companies and legal entities or intermediaries will become the ones who dispose the unclaimed shares in land.
Poor level of land resources recording and control leads to abuse and criminal offense in disposal of land plots. During the period of 2005-2009 many officials were charged with abuse of their authorities: Mayor of Fryazino, Moscow Region (allotment of land plots for construction on a non-tender basis); Mayor of Scherbinka, Moscow Region (abuse of office in the sphere of land plots disposal); Mayor of Togliatti (unlawful disposal of land plots in 1992-2003); Mayor of Tomsk (unlawful allotment of land plots); Mayor of Saratov (unlawful distribution of land plots); Mayor of Volgograd (unlawful allotment of land plots) and others.
The problem of low level of recording and control in the sphere of land use is also a big problem. Given the system of cadastral records the error makes 20%, i.e. 341. 96 mln ha out of 1,709.8 mln ha.
1 Federal Law No.№66-FZ "On Amendments to Certain Legal Acts of the RF and Invalidation of Certain Legal Acts (Clauses) of the RF in Relation with Enactment of Federal Law On State Real Estate Cadastre" of May 13, 2008.
2 In addition, an attempt was made at the end of 2008 to decrease unjustified high costs of titles/encumbrances registration for agricultural land plots. Thus, the fee for registration of a share in land was reduced 10 times. 444
The government practically removed itself from the sphere of territorial development. There is no systematic and planned development of infrastructure (utilities and road construction). Lack of land plots prepared for construction causes the construction costs growth and increase of load on the existing infrastructure. This leads to "pin-point" increase of population density at the same time leaving significant territories undeveloped.
In view of the above, the priority measures to improve land relations would be creating efficient system of state management of land resources meaning changes in the system of recording and controlling the land resources based on assessing the suitability of lands for life-sustaining activities. Valuation of privately owned land should be based not on the total territory of the country, but on the territory suitable for life-sustaining activities. Besides, territories with future development potential should be identified and the required conditions for their development should be created.
6.3.3. Federal and Regional Policy in the Sphere of Land Relations: some specifics
Land regulation in Russia has been under on-going change over the recent years, especially starting from 2006. This was the beginning of the so-called "mini-privatization" and "dacha amnesty", as well as of cadastral recording and cadastral valuation system, decreasing the prices for land bought-out by industrial enterprises, etc. These new endeavors have started demonstrating some yield fruit by now: new institutions are slowly taking shape, and the privately owned land segment is gradually growing. The demand for government services has remained stable and high in the sphere of land relations, it significantly exceeds the capabilities of the existing organizations - especially, given their current performance. However, the "growth points" described above have very little impact on the overall federal and regional land use policy having formed over the last 20 years, and the quality of government services in this sphere remains very poor.
Segmental development may also be observed in the regulation of land use and land acquisition for various purposes. Active housing construction in 2005-2008 resulted in stricter government control of disposing land plots allotted for construction; mechanisms of selling land plots through auctions were introduced. Special focus on agriculture resulted in various forms of government support to agricultural producers including support in the sphere o land use regulations. Leasing agricultural lands from the state turned out to be the only segment of leasing land where the fees were reduced. Simplifying the turnover of agricultural lands was one of the most important novations of the period in question.
At the same time development of only certain segments of land relations does not serve as a driver for improvements in other segments. For example, it is very easy to bypass the requirement of selling state and municipal lands through auctions (and on pretty lawful grounds!) due to fragmented regulation. There is an RF Government Resolution setting the procedure for such auctions, but it is only selectively observed. Out of 12 land plots sold by the state in 2009 only 1 was sold through an auction.
Such "drop-out" of certain land relations segments from the government attention is followed by insufficient way federal power bodies are working with the regions on implementing the decisions in economics and by their systemic lack of attention towards regional land policies, which in certain cases are quite the opposite to the federal policy, or regions may just ignore the tasks set at the federal level or simply be incapable of implementing them. Regional policy is to a significant extent impeding the activities of local self-government bodies
in the sphere of land use depriving them either of authorities or of funds required for implementation of land-related resolutions. Inconsistency of regulatory framework at different levels of government is another important barrier, and often enough the level of regulation at regional level is not sufficient.
In 2007 the Federal Agency for Real Property Cadastre ("Rosnedvizhimost") audited 375,027 regulatory acts at the level of the Russian Federation constituents (regional level) and at the local level pertaining to land relations. The audits revealed non-compliance with the federal land legislation in 8,093 acts of regional and local level, and 6,522 recommendations were proposed for bringing them in compliance. Out of them 3,947 acts were brought into compliance, in 2,316 cases materials were sent to supervising agencies for invalidation of the respective regional and local acts. In Nizhny Novgorod Region the Prosecutor's Office initiated enactment of over 200 acts on land use, in Penza Region - 11 draft plot plans and rules of land use and development1. However, this activity does not compensate for poor performance of government regulation mechanisms.
Analyzing land privatization laws evidently shows that such privatization is heavily dependent on the regulatory framework of the RF constituents (regional laws and regulations), which provides for the following:
- establishing the norms for land plots allocation for farming, gardening, vegetable production, cattle breeding and construction of summer cottages (dachas);
- defining the prices for agricultural lands;
- granting the right of free privatization of agricultural lands;
- defining the prices of land plots for owners of buildings and facilities;
- defining the initial prices and format of auctions for selling land plots for construction;
- defining the terms of privatization of smaller and medium-size businesses.
The way regional authorities exercise their rights in this sphere influences the trends in land privatization process greatly, especially in the conditions of lack of municipal property.
In reality certain regions are implementing land relations policy based either on setting significant regulatory and administrative barriers and imposing additional tax obligations on land title holders (especially in the construction sphere) making buy-out of land economically unfeasible (e.g., Krasnodar Region in providing land plots for construction; City of Moscow); or on drastic shrinking or complete lack of privatization decision powers of municipal authorities due to undeveloped land regulations at municipal level (the majority of the RF regions).
Zero or close to zero privatization performance for municipal lands is practically a common rule across Russia. Centralization of powers at the regional level allows for any constituent entity of the Russian Federation to unilaterally use its powers for disposal of land or control maintaining of the status-quo. Traditional municipal deficit of municipal budgets is an additional barrier for municipal land ownership development. S a result, there are no adequate mechanisms for allotment of municipal lands and no possibilities for real systematic control.
The need for alignment of federal and regional policies in the sphere of land privatization in terms of shaping the policy, identifying the mechanisms and allocating adequate funds, or acknowledged and agreed refusal from privatization concept in certain regions or segments is
1 See text of presentation by Yu. Chaika, General Prosecutor of the RF at the extended meeting of the General
Prosecutor's Office Collegiate Body // genproc.gov.ru, February 18, 2008.
the key precondition of effective privatization process. The key issue here is substantiated choice of land policy by the region.
The process of shrinking the area of the common legal framework is going on in the same fragmented manner as land relations development. "Special" authorities were granted to power bodies in Krasnodar and Primorsky Regions with regards to withdrawal of land. Taking into account the growing activity of the Russian Federation in implementing international projects, the number of such "special" procedures is likely to increase. State-owned companies and their managing companies were granted "special" authorities in 2007 allowing them to obtain land plots without participation in any auctions/tenders7. Considering all the assets currently controlled by such companies, the market segment being put beyond the general regulations is quite significant. Subsoil users received the right to obtain land plots without participation in any auctions/tenders in December 20082
Exceptions from the common rules are often needed; however, it's the message dictating such exception which is of special importance here. Like in the case of setting up state corporations, the message is of quasi-state or quasi-public here and does not demonstrate any positive effect, which makes such exceptions look unjustified.
As for privatization of land, there are no clear-cut objectives and baselines set at the federal level, so privatization efficiency needs to be evaluated based on the overall outcomes (amount of land transferred into private ownership). No assessment is performed with regards to the impact of land ownership status transformation on competitiveness of industrial and agricultural companies, on the level of housing prices, on entrepreneurial activity growth, etc.
To be able to effectively implement land privatization program, its objectives need to be clearly set. If the main objective here is to provide housing to the people, then all mechanisms for construction incentives and support should be engaged (transparent and simplified procedure for provision of land for construction, investment into construction and issue of loans, infrastructure development at plots subject to construction, etc.). Land privatization per se will not necessarily provide for more active construction and decrease of housing prices.
If we are to talk about the agricultural complex, the announced intent is to improve efficiency of land use and to give a new spin to their turnover. However, the legal status of unclaimed shares in land and lands of agricultural producers in bankruptcy is not duly regulated. And those are millions of hectares of agricultural lands which are withdrawn from turnover.
The procedure for turnover of shares in land received a new, simpler regulation. However, those are the buyers who benefit, and not all of them are farmers. So the new regulatory framework promotes the buy-out - not sustainable development of rural territories and their residents.
The Land Redistribution Fund created in the 90-ies is another "black hole". Back in those days the lands of agricultural producers (Soviet kolkhozes [cooperatives of farmers] and sovkhozes [state-owned agricultural enterprises]) were transferred to this Fund. As of January 1, 2008, the Land Redistribution Fund comprised 46.6 mln ha, i.e. 11.5% of agricultural land. New land plots are still being transferred to the Fund at the expense of agricultural producers in bankruptcy, in case the land is not used or is voluntarily rejected, etc. As of January 1, 2009, 15.6 mln ha were registered in cadastre as land in use by manufacturers of commercial agricultural products, at the same time the respective title holders are excluded from the regis-
1 Federal Law No.240-FZ "On Special Economic Zones in the RF" of October 30, 2007.
2 Federal Law No.311-FZ "On Introducing Changes into Certain Legal Acts of the RF" of December 30, 2008.
ters of individuals and legal entities. During 2008 the area of such land grew by 1.3 mln ha versus the preceding year. This group of land comprised 5.5 mln ha of the shares in land and land jointly owned by individuals, as well as 9.9 mln ha of state and municipal land.
Today the federal laws allow government officials (of both federal and regional levels) to fully use their judgment in disposing the lands of the Fund. They have the right to grant this land in someone's ownership for free, which potentially may be used as a source of unlawful income for such officials, decrease the level of revenues into the federal and regional budgets and deteriorate the regulation of the land use sphere.
The unclaimed shares in land currently making 25.6 mln ha still remain a "gray zone". Their owners either have not received certificates of a share in land or have not exercised their right of disposal of the share.
As has already become a tradition over the recent years, new organizations were set up by the government to compensate for the inefficient regulation of the land relations. They are the Fund for Housing Construction Support and Residential Mortgage Agency.
The Fund for Housing Construction Support was created in 2008 with the purpose of developing land plots assigned for housing construction. The Fund's objective is to engage non-used of inefficiently used state-owned land into market turnover (meaning lands assigned to some unitary state enterprises and other government institutions, to Russian Academy of Sciences and agricultural academies). At first the plan was to use the fund for searching such land plots and preparing all the appropriate documentation. The a special Government Commission would review the land plots presented by the Fund and decide either (1) to leave them as federal property or to hand them over to the RF constituent entities under a mandatory condition of connecting to the utilities and selling through an auction during the next three years, or (2) the Fund will develop such plots itself (prepare city planning documents and create infrastructure) with further selling through an auction. Several years ago such scheme could have certain success, but to today its weal points are obvious. And the main of them is low effective demand for land plots assigned for housing construction.
One of the new schemes engaging the Fund for Housing Construction Support stipulates funding of construction by the Residential Mortgage Agency through earmarked loans to the banks. The banks will then issue loans to the developers and provide mortgages to those who buy housing. In this scheme the Fund for Housing Construction Support will perform as a guarantor for selling the housing, and in case such housing will not be in demand at the market, the Fund will buy it out at a distress price of RUR 30,000 per sq. m. The land plots prepared by the Fund (see above) will most likely become part of this scheme. The scale of the Fund and the nature of its activities does not provide for the possibility of qualitative change in the situation of shortage of prepared (from the engineering point of view) land plots for housing construction, because for massive housing construction allotment and engineering preparation of hundreds of thousands hectares per year is required1.
Summarizing the above it can be said that a whole set of measures is required to improve the efficiency of the current land policy:
- creation of efficient mechanisms for interaction between the federal economic government institutions and regional executive power bodies;
1 See details in the Annual Report on the Activities by the Fund for Housing Construction Support for 2009 -
http:/ fondrgs.ru; Expert No.26, July 6, 2009.
- analysis of regional land policies at the federal level, evaluation of their justification and of their consequences for the regions;
- measures to improve the situation - from invalidation of certain legal acts and holding certain officials liable for offences of competition policy up to initiating criminal law suits;
- change in regulating the activities of Land Redistribution Fund;
- tightening control over buying out agricultural land and some other categories of land.
6.3.4. Lease of State and Municipal Land
Lease-based relations continue to dominate in the sphere of land use, and the situation is not likely to change in the long-term perspective. With that it is especially important for such relations to be stable and mutually beneficial both for the state and for the tenants.
As for the state, we can see that in unstable financial and economic situation in 2009 when effective demand for buying out land from the state fell drastically and budget revenues from ot privatization and from activities of joint-stock companies with government participation and of unitary municipal enterprises were going down as well, those were the revenues from land tenants (lease fees) that demonstrated growth1.
It is obvious enough that in volatile and unfavorable economic environment those players who are more mobile and more flexible than the government. So budget revenues from business activities are unlikely to come back to high level until the economy stabilizes. In such conditions fixed budget revenues which are not dependent on companies' performance become especially valuable.
It means that improving the efficiency of state and municipal land resources management is one of the most relevant tasks.
And while discussing the ways to resolve this task it is quite relevant to remember about the problem of Land Redistribution Fund, about contradictions between federal and regional land policies; about the problems of shares in land and of bankrupt agricultural producers who were not excluded from the registers; about the problems of cadastral value of land being the basis for lease payment calculations, etc.
Recent changes of legislation in the sphere of land lease were connected with the changes in distribution of revenues from leasing land between budgets of different levels. These changes have been quite significant over the recent years2. Thus, until April 2007 100% of revenues from sale and lease of municipal land plots went into the respective local budget. This became one of the factors impeding delineation of federal and municipal land, because in case of such delineation local budgets would be losing revenues.
In April 2007 the share of revenues in the budgets of settlements and city districts from leasing non-delineated land was reduced down to 50%, which led to shortfall in income in the regions.
Provisions to compensate for such loss were enacted in July 20083. The law stipulated in favor of local budgets redistribution of no less than 50% of revenues from leasing federal land plots located under the respective local governments jurisdiction and from selling the rights
1 See details in: G. Malginov, A. Radygin. Privatization Process and Land Relations Status - Economic and Political Situation in Russia, April 2010 - M., Institute of Economy in Transition, p.36.
2 Article 62 of the RF Budget Code.
3 Federal Law No.161-FZ "On Housing Construction Support" of July 24, 2008
for leasing such land plots in case the powers to manage and dispose such land were granted to the RF entities and in case the regional legal framework does not stipulate otherwise.
The practice of regional authorities exercising their powers for leasing land brings a lot of questions, including questions from prosecutor's agencies revealing numerous violations. According to Yuri Chaika, General Prosecutor of the Russian Federation, "leasing state and municipal property including plots assigned under the right of economic management and the right of operational management with violations of the effective regulations is observed on a mass scale"1.
For example, it was identified that in the territory of Mordovia Republic federal property (real estate and land plots) were leased based on the directives of the Head of Federal Property Management Agency without any tenders and without report about the site valuation2. In Tver Region 87 legal acts of local self-government bodies about regulating agricultural land use and turnover were qualified as contradicting to the federal legislation. Granting land plots with violations of the respective procedure is also one of the key problems in the sphere of land use. As per the results of checks by prosecutors of Kaliningrad Region, 227 breaches of law were identified. In Stavropol Region during similar checks prosecutors introduced 324 representations to officials and companies directors about elimination of laws violations in the sphere of land use.
On top of that, facts about criminal offences - bribes, abuse of powers by the Head of district administration and the Head of Land Resources and Land Use Planning - were revealed in Chelyabinsk and Pskov Regions. In the city of Kislovodsk criminal proceedings were initiated against former Mayor and Vice-Mayor for unlawful allotment of land plots (for bribes/. However, the overall context of opposing the corruption does not yet allow for qualitative improvement of the situation 70% of bribery offenses are about bribes below RUR 10,000.¥ That means, the level of anti-corruption fighting is merely "on a household level".
Local self-government bodies often lease land plots for construction on a non-tender ba-sis5, such violating the provisions of law from 2005 and onward6.
1 See Report by Yu. Ya. Chaika, General Prosecutor of the RF, at the meeting of the Council of Federation within the Federal Assembly of the RF, April 28, 2010 - http://genproc.gov.ru/management/ ap-pearences/document-33/?print=1.
2 See details at www.genproc.gov.ru.
3 "Land Allotments.- "Expert Online" of August/29, 2008.
4 See Report by Yu. Ya. Chaika, General Prosecutor of the RF, at the meeting of the Council of Federation within the Federal Assembly of the RF, April 28, 2010 - http://genproc.gov.ru/management/ ap-pearences/document-33/?print=1.
5 See, for example, Ruling by Higher Arbitration Court of the Russian Federation of September 10, 2008 N 9652/08 on case N A60-32127/2007 about invalidation of Resolution of Yekaterinburg City Mayor; about invalidation of Resolution of Petrozavodsk City local self-government Head; Ruling by Higher Arbitration Court of the Russian Federation of September 1, 2008 N 8498/08 on case N A26-3935/2007; Ruling by Higher Arbitration Court of the Russian Federation of June 23, 2008 N 7697/08 on case N A54-3588/2007C7 about invalidation of Resolution of Ryazan Regional Government about leasing a land plot to LLC "Semeyniy Ochag" for construction of an apartment building; about invalidation of Resolution of Blagoveschensk City Mayor; Ruling by Higher Arbitration Court of the Russian Federation of June 4, 2008 N 6692/08 on case N A04-7170/06-19/548 about invalidation of Resolution of the Head of Voskresensky Raion Municipal Formation of Moscow Region; Ruling by Higher Arbitration Court of the Russian Federation of April 23, 2008 N 4491/08 on case N A41-K2-19501/06, etc.
6 For details see: "Land Relations and Real Estate Markets" // Transition Economy. Outline of Economic Policy in Post-Communist Russia in 2000-2007, M., Institute of Economy in Transition, 2008, pp.608-609.
Violations of such kind and criminal offenses in the sphere of land redistribution mean that state/municipal property is transferred not to the most efficient owner and the respective budget is likely to lose some revenues.
In July 2007 the Federal Law "On Small and Medium Size Business Development" was enacted fixing one of the types of property-related support of smaller and medium-size businesses as granting the right to lease state and municipal property (land plots, buildings, non-residential premises, etc.) under privileged terms (p. 1 of Article 18).
According to Andrei Sharov, former Director Government Regulation Department in the RF Ministry of Economic Development, though this new law has been effective for a relatively small period of time, positive outcomes can already be observed. List of properties for lease have been developed in 34 regions comprising in total 29.5 thousands plots with the overall area of 6 mln 215 thousand sq. m. Certain benefits were defined in 50 constituent entities of the RF: in Oryol Region, for example, business men were relieved of lease payments, and in some regions including Moscow, lease rates were fixed at the level of 2008.1
6.3.5. Legal Framework on Land Issues: 2007-2010
1. In July 2007 Federal Law No.221-FZ "On State Cadastral Records" of July 24, 2007 effected starting from March 2008 stipulated consolidation two registration systems: Federal Agency for Real Property Cadastre ("Rosnedvizhimost") and Bureau of Technical Inventory (BTI). The State Cadastre System shall be finalized by the end of 2011.
The key issues in acquisition of rights for land plots and land turnover are changes in the procedure for entering a certain land plot into cadastre and cadastral activities. Inefficiency of both mechanisms can materially affect the dynamics of privatization process and land turnover.
2. In 2007-2008 the norms about simplifying the procedure of granting and registering titles for land plots of gardeners, truck-farmers, dacha owners and their associations came into effect receiving the name of "dacha amnesty". Simplification of the procedure the basis of which was laid back in JuneuroHe 2006 is mainly connected with cancellation of the mechanism of centralized collection of applications, preparation of documents and decision-making about land plots privatization - including for individual use. The legislator introduced another mechanism stipulating for individual acquisition and registration of title for a land plot and a separate mechanism for acquisition and registration titles for land of common use - by noncommercial associations of gardeners, etc.
As the first step the simplified procedure was introduced for the period until January 1, 2010, and then it was prolonged until March 1, 2015.
In addition in 2007-2008 other legislative initiatives targeted at improving the "dacha amnesty" mechanism were undertaken:
1. Simplified procedure of title registration was introduced starting from October 1, 2007 for those who have land plots registered in state cadastre meaning they either have cadastre plan of the land plot no matter how old or - in case there is no such plan - a cadastre number of the land plot.
1 "Amendments to "minor privatization" law are being discussed in the Council of Federation", April 8, 2009 -www.arenda.irbp.ru.
2. The possibility of simplified registration of titles was stipulated in November 20071 for land plots2 of citizens having inherited buildings or facilities or received them on other grounds without documents certifying the right for the respective plot3.
3. In May 2008 the period was fixed - until January 1, 2015 - during which no permit will be required for commissioning an individual home or submission of such permit for technical inventory of such home including development and issuance of technical passport.
4. Also in May 2008 changes were introduced into the Land Code4 stipulating for simplification of procedure for land plots titles registration by way of replacing the requirement for having the land plot map by the requirement to have cadastral passport for which significantly less data is needed, as well as less efforts and costs. authorities of state power bodies of the RF regions and of local governments were changed:
1) the RF constituent entities were granted the rights to organize and finance actions to prepare the documents required for cadastre registration of such land plots, while the rights of local self-government in this sphere were expanded;
2) the RF constituent entities were granted the right to set the maximum limits for prices, tariffs, rates, etc. for territorial land use planning and surveys with regards to the above mentioned land plots5.
According to the General Prosecutor's Office, by the beginning of 2008 almost 50% of the RF constituent entities were not using their right to set the maximum limits for prices, tariffs, rates, etc. for territorial land use planning and surveys6.
According to Pavel Krasheninnikov, Chairman of the RF State Duma Committee for Civil, Criminal, Arbitration and Procedural Legislation, 2.5 mln of Russian citizens used the simplified procedure for registering their real estate titles by July 2009. Some experts believe, there are 20 mln more who still need the "dacha amnesty"7; however, General Prosecutor's representatives in 2007 claimed there were 30 mln of such citizens.
3. Federal Law No.159-FZ "On Specifics of Divesting Real Property Being State Property of the RF Entities or Municipal Property Leased by Small and Medium-Size Businesses and on Amending Certain Legal Acts of the RF" was enacted in 2008.
The new law introduced the pre-emptive right for small and medium-size businesses to buy-out the leased real property with the possibility of payment by installment at the interest rate equal to 1/3 of the RF Central Bank financing rate for the period until July 1 2010 (later
1 Federal Law "On Amendments to Separate Legislative Acts of the RF on the Issue of Simplification of Titles for Heirs and Other Citizens" No.268-FZ of November 23, 2007.
2 Land plots allocated for household farming, dacha farming and gardening, and for individual homes construction before October 30, 2001.
3 In the case of lack of title-confirming documents certificates of inheritance or another documents may be presented setting or evidencing of Article 25.2 of Federal Law "On State Registration of Real Property Rights and Transactions Therewith" and setting/evidencing the right of an individual - any previous owner of the respective building/facility for this particular land plot.
4 Federal Law "On Amendments to Separate Legislative Acts of the RF and Invalidation of Certain Legislative Acts (Clauses) in Relation with Enactment of the Federal Law on State Real Property Cadastre" No.66-FZ of May 13, 2008.
5 The period for exercising these powers was initially set until January 1, 2010, and then in July 2009 it was extended until March 1, 2015.
6 See Report by Yu. Ya. Chaika, General Prosecutor of the RF, at the meeting of the Council of Federation -http6//genproc.gov.ru.
7 T. Mikhailova "Dacha Amnesty Received a New Term". - Rossiyskaya Gazetta, July 2, 2009. 452
extended until July 1 2013)1. The process of land buy-out started under this law received the name of "minor privatization" - similar to the Eastern Europe countries, where such land privatization took place in 80-ies - 90-ies and was the first step in privatization of all the state assets.
In July 20092 amendments were introduced into this Federal Law allowing for expanding the circle of entities entitled to use the pre-emptive right for real property privatization. Thus, the lease term entitling for privatization was decreased from 3 to 2 years; also it became possible to settle the lease payment arrears and arrears in payment of fines imposed for untimely lease payments. Previously it was the fact of being in arrears on lease payments that impeded real property privatization for many small and medium-size businesses.
4. In July 2007 lower rates for land buy-out were set5, the maximum amount not to exceed 20% of the land plot cadastre value - for cities with population over 3 mln, and 2.5% of cadastre value - for land in other locations. These terms for land acquisition relate to commercial companies and individual entrepreneurs should they own buildings and facilities located in such territories (including those erected in the place of the destroyed or demolished ones or those re-constructed), should these buildings/facilities had been previously divested from state/municipal property (p. 2 of Article 2 of Federal Law No.137-FZ "On the RF Land Code Enactment" of October 25, 2001)¥.
Actually mainly the industrial enterprises were meant here - those which had emerged during the privatization process, as well as entities having later acquired the title for real property of such enterprises. The regulations provide for quite a significant reduction of the buy-out price.
5. In 2010 the Government undertook some measures to resolve the outstanding issues in the sphere of cadastral valuation of land. According to the RF Chamber of Industries and Commerce, unlawful or unjustified valuation was identified in 10 regions of Russia.
In July 2010 amendments were made in land valuation regulations having increased the level of protection of the individual citizens' and legal entities' rights in the sphere of cadastral valuation of land.5
1) Mandatory insurance was introduced against the liability for causing damage subject to a certain level of cadastral value - in the amount of no less than RUR 30 mln;
1 The refinancing rate of the Central Bank as of the date of publishing the leased property sale notification.
2 Federal Law No.149-FZ " ot 17.07.09 r. "On Amendments to the Federal Law "On Specifics of Divesting Real Property Being State Property of the RF Entities or Municipal Property Leased by Small and Medium-Size Businesses and on Amending Certain Legal Acts of the RF" and to certain legal acts of the Russian Federation" of July 17, 2009.
3 Federal Law No.212-FZ "On Amending Legal Acts of the RF with Regards to Clarification of the Terms and Procedure for Acquisition of Titles for Land Plots Being in State or Municipal Property" of July 24, 2007.
4 In addition to that Federal Law No.212-FZ "On Specifics of Divesting Real Property Being State Property of the RF Entities or Municipal Property Leased by Small and Medium-Size Businesses and on Amending Certain Legal Acts of the RF" introduce into the RF Land Code (p. 1.2. Article 36) the clause that the sales price for land plots being state or municipal property if bought-out by the owners of buildings and facilities located in the territory of such plots cannot exceed their cadastre value. In addition it was stated that the procedure for defining the price for such land plots and for payment shall be set by the RF Government for the land plots being in federal property, by the RF entities power bodies - for the land plots being the property of the regional government or for which the share has not been set; and by local self-government bodies for lands being in municipal property (p. 1.1 Article 36 of the RF Land Code as amended by Federal Law No.212-FZ of July 24, 2007).
5 Federal Law No.167-FZ "On Amendments to the RF Law "On Valuation Activities in the Russian Federation and Certain Legal Acts"" of July 22, 2010.
2) Mandatory expert evaluation of the cadastral valuation report by a self-regulating organization was introduced;
3) Mandatory publishing of cadastral valuation reports was introduced;
4) Individuals and legal entities were granted the right to challenge the identified cadastral value - either in court or in the especially established Commission. With that the individuals/entities disagreeing with the identified cadastral value shall have the right for independent market-based real property valuation.
These changes were long expected and targeted at decreasing the level of arbitrary valuation on behalf of governors and unjustified valuations on behalf of specialized assessors.
The weakest element in all the above novations is the prescribed membership of the Commission for settlement of disputes about the cadastral value: it is dominated by regional officials which significantly increases the risk of unjustified arbitrary decisions. Introducing third-party experts into these Commissions membership could have significantly improved the situation.
The respective similar clause was also introduced into Article 66 of the RF Land Code.
Improving the transparency of all data about state and municipal lands sales and leasing could become an additional safeguard against abuse in land valuation sphere (the best option would be to create a centralized Internet site).
6. The most valuable amendments to legislation on agricultural land turnover were enacted in December 2010.1 With some minor exceptions they are coming into effect starting from July 1, 2011.
The law provides detailed regulation of the procedure for withdrawal of agricultural land and plots allocated for construction subject to them not being used for the prescribed purposes. Land may be withdrawn from the title holder or from the tenant in case it has not been used for the prescribed purposes during the 3-year period (without account of time required for this land development - up to 2 years, and time falling under the natural calamities period). With regards to plots allocated for construction such period of non-use shall make 5 years.
As for the privately owned land - only court may withdraw it from the title holder. Same may be done by an authorized agency with regards to state-owned and municipally-owned land. Land withdrawal from the title holder may be reinforced in case violations are not eliminated after administrative sanctions. The withdrawn privately owned land plot shall be sold via public auctions. The ex-owner shall be entitled to the proceeds less the auction organization expenses and cadastral activities costs.
The criteria for recognizing the land as not being used for the prescribed purposes should be approved by the Government. According to some experts2, almost 50% of agricultural land in Russia has been withdrawn from the turnover, and about half of it is land bought out by investors with speculative purposes. It is the most fertile, conveniently located land with capitalization growth rate of 30-40% per annum.
In addition, the new Law
1 Federal Law No. "On Amendments into Certain RF Legal Acts to Improve Agricultural Land Turnover" of December 29, 2010.
2 Sergei Lisovsky, Senator, co-owner of Mosselprom Group: "Dmitry Medvedev urged us to work on the draft legislation providing for withdrawal privately owned agricultural land not being in use", November 26, 2010 -http // www.n-s-k.net.
A) Significantly strengthens administrative liability for non-using agricultural land in the prescribed purposes;
B) Approves the mechanism of recognizing land / shares in land as unclaimed, introduces the procedure for their hand-over to the state by way of judicial procedure;
C) Introduces the procedure for the general meeting of the owners of shares in land;
D) Obliges local self-government bodies to organize such general meetings before July 1, 2013, should they not do it on their own initiative prior to July 1, 2012. Such general meetings shall be authorized to approve the land survey draft, list of title holders, size of shares in land, to provide for cadastral activities for forming land plots and to make decisions on other significant matters;
E) Changes the process of forming Land Re-Distribution Fund;
F) Introduces a series of other changes.
6.3.6. Outcomes and Key Areas of Land Relations Development
Here are the key outcomes of 20 years from the start of land market development in the post-Soviet Russia:
- Land market development started;
- Legal framework created for land titles acquisition;
- Benefits were provided for acquisition of land plots into private ownership (prices decreased for land plots occupied by industrial enterprises; benefits for land buy-out by small and medium-size businesses) and their recording n documentation ("dacha amnesty");
- Mechanisms improved for implementation of the procedure of land title acquisition -mandatory land auctions;
- Land cadastre and cadastral valuation system formation started, as well as delineation of property rights between the level of governments;
- Some other measures were undertaken.
Nevertheless, a great many problems remain outstanding. A number of systemic factors are acting in Russia, and they are the barriers for unhampered land turnover and are significantly decreasing the effective demand for land and the efficiency of using private property. They are:
1. Property rights are not sufficiently protected by the state by the state due to lack of court independency from the executive power, corruption, poor performance of municipalities, nationalization campaign (including special laws about Sochi Olympics and Asian-Pacific Economic Cooperation Forum);
2. The majority of Russia territory and infrastructure is poorly developed, which really excludes efficient land use and leads to manifold decrease of land use efficiency. 18% of the land value is spread across 98.1% of the country territory. Mainly all the most valuable land is concentrated in populated boroughs;
3. Local self-government and power bodies of the RF entities are poorly developed, they do not provide for efficient decision-making and regulation of land allotment and withdrawal, tax assessment and use of land;
4. The mechanisms of land sale and hand-over into state property are non-transparent due to both corruption and lack of budget funds for preparing land plots for sale; land relations regulation at municipal level is at a very low level;
5. Quasi-property exists in Russia: false legal regime for ownership regulation for the sites which are not real property due to significant limitations of their use and disposal (e.g., shares in land);
6. The institutions providing for land turnover are at the very early stage of their development, which explains the poor quality of government services in the land use sphere and high cost incurred by owners and title holders (land cadastre, cadastral valuation of land, self-regulating organizations of assessors, etc.).
The most dangerous or the most negative factors are as follows:
1. Agricultural land is not used for the intended purposes and is part of semi-legal turnover (shares in land), uncontrolled buy-in. Agricultural land makes 97.0% (128.9 mln ha) of the total privately owned land in Russia, and 83.2% of it is distributed among individuals as shares in land. About 1/5 of officially registered privately owned land is actually the unclaimed shares in land (25.5 mln ha). As of January 1, 2009, agricultural producers were actually using 2,096.2 thousand ha of state-owned and municipally-owned land without any for-malization in the appropriate documents.
At the same time it is selling agricultural land that provides for sustainable overall growth of state and municipal land sales. During 2004-2008 the area of agricultural land sold annually by the state grew 46 times (from 8.5 thousand ha up to 391.2 thousand ha).
Such extensive development of private property in land sector mainly at the expense of the most valuable land and continuing weakening of government control in the sphere of agricultural land use has a very strong negative impact due to the following:
- Agricultural land in Russia has limited area and strategic value;
- Agricultural land has a very high share in the total private property of citizens, allowing
for high turnover of such land between private owners if supported by efficient legal regulation;
- Gray non-transparent turnover of shares in land and delineation of land plots.
2. Poor level of government regulation and control in the sphere of land resources: agricultural producers in bankruptcy not excluded from official registers (1.5 mln); uncontrolled use and turnover of land from the Re-Distribution Fund (46.6 mln ha or 11.5% of agricultural land as of January 1, 2008); slow progress in land delineation (average annual growth rate was 1.6% in 2006-2008).
3. Land policy is implemented without account of land resources and prospects of their inclusion in land turnover. Thus, only 1/3 of land resources in Russia are favorable for human vital function. Only 13% of land area is used in agriculture (plough land, gardens, hay fields, grass land). As for the most valuable land share - only about 7.7% is plough land, and more than half per cent are in the black soil area. And problems are the biggest in this particular area.
4. Poor level of registration of land titles, the error of State Register data about land transactions makes 20%, this means practically 342 mln ha of land is not registered - more than the territory of Finland (338 mln ha) or Italy (301 mln ha) or Great Britain (244 mln ha).
5. Lack of transparent data about land property and land turnover within the segment of land plots acquired by individuals "for other purposes". This segment of turnover demonstrates different mechanism of sales-and-purchase transactions, however, the trend is same -more and more agricultural land is bough by legal entities. Thus, 3 times more land plots were purchased "for other purposes" in 2008 than in 2007 (23.8 thousand transactions in 2007;
69.4 thousand transactions in 2008). The area of land plots purchased within this category grew 2 times: 106.6 thousand ha in 2007 and 246.3 thousand ha in 2008).
This category and the structure of land titles require details in this part. It is quite possible that legal entities are thus buying-in land, including agricultural land - in such cases when it is not desirable to legalize the beneficial owner.
Today the level of institutional development, including government institutions, providing for use, turnover and protection of privately owned land excludes the possibility of high-quality services in the segment of big size real property.
At the same time, the level of state land property management is also very low.
In relation to all the above, the optimal scenario looks as follows: in privately owned land segment - using land resources as leverage for resolving the most acute social and economic problems; and in the state-owned land segment - improving government management and control of land allotment and registration, including the unused land into turnover.
With the purposes to improve government policy in the sphere of land privatization the priority measures should be targeted at defining the strategic areas for private land ownership development.
Up till now we could define privatization either as a large-scale change of real property ownership profile, or as a way to increase budget revenues (mainly for regional budgets), or as a way to consolidate real estate. In all of such cases what is sold and to whom practically did not matter. The summarized results are unclear and do not allow for talking about some quality change in the situation or about the improvement of land use efficiency.
It seems that the objective for land privatization should be defined differently. Privatization should be used as an instrument for resolving a specific social and/or economic task. For example, increasing the number of middle class may be selected as an objective - and based in this various methods for its efficient achievement may be defined, the key parameters of the process may be specified, as well the required legal, financial and other tools and the potential costs. Besides, the control over such policy implementation may become more efficient and the required adjustments may be introduced. Given this example, the key areas for privatization could be in individual homes construction and farming development.
The criteria for program implementation efficiency could be: increased provision of housing at the expense of individual construction (maybe - collectively funded), increased revenues from farming sector.
Private farms play a very important role within the privately owned land segment (15.9 mln ha of land); as well as personal subsidiary plots (7.2 mln ha of land) and dacha owners associations (1.2 mln ha of land).
Private title holders are 16 mln families having got their individual subsidiary plots; 14 mln families in gardeningcagoBogcTBOM; 7 mln families currently building their individual homes; 3 mln families engaged in small farming and 137.7 thousand dacha owners.
Such high engagement of citizens into the process of acquisition of land titles requires the following from the state (if only it has interest in expanding the privatization process):
- create favorable conditions for maintaining and increasing the demand for land plots (provision of utilities under fair and acceptable price at private initiative of citizens; provision of loans for such purposes; simplification of mechanisms for transparency of issuing loans);
- improve the quality of government services in the land sphere;
- develop a set of government actions to enhance each of the mentioned land market segments;
- consider increasing the norms of land allotment in the regions with sufficient lands and expand privately owned land plots;
- create efficient mechanisms for managing the processes of allotment, development and construction on such land plots - both by the state institutions and by self-regulating organizations.
It is quite obvious that such segments of land market as land plots for building individual homes and dacha owners associations are underdeveloped.
The main impediments here are the following:
A) Inefficient and overcomplicated mechanisms of such land plots allotment;
B) Underdeveloped infrastructure, high cost of utilities connections, of obtaining construction permits and of commissioning;
C) Regional land policy in the sphere of building individual homes and setting up dacha owners associations (created only in 56 RF entities);
D) No right for registration in dacha homes as permanent residency;
E) Limitations for buildings established for small farms and gardening associations, other unjustified prohibitions for using land plots.
Land privatization for the purpose of building individual homes is a huge factor capable of activating the citizens' demand for land plots. However, land development in this segment is really in embryo state. The share of privately owned land used for this purpose does not exceed 0.05% of total land area (i.e., 0.8 mln ha).
The following factors can provide for significant growth of activity at the land market: substantial household incomes' growth in 2000-s, the amount of loans issued to individuals, high housing deficit (circa 1.6 bln sq. m) and incapability of the government (at least in the mid-term perspective) to resolve this issue (estimated period required is no less than 35 years if the pre-crisis construction growth rate is preserved).
The following will be required for promotion of land privatization with the purposes of building individual homes:
1. Assure creation and development of the system of land plots allotment and acquisition with the purpose of building individual homes, expand opportunities for access to such systems;
2. Assure efficient mechanisms of challenging the results of land auctions and land plots valuation; assure control on behalf of the RF Ministry for Economic Development, RF Ministry of Regional Development, Prosecutor's Office over legal acts adopted at the regional level in the sphere of such land lots allotment;
3. Develop the system of incentives for acquisition of land by citizens beyond the boroughs of residential areas including land in undeveloped territories (e.g., lower interest rate for loans issued to finance construction and utilities connections, longer pay-back period for such loans, reduced / socially acceptable costs for utilities connections, etc.);
4. Develop programs providing for quicker utilities connection (gas, electricity, water, communications, roads) at socially acceptable price for the land plots bought out by citizens for building individual homes. This program should stipulate for provision of services by certain government agencies under public contract terms, the format and terms of which should be defined by the state (best of all - in a federal law), for performing certain work when allocating land plots subject to requests from the title hold-
ers. The number of owners requesting such work should be set at the level providing for the contractor's profitability, on one hand; and excluding the possibility to delay the construction and assure socially acceptable price, on the other hand. Payment by installment and delay in payment under such contracts, as well as the possibility to challenge the cost of services provided under such contracts should also be provided for. In addition, the possibility for selecting contractors via tenders in segments with high competition should be provided for; 5. Consider transformation of certain categories of land plots (except for agricultural land) into land plots designated for building individual homes in cases when increase of their size is possible.
In addition, it is necessary to consider the possibility for increasing the size of land plots allocated to citizens, especially in the regions with vast land resources. The norms of land plots allocated to citizens (6-12 pieces of one hundred square meters, which is a traditional Russian measurement of land) were acceptable in early 1990-ies, however, by the end of 2000-ies they do not match with the level of income and the level of demand on behalf of individual citizens, with medium-level income and higher. Establish an effective system of managerial control and monitoring of activities in the regions with regards to legal framework regulating allotment privatization and mechanisms of land - to exclude the facts of massive violations of citizens' rights, facts of abusing official powers (currently often found in this sphere).
Initially land plots may be leased for building individual homes with the right of further buy-out.
Investment aspect of land privatization should also be revisited, specifically - privatization of land occupied by enterprises. The purpose of such privatization should not be consolidation of real property as one single asset, which in practice often turns into buying a land plot with high market value at the underestimated price, which does not have any impact neither on the enterprise growth (micro level), not on the macro-economic development. Privatization of land occupied by enterprises should provide for future development of manufacturing. Land plots should be allocated for buy-out at discounted price to major, medium-size and small enterprises capable of implementing investment projects resulting in their competitiveness growth, cost reduction, growing yields, sales market expansion, etc. (today this practically means shrinking the segment of land plots occupied by enterprises subject to privatization). Otherwise privatization will be senseless for the state.
Besides, land plots designated for gardening private subsidiary farms, etc. may have quite good potential for being in high demand.
Amending legal framework currently providing for intermediaries acquiring land including agricultural land and plots under enterprises is extremely important for efficient land privatization.
The issue of land property rights (titles) re-registration is of special importance. Actually we deal here with the already formalized by out-dated rights which will cease to exist in future: permanent (unlimited) use and lifetime ownership with hereditary possession.
It is important that the government policy is targeted at expanding the private property segment, but not by introducing common efficient rules "top down", but rather by creating the conditions at the ground level ("bottom up"). The costs of such approach are pretty high: for individuals - substantial expenses on land surveying and stock-taking, long period, etc.; for
the government - several years of transition (deregulation) period in the private real property segment.
Poor efficiency of such approach we are now witnessing in the process of re-registration under the "dacha amnesty" process, when registering agencies cannot handle the high demand, the established timeline is unjustifiably long, the prices for land survey services are monopolistically high and not affordable to many citizens, which provokes for growing bribery and abuse.
Efficient re-registration of titles in this segment would mean cardinal change of the approach. Citizens qualified for such re-registration and their heirs should be given a fixed period (e.g., 1 year) to send a request for re-registration of their title (according to the established template) to the State Register Agency (local administration may be an option) territorial branch in the jurisdiction of the land plot location (including sending via e-mail). Government agencies shall keep a special register of such individuals and land plots and issue a special notification about receiving the above described requests.
The State Register agencies should have all the necessary authorities to perform the actions required for re-registration of titles subject to agreement with the individual having requested such re-registration (cadastral valuation and delineation, issuing the required inquiries, etc.) and then the re-registration itself. The applicant shall cover all the required expenses. The following needs to be developed and approved for this purpose:
- socially acceptable tariffs for all government services in this sphere which should be provided to everyone who would like to use the above described mechanism;
- methodology for the State Register agencies work, for interaction with other bodies and with individuals.
Taking into account the existing practice of land title registration, certain elements of legal relations (may be - for a certain period) maybe withdrawn from under such regulations due to big number of errors and mismatches in title documents. The State will bear all the efforts for further title registration of titles and the individual will cover the costs. The "pros" of the proposed options are the following:
- significant facilitation of real estate market expansion;
- elimination of acute social problems in the sphere of land title registration;
- decrease of corruption level in real property titles registering agencies;
- decrease the level of social costs of monopolistically high prices for territorial land survey and stock-taking services;
- government capability of creating systems for land surveying and stock-taking which would adequately respond to the economic needs and have socially acceptable prices for their services.
The weak points: limited capabilities of State Register network; possibility for abuse on behalf of citizens; need for additional state funding.
This methodology could be tested in certain regions selected based on high level of effective demand of population and capabilities of territorial agencies of the State Register network.
In a similar way a possibility could be stipulated for legal entities using their land plots under the terms of permanent (unlimited) use: in case such entity does not apply for the land title registration, the lease agreement shall be executed, when the executive agencies draft the required documents and the expenses are covered by the tenant.
In addition, it looks feasible to consider introduction (or using in a wider scale) the installment scheme for buying out the leased land plots. With that, buying out the most valuable (expensive) land should be delayed until their prices go up (currently land plots are significantly underestimated). Today land privatization may be used as a way to get additional income into the budget, but tomorrow it may result in systematic problems, resolution of which may take decades.
6.4. Regulation of competition limiting concerted practices in 2008-2010
Effective Russian anti-monopoly legislation describes the entire diversity of competition limiting concerted practices consequences causing damage to consumers or players in the adjacent markets. According to Article 8 of Law No.135 «"On Protecting Competition", concerted practices of commodities markets participants shall be include all actions the outcomes of which are in line with the interests of every participant of the market under the following conditions:
- their actions are known to each other in advance;
- these actions are not resulting from the circumstances which have equal impact on all commodities markets participants.
According to Article 11, competition limiting cartels or concerted practices shall be prohibited in case they lead or may potentially lead to:
1) establishing or maintaining certain prices, rebates, mark-ups or premiums;
2) increasing, reducing or maintaining prices at auctions;
3) dividing the commodities market by territories, volume of sales or purchases, range of sold commodities or composition of sellers or buyers (customers);
4) economically/technically unjustified refusal to execute contracts with certain sellers or buyers;
5) imposing unfavorable terms and conditions in counterparty, or imposing terms and conditions which are not related with the subject of contract;
6) economically/technically/in any other way unjustified fixation of prices (tariffs) for one and the same commodity;
7) reducing or terminating production of goods which are currently in demand or which have already been procured in the conditions when such goods may be profitably manufactured;
8) impeding other economic operators to either enter or exit a certain commodity market;
9) establishing professional or other types of associations membership (participation) terms in case such terms lead or may potentially lead to preventing, limiting or eliminating competition.
According to statistical data anti-monopoly agencies in the US, EU and Russia identify not more than several dozens of violations per year. Even a smaller number of violations are terminated after they are contested in courts.
The most effort-intensive stage in the process of identifying the facts of competition limiting concerted practices is the need to provide evidence that all the participants knew about their actions. According to p. 2 of the Resolution No.30 of the RF High Arbitration Court Plenum of June 30, 2008 "On Some Issues Arising in Connection with Arbitration Courts Applying Anti-Monopoly Legislation", which talks about concerted practices, the fact of actions being committed by different market players simultaneously and consistently without any external reasons may be viewed as such evidence. It should be noted that the extent of
consistency and uniformity of actions shall be defined by the respective anti-monopoly agency, and in case its decision is challenged - by the respective Arbitration court.
For example, the judgment of Altaisky Region Arbitration Court confirmed the lawfulness of conclusions made by Altai territorial division of FAS (Federal Anti-Monopoly Service) about the activities of OJSC Rosneft - Altainefteprodukt and OJSC Gazpromneft-Altai constituting a price collusion - on the basis of two criteria: practically simultaneous increase of different grades of gasoline prices by the same value in the territory of Barnaul city from April 3 until May 30, 2009.
In 2008-2010 anti-monopoly agencies of Russia made decisions on such types of violations as coordinating economic activities, impeding entrance to / exit from the market, geographical division of markets, collusion at auctions, price collusion and refusal to act independently by executing exclusivity agreements for supplying products / rendering services.
Table 23
Ascertainment of competition limiting concerted practices in 2008-20101
Participants Type of violation Commodity Type of market Investigation initi- Number of cartel par-
ated by ticipants
1 2 3 4 5 6 7
2008
1 LLC Sibneft-Krasnoyarsknefteprodukt, LLC Fortuna Plus, OJSC Krasnoyarsknefteprodukt price collusion petroleum products regional FAS 3
2 OJSC Oskolnefftesnab, LLC Starooskolskaya neftebaza, OJSC Belgorodnefteprodukt price collusion petroleum products regional FAS 3
3 LLC Kurskoblnefteprodukt, LLC Alexiya price collusion petroleum products regional FAS 2
4 OJSC NK Rosneft - Altainefteprodukt, OJSC Gazpromnefft-Altay price collusion petroleum products regional FAS 2
5 LLC LUKoil-Severo-Zapadneftprodukt, LLC Pskovskaya Toplivnaya Kompaniya, LLC Pskovnefteprodukt price collusion petroleum products regional FAS 3
6 LLC LUKoil-NIzhnevosknefteprodukt, LLC Gazprom Dobycha Astrakhan price collusion petroleum products regional FAS 2
7 OJSC Khabarovsknefteprodukt, LLC RN-Vostoknefteprodukt price collusion petroleum products regional FAS 2
8 CJSC Electron coordination of economic activities fiscal registers sales regional FAS 1
9 LLC LUKoil-Yugnefteprodukt, OJSC NK Rosnefft-Stavropolye, LLC Bashoil-KMV, LLC Stavnefft, LLC PKP Stavpromkomplekt price collusion petroleum products regional FAS 5
10 LLC TV&Radio Company "Luch", CJSC TV-Service, CJSC RMA Telehone", Individual Entrepreneur Kakurin A.A. price collusion cable TV regional FAS 4
11 Federal State Unitary Enterprise Scientific pilot integrated dairy plant named after Vere-schagin, CJSC PTK "Severnoye Moloko", OJSC Sukhonsky Dairy Products coordination of economic activities dairy products regional FAS 4
12 CJSC Gaspromneft - Kuzbas, OJSC Tomsknefteproduct price collusion petroleum products regional FAS 2
13 OJSC SK Eni, LLC Novaya Lizingovaya Kompaniya, CJSC Moscow Commercial Bank Mosprivatbank coordination of economic activities leasing services regional FAS 4
1 Systematization of data published at FAS of Russia website at www.fas.gov.ru 462
(continued) table 23
1 2 3 4 5 6 7
14 LLC Rusfinans Bank, OJSC GSK Yugoriya coordination debt financ- regional customer 2
of economic ing
activities
15 9 radio-taxi market players price collu- radio-taxi regional customer 9
16 OJSC Orenburgnefteprodukt, LLC TK Petrol price collu- petroleum regional FAS 2
sion products
17 LLC UniMilk, CJSC Tandem coordination dairy prod- regional FAS 2
of economic ucts
activities
18 Bank Societe Generale Vostok, OJSC Rosno, coordination consumer regional customer 4
LLC Renaissance Strakhovaniye Group, of economic lending
CCJSC Soyuznik activities
19 Retail chains AkBarsTorg, Magnit, Patterson, coordination retail regional FAS 5
Perekryostok, Optovik of economic
activities
20 CJSC Refenergo, CJSC Pool-Energo coordination electric regional FAS 2
of economic power
activities
21 Bank VTB 24, 12 insurance companies coordination mortgage national FAS 13
of economic lending
activities
2009
1 OJSC Silvinit, OJSC Uralkaliy price collu- potassium national consumers, 2
sion chloride power bodies
2 OJSC Aviakompaniya Avis-Amur, OJSC collusion at medical aid regional FSB 2
Aviakompaniya Vostok auction aviation
3 LLC Agroremstroy, LLC MonolitStroy, collusion at metal roof- regional consumers 3
LLC Construction company SMU-30 auction ing mainte-
nance
4 8 wholesale companies collusion at supplying regional regional 8
auction vegetables to administra-
educational tion
institutions
5 IKEA Mos Company coordination leasing space regional consumers 1
of economic
activities
6 OJSC Bassol ,LLC Promsol exclusivity salt regional consumers 2
contract
7 Sverdlovsk railway, CJSC Visavi exclusivity railway cars regional FAS 2
contract delivery and
cleaning
8 OJSC Izhmash Concern, LLC Deryabin- exclusivity non-military national FAS 2
Oruzhiye contract weapons
9 OJSC Makhachkalinsky Vinzavod, LLC Pre- exclusivity alcoholic regional FAS 2
mium contract products
10 OJSC Center for Rescue and Environmental coordination servicing national consumers 1
Operations of economic hazardous
activities industrial
sites
11 OJSC Center for Rescue and Environmental market divi- servicing regional FAS 2
Operations, sion hazardous
State Institution for Moscow Region Mosobl- industrial
pozhspas sites
12 CJSC Delta Credit Commercial Bank coordination mortgage regional FAS 1
of economic lending
activities
13 OJSC Baltika Brewery and 6 distributors market divi- beer whole- regional FAS 7
sion sale
14 OJSC Promsvyazbank and 12 insurance com- coordination debt financ- regional FAS 13
panies of economic ing
activities
(continued) table 23
1 2 3 4 5 6 7
15 CJSC Penzanefteprodukt, LLC LUKoil Nizhnevolzhsknefteprodukt price collusion petroleum products regional 2
16 LLC Soda-Chlorat, LLC KhimStandard market division potassium chlorate regional customer 2
17 OJSC AK Bars Bank, Open Joint-Stock Insurance Company Rossiya exclusivity contract auto loan regional FAS 2
18 OJSC Electroapparat, LLC Trading House Electroapparat coordination of economic activities automatic circuit breaker national competitor 2
19 LLC OPUS Trading House coordination of economic activities linoleum and floor coating wholesale national FAS 1
2010
1 CJSC TechnoNIKOL, LLC TechnoNIKOL -Construction Systems market division construction materials national customer 2
2 CJSC Rusperforator, Federal State-Owned Enterprise Permsky Porokhovoy Zavod, Federal State-Owned Enterprise Plant named after Ya. M. Sverdlov, OJSC Promsintez, Federal State Unitary Enterprise Bryansk Chemical Plant named after 50th October Anniversary, OJSC Kalinovsky Chemical Plant price collusion commercial explosives national customer 6
3 OJSC Sberbank, Commercial Bank Odinbank (LLC), Federal State Unitary Enterprise Post of Russia, Municipal Unitary Enterprise Information-Computing Center of Odintsovo urban settlement, Odintsovsky Municipality in Moscow Region, Municipal Unitary Enterprise Housing and Utilities Division coordination of economic activities payment for services regional customer 7
4 LLC KRK-Strakhovaniye, OJSC Alpha Strakhovaniye, OJSC SG MSK, LLC Ros-gosstrakh, LLC SG Admiral, LLC Renaissance Strakhovaniye Group, OJSC Russkaya Strakhovaya Kompaniya coordination of economic activities Insurance business national customer 7
5 Non-State Institution for continuing professional education Business Security School, Non-State Educational Institution STRAZHA price collusion security guards certification exams regional customer 2
6 LLC Rexam, OJSC Baltika Brewery coordination of economic activities aluminum cans national customer 2
7 Kotlas poultry farm, Agricultural Service Company Arkhselprom price collusion table egg regional FAS 2
8 Federal Division of Motor Ways Chernoze-mye, LLC Road Operating Company No.36 collusion at auction road construction regional customer 2
9 LLC Agrotorg, CJSC Trading House Perekry-ostok, LLC Real Hypermarket, LLC Lenta, CJSC DIXI-PETERBURG , LLC O'Kay price collusion buckwheat groats regional FAS 6
10 LLC Echo firm, LLC TD-Holding, LLC RESOURCE, LLC Vladimir and Co., LLC Alekon, LLC Samarskaya Niva, LLC AgroMir price collusion buckwheat groats regional FAS 7
11 Manros-M, OJSC Wim-Bill-Dan branch, CJSC Lyubinsky MKK, OJSC Vita price collusion milk regional FAS 4
12 OJSC Kyshtym mining and concentrating company, OJSC Polyarny Quartz exclusivity contract gangue fractional quartz regional FAS 2
13 LLC LUKoil-Yugnefteprodukt , OJSC NK Rosneft - Staropoliye price collusion petroleum products regional FAS 2
14 OJSC SUEK, OJSC Russkiy Ugol, CJSC Stroyservice price collusion powergenerating coal regional customer 3
(continued) table 23
1 2 3 4 5 6 7
15 OJSC AKB ROSBANK, Open Joint-Stock coordination mortgage regional customer 2
Insurance Company RESO-Guarantiya of economic lending
activities
16 OJSC Mozyrsol, LLC BPK, CJSC Predpri- market divi- sodium salt national FAS 10
yatiye MS CJSC TDS, OJSC Upak Group, sion
LLC Grocery, LLC Eurotrust Expo, LLC
Gildiya+, LLC SevZapRegionSol SPb, LLC
Euroservice Plus
Looking at the profile of violations in 2008-2010 the following conclusion may be made: price collusions and coordination of economic activities are the most common violations (Fig. 5, Table 23).
Exclusivity Contract 6 11%
Price collusion 22 39%
Coordination of
economic activities 18 32%
Impeding entry to or exit from the market 1 2%
Division of Collusion at market 5 9% auction 4 7%
Fig. 5. Identified cases of competition limiting concerted practices in 2008-2010 - by types
Significant increase of concerted practice associated with financial institutions activities coordination was observed in 2010 versus 2008. In 2008 11 price collusions out of the total of 12 were identified based on monitoring petroleum products prices.
Table 24
Competition limiting concerted practices cases by types, 2008-2010
Type of violation
Year
2008
2009
2010
Coordination of economic activities
Impeding entry to and exit from the market
Division of the market
Collusion at auction
Price collusion
Exclusivity contract
12
In the following Table (Table 25) the types of concerted practices are analyzed against the spheres of economic activity
9
4
Table 25
Congruence between types of concerted practices and spheres of economic activities
Types of violations Sphere of economic activities Coordination of economic activities Impeding entry to and exit from the market Division of the market Collusion at auction Price collusion Exclusivity contract
Wholesale and retail 1 2
Consumer goods 2 1 3
Industrial manufacturing 1 1 2 2 3
Raw materials market 1 1 13 2
Services to government organiza- 4
tions
Public services 1 3
Services to business operators 4 1 1
Financial services 7 1
As one can see from the above data, coordination of economic activities cases were identified in all spheres of business, impeding market entry/exit and division of markets are found more often in the sphere of manufacturing. Price collusion was most often identified in raw materials markets which may be associated with the fact that the products in these sectors are more homogeneous and it is easier to prove that change of price is not associated with any external factors. Besides, producers' prices for socially important goods are monitored providing data for identifying price collusion.
Coordination of economic activities is most common type of concerted practices in financial markets associated with limiting the number of insurance companies whose policies are mandatory to have for getting a mortgage, for example.
Most often two entities are recognized as anti-monopoly law offenders committing concerted practices. In particular, most often price collusions of two companies within one regional market are identified (see Table 26 and Fig. 6).
Table 26
Congruence between types of concerted practices and number of offenders
Number of offenders
> 5
Type of violations
Coordination of economic activities
Impeding entry to and exit from the market
Division of the market Collusion at auction Price collusion Exclusivity contract Total
4 1 11 6
28
1
2
3
4
5
5
5
3
2
2
2
5
5
5
2
9
>5
participants 17%
5 participants 4%
4 participants 9%
3 participants 9%
1 participant 9%
2 participants 52%
Fig. 6. Identified cases of competition limiting concerted practices - by number
of offenders
Federal Anti-Monopoly Service (FAS) is usually initiator of investigation of concerted practices. Concerted practices are most often identified as the result of prices monitoring in case of changes in economic environment or during checks initiated by media publications.
Table 27
Congruence between types of concerted practices and investigations initiators
Investigation initiated by
Competitors
Power bodies
Consumers
FAS
Type of violations
Coordination of economic activities Impeding entry to and exit from the market Division of the market
Collusion at auction
Price collusion Exclusivity contract Total
2 2 4 1
17
10
17 5
35
8
1
3
1
3
Based on the analysis of completion limiting concerted practices regulation the conclusion can be made that anti-monopoly agencies are especially effective in identifying the following types of concerted actions:
- in regional raw materials markets;
- committed by two market participants;
- expressed in establishing or maintaining the same level of prices;
- identified as the result of monitoring.
The violations profile in 2008-2010 indicates that starting from 2009 the number of violations identified in the national market increased significantly (from 1 case up to 6 cases).
Fig. 7. Concerted practices in the national and regional markets in 2008-2010
Actions by the companies simultaneously raising prices may be qualified as abuse of their dominating position in the market in the form of setting monopolistically high prices. The fact of collective domination must be identified in order to qualify a type of concerted practices violation. Also, pricing mechanisms need to be analyzed in order to prove that the established price exceeds the aggregate amount of costs and revenues required for manufacturing and selling this particular type of goods.
Identification of the market shares of each participant of an anti-competition cartel is not required in order to call them liable. However, the fact of their dominating position in the market needs to be identified in all cases of qualifying collusions at the national market. Thus, FAS issued a resolution determining the fact of OJSC Silvinit and OJSC Uralkaliy setting the monopolistically high price for potassium chloride in the Russian Federation in 2008. For that FAS had to prove the fact of collective domination of these two companies in the national Russian market. OJSC Bassol and LLC Promsol are the only manufacturers of sodium salt in the territory of Russia. FAS resolution on OJSC Electroapparat reads that automatic circuit breakers are innovative proprietary technology of the manufacturer, respectively, the company is a monopolist in the market.
A situation may be possible when concerted practices in the form of supporting prices at certain level are qualified as setting the monopolistically high price. For example, in 2010 FAS issued a resolution of setting monopolistically high prices by OJSC VympelKom, OJSC Megafon, and OJSC MTS in the roaming services market.
According to the effective legislation domination may be determined with regards to one company with a market share exceeding 35% and no more than 3 companies with their total market share collectively making 50%. The Federal State Statistics Service (Rosstat) takes into account economic concentration ratio for material production yields within the Russian Federation borders. With the assumption of the commercial market border being limited with the code of Russian Classification of Production for a certain type of goods, and the geographical borders - by the administrative border of the Russian Federation, the comparison can be made between the shares of the biggest company and three biggest companies.
Ratio between the share of the biggest manufacturer and three biggest manufacturers (based on economic concentration ratio for 1101 types of goods produced in mechanic engineering sector)
100 90 80 70 60 50 5 40 30 20 10 0
it is possible to identify ~ the dominating position of three rnajor manufacturers it is possible to identify the dominating position of the major manufacturer : and three major manufacturers
50 CR1
Ratio between the share of the biggest manufacturer (CR1) and three biggest manufacturers (CR3) (based on economic concentration ratio for 648 types of food products sector)
100 90 80 70 60 50
>
J 40 30 20 10 0
: it is possible to identify ° : the dominating position ; of three major manufacturers % it is possible to identify the dominating position f o of the major manufacturer and three te major manufacturers
:
50 CR-1
Ratio between the share of the biggest manufacturer and three biggest manufacturers in chemical industry
100 90 80 70 60 50
CO
g 40 30 20 10 0
| it is possible to identify i the dominating position of three | major manufacturers
it is possible to identify the dominating position c if the major
manufacturer and three major manufacturers
50 CR1
Fig. 8. Ration between the share of the biggest manufacturer and the collective (aggregate) share of three major manufacturers in various sectors
According to Article 5 of the Law on Competition Protection, the company may be recognized as dominating in the market if its market share exceeds 35%, and three companies - if their collective market share exceeds 50%.
As we can see on Fig. 8, there are practically no situations when identification of the dominating position is possible for one biggest market player and impossible for three major market players. At the same time, as it is shown for the example of economic concentration of mechanical engineering, chemical and food producers, the dominating position may be identified both for the biggest manufacturer and for three biggest manufacturers of significant number of types of goods in the mentioned sectors.
The key specific feature of identifying a price collusion associated with setting monopolis-tically high prices in the scenario of collective dominating position is the possibility to prevent the violation before simultaneous increase of prices. The example of such type of price collusion is 2009 Resolution with regards to concerted practices of OJSC Silvinit and OJSC Uralkaliy at the national potassium chloride market - the key feedstock for producing potassium fertilizers and some other products of chemical petroleum sector.
The Resolution about setting the monopolistically high price for potassium chloride with regards to these two companies was issued in 2008.
In 2009 the actions of these two companies on simultaneous increase of prices were qualified as concerted practices limiting the competition. In particular, Moscow City Arbitration Court Ruling says that OJSC Silvinit and OJSC Uralkaliy are profit-generating for both sides, because Q2 2009 20% increase of price for potassium chloride from RUR 3,955 up to RUR 4,750 per ton is in the interests of both market players. Such actions are beneficial for them because such increase of price would lead to increase in their revenues from selling potassium chloride.
The fact of such actions being discussed at meetings at the RF Ministry of Industries and Trade where the representatives of the said compound fertilizers plants were present was regarded as evidence of price increase being known to all the participants in advance.
The fact of the price increase not being justified by calculations based on the production costs analysis and not being caused by economic factors was regarded as evidence of no external factors impact on the price level. Macroeconomic indicators were analyzed with this purpose - such as the customs duties amounts, regulated tariffs, and Rosstat data on producers' price index by types of economic activities in the Russian Federation in 2009.
The most significant factor was that the market participants used different approaches to identifying the price collusion. Thus, actions by OJSC Uralkaliy were in the form of executing supplementary agreement to the supply contract listing the new price, which they had sent to their customers. Actions of the second collusion participant were done by sending a price increase proposal to the customers on behalf of an intermediary company. Thus, in 2009 OJSC Silvinit handed over all the potassium chloride volumes for domestic consumers to LLC Mineral Trading, at the same time the agreement between these two companies did not include and provisions for pricing. However, such actions on behalf of the manufacturer do not release from the liability for pricing when re-selling the product.
So in certain cases when pricing procedures violations were revealed in monopolistic and oligopolistic markets (i.e. markets with infrastructure deficiencies) price collusion cumulative 470
evidence qualification may be more efficient regulating mechanism versus identifying the facts of setting monopolistically high prices in the environment of collective domination.
About 14% of all concerted practices pertain to coordination of activities in financial markets. In order to reduce dissemination of such violations the RF Government Resolution No.386 "On Permissible Agreements between Credit Institutions and Insurance Companies" was enacted on April 30, 2009. This Resolution contained a list of non-permissible agreements between the financial market players and contributed to a significant reduction of agreements between the financial market players in 2009 versus 2008.
Practically all the violations in 2010 were connected with agreements in the mortgage loans markets. For example, FAS Territorial Division for Komi Republic determined that OJSC AKB ROSBANK and Open Joint-Stock Insurance Company RESO-Guarantiya had entered into an impermissible agreement in the property insurance market for mortgage loans. According to this agreement, the Bank clients were advised in addition to the statutory insurance of the real property subject to acquisition (see Law "On Mortgage (Real Estate Pledge)" was advised to purchase a policy for voluntary life and work capacity insurance. At the same time clients having purchased additional insurance services were offered discounted property insurance tariff.
In 2010 the following changes were introduced into the RF Government Resolution No.386 to reduce the number of anti-monopoly laws violations. These changes also cover mortgage lending markets.
- on December 3 2010 the RF Government enacted Resolution No. 968 "On Amending General Exceptions with Regards to Agreements between Credit Institutions and Insurance Companies" according to which it is allowed to require insurance for the period of mortgage in case it is possible to pay the premium in installments with payments not more frequently than once per year.
Overall the most valuable area of improvement in the concerted practices regulation is amending the effective legislation allowing control/regulate certain markets.
6.5. The Russian Housing Market in 2010: Stagnation and Beginning of the Recovery
Last year, most indices of the country's social and economic development (the GDP, industrial production and investments in fixed capital) showed positive dynamics. The above factor could not but have an effect on the dynamics of the households' cash income. According to the preliminary data, in 2010 the households' real disposable income grew by 4.3% against 2.1% in 2009.
An increase in growth rates of households' income in a situation where the main macro-economic and financial indices remain stable has contributed to realization of the accumulated earlier delayed solvent demand which had a positive impact on the dynamics of the housing market.
6.5.1. Price Situation on the Secondary Housing Market1
It is worth remembering the way the dynamics of the prices on the Russian housing market was formed during the crisis. From the end of 2008, the housing prices in rubles and their USD equivalent started to decline. The most critical phase of falling prices lasted till May 2009; after that the RUR prices kept declining but at a slower rate, while by the end of that year they virtually stabilized in most cities. Due to a drop in RUR prices and RUR depreciation, the USD price equivalent decreased a great deal more by May, but then it virtually stabilized as a result of both slowdown of rates of a drop in RUR prices and a somewhat appreciation of the RUR exchange rate which took place simultaneously with insignificant fluctuations within the limits of the band set by the Central Bank of Russia. In general, in 2009 a drop in housing prices was observed nationwide.
In 2010, there was a smooth growth in housing prices in Moscow, while fluctuating stability was typical of most cities of the sample. (Table. 28).
Moscow became an undisputable leader as regards the price growth in nominal terms (10%). Also, it is worth mentioning a price increase of over 5% in a group of cities of Siberia and the Urals (Novosibirsk (9.2%), Krasnoyarsk (7.9%), Ufa (7.1%), Omsk (6.2%) and Tyumen (5.3%)), as well as Tver (7.4%). A drop in prices was registered only in Nizhny Novgorod, Stavropol, Ryazan and Shakhty (the Rostov Region), however, it amounted to less than 3%.
In analyzing the price dynamics within the longer period (as compared to December 2007) which included the pre-crisis period, the critical phase of the crisis and the beginning of exit from the crisis, it can be stated that in December 2010 in most cities of the sample nominal prices on the secondary housing market were lower than those which prevailed three years ago. At the same time, as compared to December 2007 in Moscow that index was exceeded by over 26%, while in Shakhty, by 19%; the Moscow Region, by 17. 5%; St. Petersburg, by 5.8% and Ulyanovsk, by 3.9%. In Tver, the value of the index in December 2007 was almost the same as that in 2010. The largest drop in prices was registered with the group of cities of Siberia and the Urals: in Izhevsk prices fell by 24%; in Perm, by 21% and in Omsk and Krasnoyarsk, by nearly 20%.
1 All the calculations have been carried out on the basis of such a monthly data on the average unit weight of the supply price on housing in Russian cities as was provided by RGR certified real-estate analysts S. G. Sternik (OOO «Sternik's Consulting»), A. G. Beketov (All - Moscow and the Moscow Region), S.V. Bobashev, M.A. Bent, GK «The Bulletin of Real Estate» (St. Petersburg), M. A. Khorkov, A. A. Antasyk, G.T. Turashvili (All - RiTz UPN, Yekaterinburg), A. M Cheremnykh, UK «ASSCO-Stroi» (Izhevsk), A.A. Stepanova SAN «Expert» (Ufa), N. N. Afanansieva, «Adalin-Expertiza Sobstvennosty» (Yaroslavl), S.A. Stasyukevich, «ABI Group» (Vladimit), I. A. Yermolaeva, K.A. Salmina, RID Analitics (Novosibirsk, Kemerovo, Baranaul and Krasnoyarsk), V. M. Troshina, «Information and Analytical Center «BrOK» (Tyumen), A.M. Chumakov, «Titul», G. V. Pivovarova, «Don-NT» (All - Rostov-on-Don), E. D. Epishina, Yu. V. Ep-ishina, GK «Kamskaya Dolina» (All - Perm), V.N. Kaminsky, TITAN (Tver), G.N. Zyryanova, «KuzbassIn-vestStroi» (Kemerovo), D.A. Stukalov, N. I. Kovalchyuk, RK «Sluzhba Nedvizhimosti» (Real Estate Service) (Chelyabinsk), M. A. Repin, «OMEKS» (Omsk), M. Yu. Savina, «Agentstvo Pechati i Informatsii» (Information and Press Agency) (Ryazan), N. A. Yarsina, «Center of Real Estate» (Ulyanovsk), A. V. Trushnikov, «B.I.N.-Expert» (Sterlitamak), A. S. Trofimov, Ilekta Center (Stavropol), G. Yu. Eidlina, «Realty» (Shakhty). 472
Table 28
Dynamics of the average unit price of the supply of apartments on the secondary housing market in the 2007-2010 period
Thousand RUR/ sq. meters_Index
City (Region) December 2007 December 2008 December 2009 December 2010 December 2008 / December 2007 December 2009/ December 2008 December 2010 / December 2009 December 2010/ December 2007
Moscow 133.38 186.8 153.0 168.5 1.401 0.819 1.10 1.263
St. Petersburg 77.76 101.3 81.1 82.3 1.303 0.801 1.015 1.058
Moscow Region 62.13 91.0 71.5 73.0 1.465 0.786 1.021 1.175
Yekaterinburg 64.1 62.2 53.0 55.5 0.970 0.852 1.047 0.866
Novosibirsk 59.0 59.4 45.5 49.7 1.007 0.766 1.092 0.842
Perm 55.8 58.2 42.4 44.1 1.043 0.729 1.040 0.790
Krasnoyarsk 54.3 57.0 40.3 43.5 1.050 0.707 1.079 0.801
Tyumen 53.7 52.5 43.1 45.4 0.978 0.821 1.053 0.845
Rostov-on-Don 52.0 56.4 48.4 50.5 1.085 0.858 1.043 0.971
Nizhny Novgorod 49.0 59.85 46.37 45.8 1.221 0.775 0.988 0.935
Tver 49.4 62.6 46.1 49.5 1.267 0.736 1.074 1.002
Yaroslavl 46.9 51.6 41.1 42.8 1.100 0.797 1.041 0.913
Kemerovo 45.8 53.0 40.3 40.6 1.157 0.760 1.007 0.886
Izhevsk 45.4 41.7 33.3 34.5 0.919 0.799 1.036 0.760
Chelyabinsk 50.5 36.8 37.2 0.729 1.011
Ufa 45.2 50.2 41.0 43.9 1.111 0.817 1.071 0.971
Vladimir 36.7 37.5 1.022
Omsk 44.2 40.0 33.4 35.47 0.905 0.835 1.062 0.802
Barnaul 39.8 34.4 35.1 0.864 1.02
Ryazan 36.8 37.4 35.4 34.4 1.016 0.947 0.972 0.935
Stavropol 33.1 32.4 0.979
Ulyanovsk 30.6 29.9 31.0 31.8 0.977 1.037 1.026 1.039
Sterlitamak (Bash- 26.3 28.1 22.9 23.7 1.068 0.815 1.035 0.901
kortostan)
Shakhty (Rostov 22.1 31.1 27.0 26.3 1.407 0.868 0.974 1.190
Region)
Moscow is still an undisputable leader as regards the level of housing prices. In relation to Moscow, in December 2010 the three main groups could be singled out among the rest of the cities of the sample:
- cities where prices were in the range of from 1/4 to 1/3 of the level of Moscow prices (Yekaterinburg, Rostov-on-Don, Novosibirsk, Tver, Nizhny Novgorod, Tyumen, Perm, Ufa, Krasnoyarsk and Yaroslavl);
- cities where prices were in the range of from 1/5 to 1/4 of the level of Moscow prices (Kemerovo, Vladimir, Chelyabinsk, Omsk, Barnaul, Izhevsk and Ryazan);
- cities where prices amount to less than 1/5 of the level of the Moscow prices (Stavropol, Ulyanovsk, Shakhty and Sterlitamak).
A special place is occupied by St. Petersburg and the Moscow Region where the level of prices as compared to Moscow prices amounted to 0.49 and 0.43, respectively (Fig. 9).
Speaking about the dynamics of real housing prices (without the effect of the inflation rate), it is to be reminded that in 2010, as well as in 2009 consumer prices rose by 8.8%. As regards the cities of the sample, the value of the index of real (free of inflation) housing prices (the IGS index)1 in 2008, 2008, 2010 and the 2008-2010 period as compared to that of December 2007 are shown in Table 29.
1 Calculation of the IGS index is done according to the following formula: IGS=I^/Inp, where I^ is the index of housing prices in rubles, while Inp is the index of consumer prices.
Fig. 9. Dynamics of the average unit price of the supply of housing in metropolitan regions
Table 29
Indices of nominal and real housing prices in the 2007-2010 period
Index of nominal prices_IGS index
December December December December December December December December
City (Region) 2008 / 2009 / 2010 / 2010/ 2008 / 2009 / 2010 / 2010 /
December December December December December December December December
2007 2008 2009 2007 2007 2008 2009 2007
Moscow 1.401 0.819 1.10 1.263 1.237 0.753 1.01 0.942
St. Petersburg 1.303 0.801 1.015 1.058 1.150 0.736 0.933 0.788
Moscow Region 1.465 0.786 1.021 1.175 1.293 0.722 0.938 0.876
Yekaterinburg 0.970 0.852 1.047 0.866 0.856 0.783 0.962 0.646
Novosibirsk 1.007 0.766 1.092 0.842 0.889 0.704 1.004 0.628
Perm 1.043 0.729 1.040 0.790 0.921 0.670 0.956 0.589
Krasnoyarsk 1.050 0.707 1.079 0.801 0.927 0.650 0.992 0.597
Tyumen 0.978 0.821 1.053 0.845 0.863 0.755 0.968 0.630
Rostov-on-Don 1.085 0.858 1.043 0.971 0.958 0.789 0.959 0.724
Nizhny Novgorog 1.221 0.775 0.988 0.935 1.078 0.712 0.908 0.697
Tver 1.267 0.736 1.074 1.002 1.118 0.676 0.987 0.747
Yaroslavl 1.100 0.797 1.041 0.913 0.971 0.733 0.957 0.681
Kemerovo 1.157 0.760 1.007 0.886 1.021 0.699 0.926 0.661
Izhevsk 0.919 0.799 1.036 0.760 0.811 0.734 0.952 0.567
Chelyabinsk 0.729 1.011 0.670 0.929
Ufa 1.111 0.817 1.071 0.971 0.981 0.751 0.984 0.724
Vladimir 1.022 0.939
Omsk 0.905 0.835 1.062 0.802 0.799 0.767 0.976 0.598
Barnaul 0.864 1.02 0.794 0.938
Ryazan 1.016 0.947 0.972 0.935 0.897 0.870 0.893 0.697
Stavropol 0.979 0.9
Ulyanovsk 0.977 1.037 1.026 1.039 0.862 0.953 0.943 0.775
Sterlitamak 1.068 0.815 1.035 0.901 0.943 0.749 0.951 0.672
(Bashkortostan)
Shakhty (Rostov 1.407 0.868 0.974 1.190 1.242 0.798 0.895 0.887
Region)
As can be seen from the above data, an insignificant growth in housing prices (around 1%) in real terms took place only in Moscow and Novosibirsk, while in all other cities housing
prices fell to a different extent. The minimum reduction in the IGS index was registered in Krasnoyarsk and Tver, while the maximum one, in Ryazan, Shakhty and Stavropol where real housing prices fell by 10% and more. In Nizhny Novgorod, a similar drop of around 9% was registered.
Also, in all the cities of the sample without an exception, a drop in real housing prices (free of inflation) was registered in the period of the past three years, that is, in the 2008-2010 period. In most cities, such a drop amounted to 20%-40%. The group of metropolitan regions was affected to a lesser extent. In Moscow, the value of the IGS index points to a drop of the mere 6% in real housing prices, while in the Moscow Region, to that of 12.5%. In Shakhty, such a drop amounted to 11.3%. On the contrary, the situation was quite different with the above group of cities of Siberia and the Urals (Omsk, Krasnoyarsk, Perm and Izhevsk) where prices on housing with the inflation rate in the consumer market taken into account fell by 40% and more.
6.5.2. Activities in the residential housing market
Activities in residential housing market started to return back to normal as early as late in 2009, while in 2010 they virtually reached the pre-crisis level. Due to return to the market of both the delayed demand and the delayed supply (investment apartments, banks' collaterals and other), the volume of the supply has largely grown to ensure a deficit-free situation in the housing market.
According to the Rosregister' data, in 2009 the number of purchase and sale transactions with apartments in Moscow amounted to 55,680 which figure was the market's historic minimum in the entire contemporary period. In 2010, the volume of transactions grew by 54% to amount to 85,650, that is, to the 2003 level where the historic maximum was registered (87.500) (Fig. 10).
Thousand units, %
100 80 7 60 -40 -20 -
79,66
-,75
87,53
0,82
71,07
Q
U
77,5376,09 77,87
69,89
63,73
F
Q
77,6080,5474 1176,82
85,65
r——T
2
^ -I' in ' ^ J'
000
65,12
55,
t
TT"
999999
-20
78
00 00
2222222222
□ The volume of sales
□ Increase, %
0
Fig. 10. The annual volume of apartment sales on the Moscow secondary market
The number of mortgage transactions increased from 5,130 in 2009 to 19,800 in 2010 (that is by 286%), while their share in the total number of transactions grew from 9.6% to 23% (Fig. 11).
units 12000
10000 -8000 -6000 -4000 -2000 -0
%
40 35 30 25 20 15 10 5 0
^ ^ ^ ^ ^ # # # ^ ^ ^ ^
^ " # ^ ^ ^ # ^ ^ ^
] Deals, units
1 Mortgages, units
Share of mortgages, %
Fig. 11. Turnover dynamics of the housing and mortgages market in Moscow
In Russia, in general, the mortgage lending market grew by 150% to amount to RUR 378.9 billion in 2010. The level of interest rates on RUR mortgage loans extended within a month in December 2010 as compared to October 2010 decreased dramatically from 13.2% to 12.5%. The above value was lower than that in the pre-crisis period of January-October 2008 where the average weighted interest rate on RUR mortgage loans amounted to 12.7% (according to the data of the Agency for Mortgage Housing Lending (OAO AMHL). The total debt of mortgage lending amounted to the record-high level of RUR 1.1 trillion and exceeded the pre-crisis level which factor is evidence of a mortgage boom. In July 2010, AMHL offered its borrowers three new credit products: schemes with a variable interest rate (the budget of RUR 10.5 billion), utilization of the maternal capital (the budget of RUR 6.3 billion) and provision of loans for low-rise housing development1.
Establishment during the crisis in February 2009 of the Agency for Restructuring of Mortgage Housing Loans (OAO ARMHL), a subsidiary of AMHL may have an important effect on further development of mortgage business.
The above Agency renders support to those borrowers for whom the mortgage housing is the only one they have got and if such housing is not an elite one, either. Also, if the bank makes unacceptable demands to the borrower as regards conditions of restructuring of the loan the latter may apply to ARMHL.
During the economic crisis, the number of mortgage loans in Russia amounted to 1,200,000. According to ARMHL estimates, 9% to11% of borrowers, that is, about 90,000 persons had problems with meeting their mortgage liabilities. It is noteworthy that in some regions concentration of such borrowers was much higher than the national average. The danger of a crisis situation for the future mortgage lending was made worse by the aggressive policy pursued by creditor-banks.
About one-third of problem borrowers succeeded in solving their problems all alone having received financial support from their friends and relatives, while loans to about 40,000 to 45,000 persons were restructured by banks or with assistance of ARMHL. As regards another
1 RWAY, Information and Analytical Bulletin, No. 186 (September 2010), p. 60-61. 476
20,000 persons who failed or were late to take advantage of restructuring programs, the prospects of staying on in mortgage housing is being determined in court.
According to the General Director of ARMHL, the experience related to restructuring of mortgage loans during the crisis showed both high efficiency of mechanisms of pre-trial opinion as regards restructuring of mortgage loans and a lack of willingness by banks to do such work, as well as borrowers' low level of financial literacy. Also, a weak self-regulation of that market revealed itself in a shortage of instruments which could help credit institutions fix their relations with borrowers.
At the same time, the success of ARMHL activities points to the fact that the absolute majority of borrowers who received timely support has resumed to meet their liabilities: 84% of people who were rendered support by the Agency now meet successfully their liabilities. A major factor behind that result was a decrease in the interest rate on newly provided loans by ARMHL to two-thirds of the rate of refinancing of the Central Bank of Russia (earlier the interest rate on loans was equal to that on the main mortgage liability). Such a measure was aimed at easing of the effect related to increase in borrowers' financial burden after the period of support had d up1.
As the mortgage deals in most cases with the primary market housing of economy-class, the above mechanism is expected to contribute a great deal to recovery of the housing development.
6.5.3. Dynamics of Commissioned Housing Volumes
In 2010, the volumes of commissioning of new housing kept falling though the rates of that process slowed down (3% against 6.7% in 2009). In 2010, the overall number of commissioned housing amounted to 714,100 apartments with the total floorspace of 58.1 million square meters. (Table. 30).
Table 30
Commissioning of apartment in Russia in the 1999-2010 period
Year Million sq. m of floorspace Growth rates. %
To the previous 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
2005 43.6 106.3 143.9
2006 50.6 116.0 165.7
2007 61.0 120.6 201.3
2008 64.1 104.6 210.6
2009 59.9 93.3 197.4
2010 58.1 97.0 191.7
The source: The Russian Statistics Yearbook. 2007: Statistics Collected Papers./ Rosstat. M.. 2007. p. 507; The Social and Economic Situation in Russia. 2009. M..Rosstat. pp. 86-87. The Social and Economic Situation in Russia. 2010. M.. Rosstat. pp. 86-87. calculations of authors.
Thus, in 2010 the volume of commissioning of new housing kept falling as a result of the investment collapse of the previous years. It is to be noted that as compared to indices of the year 2008 (which indices were the best ones in the 2000s) the drop amounted to less than
1 Mortgage Lending: Between the Russian Roulette and the Engine of Development. www.opec.ru, March 2, 2011.
10%. The 2010 results turned out to be worse than those of 2007, but notably better than all those of the previous years when implementation of the priority national housing project was in full swing.
The principal difference of the 2010 results was an apparent collapse of the individual housing development. If in 2009 individual housing development smoothed such consequences of the financial and economic crisis as had the most adverse effect on developers' activities by showing a positive dynamic (in 2009 an increase in the volume of commissioning of housing which was built by households at their own expense or with use of borrowed funds amounted to 4.3%) in 2010 individual developers built 11.2% of housing less. It is to be noted that in Russia, in general, the share of individual housing development in the total floorspace of housing built amounted to 43.6% against 47.7% in 2009.
Twenty regions with volumes of commissioning of at least 1 million sq. m accounted for nearly two-thirds of housing commissioned last year. Shown below (Table 31) is the group of those regions with differentiation by the rates of growth and decrease in commissioning of housing.
Table 31
Commissioning of housing in Russian regions in 2010 (by the rates of commissioning)
Regions with growth in volumes of housing commissioned Increase to the same period last year, % Regions with a decrease in volumes of housing commissioned Increase to the same period last year, %
Voronezh Region +18.1 Moscow -34.5
Novosibirsk Region +12.2 Chelyabinsk Region -25.7
Sverdlovsk Region +10.7 Bashkortostan -14.7
Krasnodar Territory +4.2 Tyumen Region -10.8
Dagestan +3.7 Moscow region -8.5
Nizhny Novgorod region +3.4 Kemerovo Region -5.7
Stavropol Territory +2.1
St. Petersburg +2.0
Samara Region +1.6
Saratov Region +1.1
Leningrad Region +1.1
Tatarstan +0.8
Belgorod Region +0.3
Rostov region +0.2
The source: The social and economic situation in Russia. 2010. M. Rossatat. pp. 394-395.
Such growth in volumes of commissioned housing as was registered in most regions stated above can be regarded as a positive factor. The leaders in that respect were the Voronezh Region (18.1%), the Novosibirsk Region (12.2%) and the Sverdlov Region (10.7%), while in other regions including St. Petersburg (where in 2010 a small increase of 2% replaced a dramatic drop of the previous year) the growth did not exceed 5%.
The metropolitan region stands out among regions (with volumes of housing development of at least 1 million square meters) where a drop in volumes of commissioned housing was registered in 2010. In Moscow, that situation has prevailed for three years running with the extent of the drop increasing by 100% and being comparable to that of 2008 (nearly 1/3). In the Moscow Region, a positive dynamic of housing development in 2009 gave way to a drop of 8.5%. The unit weight of the metropolitan region in the aggregate volume of the nationwide housing development amounted to the mere 16.4% of which the Moscow Region accounted for a larger portion (13.3%), while the share of Moscow proper slightly exceeds 3%.
So, as it could be expected such growth in commissioned housing to 3-3.1 million square meters in 2010 (with allocation of 800,000 square meters for implementation of the municipal
housing program) as was expected by the Moscow authorities failed to take place1 though the volume of housing development (with apartment houses built under the program of the government of Moscow beyond the city borders) amounted to 3,658,500 sq. m or 87.0% to the 2009 figure. However, Moscow proper accounted for less than 50% of that volume (48.4%), while in the previous years the share of housing built beyond its borders was much smaller (approximately 10%-11% in the 2005-2007 period, over 20% in 2008 and over 1/3 in 2009).
Considering the above, it is highly unlikely that the volume of housing development in Moscow will reach the pre-crisis level (about 5 million sq. m) in the 2011-2012 period with relevant consequences for the housing market. The new Moscow authorities have already encountered difficulties in providing housing to households on the waiting list due to a failure by some investors to comply with the terms of their contracts. Also, it seems the priority of the Moscow authorities will be development of transport infrastructure and road building. As regards housing, one may expect reduction in the period of execution of relevant documents and shorter deadlines for securing of approvals at different stages of building.
6.5.4. The Current Situation and the Prospect of Development of Institutional Structure of Housing Development
In the period of over two years since the beginning of the crisis, no such target administrative changes in the money-and-credit system and the banking sector as would be aimed at upgrading of organizational and economic mechanisms (administrative, economic and fiscal) of market regulation of growth in building industry took place. Nor was growth in the volume of the supply on the primary market motivated by means of development of market diversified instruments of project finance of urban planning activities (competitive repayment banking financing, budgetary financing and mortgage monetary financing with use of government guarantees).
As a result of the crises, the new configuration of the structure of the building market is just taking shape.
On the one hand, larger players of the federal level which included mostly Moscow-based operators affiliated with different business-groups and conglomerates kept taking over companies which were local developers at the regional or city level. Such process was encouraged to some extent by state support those players received during the acute stage of the crisis. In particular, the list of economic entities (which was made public by the Ministry of Economic Development of the Russian Federation in spring 2010) which received state support included well-known private business-groups specializing in building and development (SU-155, PIK Group of Companies and Inteko), as well as production of building materials (Glavstroi)2. Unfortunately, the data is unavailable as regards the volumes and types of state support those economic entities received which factor actually brings to nought the importance of that information. Also, a question arises to what extent the above information was complete considering involvement of authorities of different levels3. As a result, large players are in position to influence pricing on the property market.
1 RWAY, Information and Analytical Bulletin, No. 186 (September 2010), pp. 55, 62.
2 www.economy.gov.ru, April 12, 2010.
3 During the crisis, in the Moscow Region to complete building of social housing the Bank of Moscow paid RUR 15 billion against guarantees of the Moscow government to ZAO GK SU-155 which apart from that also received RUR 9 billion worth of guarantees of the federal authorities.
On the other hand, due to a complicated financial situation and a large accrued debt1 building and development companies depend to a great extent on creditors (mostly banks with state participation) which in many cases along with provision of financing take hold of assets which earlier belonged to the above companies through restructuring of their debts.
Late in 2009, VTB received the controlling interest in Sistema-Gals (51.24%) with approval by the Board of Directors of AFK Sistema of the sale of its interest of 27.6% in Sis-tema-Gals. In autumn 2009, in the course of restructuring of loans for the amount of USD 500 million the bank gained the controlling interest in ZAO GK Don-Stroi whose total debt to VTB amounted, by estimate, to RUR 80 billion. With taking into account the land plots in the Moscow Region which were received by VTB as redemption of the debt of the Unified Industrial Corporation and its own development projects which the bank started earlier, VTB has a good prospect of establishing a powerful unified holding in that area.
A portion of GK Don-Stroi's assets passed to Sberbank, its another creditor (GK Don-Stroi's debt to Sberbank amounted to RUR 20 billion). Since the beginning of the crisis, Sberbank received the total of nearly 2 million sq. m of the already built property as well as that which was under construction from a number of companies, including Capital Group, Keystone Company and Coalco. The Miel Holding is prepared to assign to Sberbank about 20% of its land plots in the Moscow Region as repayment of its debt.
GP PIK may serve as an example of intensive changes in the capital structure.
In April 2009, the controlling interest in the above company was received on a non-cash basis by Nafta Moskva in return for a promise to provide assistance in restructuring of the debt in the amount of RUR 49 billion. The main creditor of GK PIK is Sberbank (RUR 15.84 billion) whose subsidiary Sberbank Capital was granted a mandate to restructuring of PIK's loans. It is not excluded that Sberbank may extend a loan to a buyer of the interest owned by Nafta Moskva, which interest is estimated by the latter at USD 1 billion.
In summer 2010, GK PIK made a decision to issue additional equities in the amount of 20% of the increased capital with VTB Capital selected as the manager of placing. It is to be noted that OOO PIK-Development which is affiliated with the above group was found bankrupt, while the Moscow government prepared a few lawsuits to ZAO PIK-Region for the total amount of RUR 1 billion due to violation by the above company of agreements on building of social housing in the Moscow Region as regards both execution of the title to apartments and failure to build relevant volumes of housing. Taking over by VTB of the Bank of Moscow and possible change of the owner of Inteko's assets (which company repaid the principal debt in 2009) will have a certain effect on establishment of the new structure of development and housing building. 2
In June 2010, new amendments to Law No. FZ-214 on Participation in Building of Apartment Houses and Other Real Property Projects By Way of Shared Funding and Amendment of Some Statutory Acts of the Russian Federation were approved. Under the above amendments, all the doubtful schemes of raising of households' funds, except for agreements on shared participation, bonds and housing associations have been banned. Also, developers are exempted from payment of VAT at conclusion of the agreement on participation in building by way of shared funding. By experts' estimates, the above measure contributed to growth in
1 Late in 2009 and early in 2010, the debt of Don-Stroi was estimated to amount to USD 3 billion, while that of Su-155, Sitema_Gals, GP PIK, Glavstroi and Inteko, to USD 1.48 billion, USD 1.3 billion, USD 1.27 billion, USD 1 billion and USD 0.7 billion, respectively.
2 RWAY, Information and Analytical Bulletin, No. 186 (September 2010), pp. 138-143. 480
the share of new housing (which is built within the frameworks of mechanisms provided for by Federal Law No. FZ-214) in Moscow from 8% to 36%.
In the 2009-2010 period, the Federal Fund for Assistance in Development of Housing Building (FFADHB) which was established in 2008 held only 24 auctions and sold 41 lots, including 10 in Moscow and 10 in the Moscow Region, 9 in Primorski Krai, 4 in the Voronezh Region, 3 in the Tyumen Region, 2 in the Novgorod Region and 2 in the Saratov Region, one in Chuvashia and one in each of the following regions: the Kirov Region, the Chelyabinsk Region, the Kursk Region, the Vologda Region and the Novosibirsk Region. Around 450 ha of land was either sold in ownership or leased1.
As a result, in Russia, in general, no system changes for the better in the market situation as regards the supply of housing have taken place in the past two years since the beginning of the crisis which fact is confirmed by the following excerpt from the Housing federal purpose program that was approved in December 2010:
"Along with weak competition among developers and excessive administrative barriers as regards developers' access to the housing development market, obtaining of land plots and securing of relevant permits to building, the main problems in the sphere of housing development still consist in a lack of developed land plots with utilities and mechanisms of attraction of private investments and borrowed funds for building and modernization of utilities, as well as prevalence non-transparent and burdensome conditions for developers as regards connection to utilities systems. In most cities, there are no reliable mechanisms of financing and implementation of projects related to provision of land plots with utilities and funds to build projects of social infrastructure which are required for comprehensive development of territories. The banking community lacks the required instruments which could permit financing (at an acceptable level of risk) of projects of development of both utilities and the social infrastructure. Such a situation results in extension of deadlines and growth in the cost of housing development. The existing practice of solving the problems related to development of utilities for housing development purposes and provision of utilities service to the already built projects is based to a greater extent on fixing of fees for connection to utilities and technological connection and fulfillment by developers of technical conditions for connection to such utilities. Such a situation results in growth in the cost of a square meter of housing"2.
For the purpose of making housing more affordable, the Housing Program is aimed at complementing the activities of commercial developers with those by individual developers and non-profit housing associations. Formation of different schemes of public and private partnership in housing development should involve not only utilization of mechanisms of compensation of expenses related to payment of the interest on loans received from Russian credit institutions for providing land plots with utilities (a pool of projects, including pipelines and heat, gas, power and water supply projects, as well as water disposal and sewage treatment projects within the borders of a municipal entity) for housing development purposes, but also use of mechanisms which support development of the social infrastructure of residential neighborhoods in order to solve the problem comprehensively.
However, mortgage is still a priority mechanism in dealing with the housing problem which fact is confirmed by the new Strategy of Development of Mortgage Housing Lending
1 www.fondrgs.ru.
2 The Housing Federal Purpose Program in the 2011-2015 period. The Program was approved by Resolution No. 1050 of December 17, 2010 of the Government of the Russian Federation.
in the Russian Federation till 2030 approved by Resolution No. 1201-r of July 19, 2010 of the Government of the Russian Federation.
As regards the short-term prospect, it is worth mentioning the following aspects.
Until the end of 2011, all the war veterans and military servicemen discharged from service are to be provided with housing. Judging from the President's address to the Federal Assembly of the Russian Federation, it can be expected that the maternal capital will be permitted to be used on a regular basis for repayment of mortgage loans before the child reaches the age of three years old. Also, land plots are expected to be provided for building purposes on a free of charge basis in case of a birth of the third or subsequent child.
A switch-over to provision of land plots for economy-class housing development on the basis of so-called Dutch auctions where the winner is considered that developer which has taken an obligation to sell housing at the maximum low price may be of greater importance.
Such an approach can be found in the Concept of Reduction of the Market Cost of Housing approved by the Ministry of Regional Development in August 2010 which concept recognizes at last (after several years of implementation of the priority national housing project) inevitability of increase in the ultimate housing price for consumers due to holding of land auctions where the winner is that player who has made the highest bid and taken the subsequent burden related to preparation of urban planning documents and land tenure documents due to refusal to do that by municipal authorities.
Introduction of such a scheme which has a potential for prices on economy-class housing to be reduced by 20%-25% requires a thorough selection of buyers because it is expected that such housing is to be bought only by households who are recognized to be in need of better housing conditions or categories of people whom the state has some obligations to with some limitations on disposal of such housing introduced.
Needless to say that specific parameters of the above mechanism and its results could be determined only after the relevant law, as well as numerous amendments to the Urban Planning Code, Land Code, Housing Code, Tax Code and other statutory acts have beenap-proved1.
6.5.5. The Prospects of Development of the Housing Market
Switching over to evaluation of different scenarios of further development, it is worth mentioning as generalization that stabilization trends which arose (by summer 2009 after the acute phase of the crises had been over) on the secondary housing market in Russia were in line with the dynamics of macroeconomic and financial indices and determined the housing market's entry into the phase of stagnation.
In 2010, the state of depressive stabilization with rates of growth in housing prices lagging behind the inflation rate was typical of most cities' markets. An exception was Moscow and Novosibirsk where growth in prices in nominal terms (9%-10%) ensured a symbolic increase of prices in real terms.
The earlier made forecasts of the dynamics of housing prices in the 2009-2010 period proved to be true. As was expected, in 2010 prices stabilized. Unlike the 1998-1999 crisis where the pricing trend had a U-form, in the current crisis prices were expected to go up in 2011-2012 with the growth in price anticipated to be not that rapid as it was in 20002001 (L-form of the trend).
1 RWAY, Information and Analytical Bulletin, No. 186 (September 2010), pp. 61, 172. 482
The forecast for the year 2011 and beyond was done on the basis of the pattern in which dependence of the growth rates of prices on those of the average per capita income for different types of the market was taken into account12.
The growth rates of households' real income and the expected inflation rate have been taken both from the Mid-Term Forecast of the Social and Economic Development of the Russian Federation in the Year 2011 and the 2012-2013 period3 and relevant regional forecasts. According to the data stated therein, in the mid-term prospect in most regions, except for Perm Territory, the values of indices close to the national average ones4 were set5.
In 2011, the type of the market in Moscow and Novosibirsk was determined as a developing one, while that in St. Petersburg, the Moscow Region and Vladimir as a stable one in the first half of the year and as a developing one in the second half of that year. In Perm, with lower growth in real income and higher rates of inflation (due to which households are more reluctant to spend their savings) taken into account the type of the market was determined as a stable one.
As a result of calculations, it has been determined that in 2011 the growth in prices in nominal terms will amount to about 15% in Moscow and Novosibirsk, to 6%-10% in the Moscow Region, St. Petersburg and Vladimir and to about 2% in Perm (Fig. 12).
It is to be noted that the forecast for the 2011-2013 period calculated on the basis of the above pattern and shown in the Figure is a smooth one. However, the earlier made forecast of higher price volatility remains in force; due to the above factor within 4-6 months monthly growth rates of prices may fluctuate up and down by 1%-2% from the average values and even enter the zone of negative values.
In the secondary market, the volume of sales will remain at the level of pre-crisis values of the 2006-2007 period, while in the primary market it recovers to the 2007 level.
At the same time, it is to be noted that in 2011 the dynamics of macroeconomic indices which is still much dependent on the situation on the global commodities and financial markets may have a great effect on the housing market in Russia.
1 G.M. Sternik and S.G. Sternik. Typology of Real Property Markets by the Trend to Create Pricing Bubbles -Property Relations in the Russian Federation Journal No.8 (95) 2009, pp. 18-28.
2 G.M. Sternik Methods of Forecasting Housing Prices Depending on the Type of the Market. - Property Relations in the Russian Federation Journal, 2011, No.1, pp. 43-47.
3 The forecast of the social and economic development of the Russian Federation in the year 2011 and the planned 2012-2013 period. - http://www.economy.gov.ru/minec/activity/sections/macro/prognoz/ doc20100923_07. Indices of the updated forecast of the social and economic development of the Russian Federation in the 20112013 period. - http://www.economy.gov.ru/minec/activity/sections/ macro/prognoz/ doc20101217_03.
4 As regards growth in GDP: 3.2%-4.6% (RF: 3.4%-4.2%), secondary production: 3.4%-4.2% (RF: 3.2%-4.2%), retail sales: 4.5%-6.3% (RF: 4.5%-6.3%), investments in fixed capital from all the sources of financing: 3.5%-4.1% (RF: 8.8%-8.1%), the inflation rate: 6.5%-5.0% (RF: 6.0%-5.0%) and households' real disposable income: 2.9%-4.5% (RF: 3.2%-4.7%).
5 Reference conditions for formation of the scenarios of economic development of Perm Territory in the period until the year 2012 (the main scenario conditions). - http://www.gorodperm.ru. Those conditions provide for slower growth rates of households' real income (2%) and higher inflation rate at the regional level (12.5%).
Thousand RUR per
300
250
200
150
100
50
0
Fig. 12. The forecast of RUR prices of the supply on the secondary market
in some cities of Russia.
If late in 2010, the outflow of capital from the private sector (it mostly fell on the 4th quarter and was somewhat smaller as compared to that of 2009) was a negative factor for the Russian economy, the dramatic growth in global prices on oil due to developments in the Middle East creates a basis for a more rapid recovery of the Russian property market. An additional factor behind the above suggestion may be the upcoming political cycle of the 2011-2012 period with the prospect of growth in budget expenditure and incomes of certain groups of households. However, the authorities' efforts to prevent a new pricing bubble on the property market make a repetition of the scenario of the mortgage-oil growth of the 2005-2007 period highly unlikely.
6.5.6. Housing Lending
According to the data of the Central Bank of Russia, 301,035 mortgage housing loans (MHL) for the total amount of RUR 378, 933 million were extended in 2010 with the outstanding debt of RUR 1,127,834 million as of January 1, 2011. The volume of mortgage housing loans extended in 2010 amounted to 58% of the total volume of loans extended in 2007 and exceeded by 148% the volume of loans extended in 2008. On the contrary, as of January 1, 2011 the outstanding debt on mortgage housing loans already exceeded that as of January 1, 2008 and January 1, 2009. In 2010, the volume of extended housing loans (HL) amounted to RUR 437,030 million or 395,515 loans with the outstanding debt of RUR 1,295,006 million as of January 1, 2011.
•Q CC
280 240 200 160 120 80 40
1400 1200 1000 800 600 400 200
6 6 8 8 8 8 Ol Ol Ol Ol 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
a a a a a a a a a a a a a a a a a a
m 4 1 2 m 4 1 2 m 4 1 2 m 4 1 2 m 4
I The volume of mortgage housing loans extended within a quarter, the left scale, billion RUR
The volume of housing loans extended within a quarter, the left scale, billion RUR
The volume of consumer loans extended within a quarter, the right scale, billion RUR
•Q CC
0
0
The source: the data of the Central Bank of Russia.
Fig. 13. Dynamics of the rate of extension of loans to individuals within a quarter
In 2010, the volume of the extended mortgage housing loans amounted 0.85% of the annual value of GDP against 1.59% in 2008. (Fig. 14). As of January 2011, the debt on mortgage housing loans amounted to 2.53% of the 2010 GDP which figure is somewhat less than the relevant value (2.59%) in 2008.
According to the data of the Federal Service of State Registration, Cadastre and Cartography, the number of residential premises encumbered with mortgage and registered in the Unified Register of Titles in 2010 amounted to 733,090.
pi
P^ 20 § 15 10
nrHB
2005 2006 2007 2008 2009 2010
the GDP, trillion RUR
the volume of mortgage housing loans extended within a year, % of the GDP the outstanding debt on mortgage housing loans, % of the GDP
2,0%
1,0% 0,5%% 0,0°%
5
0
The Source: The Rosstat data.
Fig. 14. Dynamics of the mortgage housing lending, % of the GDP
In 2010, there was a sustained growth in outstanding debt on RUR mortgage housing loans (Fig. 15). At the same time, in the 4th quarter 2010 the share of the overdue debt in the outstanding debt on RUR mortgage housing loans decreased from 2.83% in the 3rd quarter to 2.48% in the 4th quarter. It is to be noted that in December 2010, the value of the overdue debt decreased somewhat from RUR 26.1 billion to RUR 23.5 billion. On the contrary, in the 3rd and the 4th quarter 2010, the outstanding debt on mortgage housing loans in foreign currency decreased from RUR 192.4 billion to RUR 179.9 billion, while the share of the overdue debt in the outstanding debt in foreign currency rose from 6.31% (RUR 12.5 billion) late in the 4 quarter 2009 to 10.4% (RUR 18.0 billion) late in the 4th quarter 2010. (Fig. 15).
th
•Q CC
1000 900 800 700 600 500 400 300 200 100 0
4 q
2 q 3 q 4 q 1 q 2 q 3 q 4 q 1 q 2 q 3 q 4 q 1 q 2q 3 q 4 q 1 q 2 q 3 q
2006 2007 2008 2009 2010
12% 10%
8% 6% 4% 2% 0%
4 q
the debt on RUR mortgage housing loans, the left scale, billion RUR
the debt on mortgage housing loans extended in foreign currency, the left scale, billion RUR
the overdue debt as a percentage of the outstanding debt on RUR mortgage housing loans
the overdue debt as a percentage of the outstanding debt on mortgage housing loans in foreign currency
The source: the data of the Central Bank of Russia.
Fig. 15. Dynamics of the outstanding debt and the overdue debt on mortgage housing loans
In 2010, both the value of the outstanding debt on mortgage housing loans without overdue payments and its share in the total amount of the debt increased (Table 32). A positive factor is a decrease in the share of the debt on the defaulted mortgage housing loans with payments overdue for over 180 days in the total amount of the debt to 5.11% by the end of 2010. (Table 32).
Throughout 2010, the average weighted interest rate on RUR mortgage housing loans extended since the beginning of the year decreased from 14.3% to 12.5% (Fig. 16), while that on mortgage housing loans in foreign currency extended from the beginning of the year, fell in the first half of 2010 from 12.7% to 11.1% and remained virtually unchanged till the end of the year.
Table 32
Grouping of the debt on mortgage housing loans by the period of delay in payments
including:
The total amount of the
Without overdue payments
With payments overdue for 1 to 90 days
With payments overdue for 91 to _180 days
With payments overdue for over 180 days
debt on mort- %, of the %, of the %, of the %, of the
gage housing loans In million RUR total amount of the debt In million RUR total amount of the debt In million RUR total amount of the debt In million RUR total amount of the debt
2010
Feb 01 1 008 450 864 947 85.77 73 516 7.29% 17 648 1.75 52 339 5.19
Mar. 01 1 005 629 859 411 85.46 75 221 7.48% 17 699 1.76 53 298 5.3
Apr. 01 1 006 838 858 532 85.27 76 922 7.64% 17 720 1.76 53 664 5.33
May 01 1 013 685 867 308 85.56 74 709 7.37% 19 767 1.95 51 901 5.12
June 01 1 025 020 874 137 85.28 76 159 7.43% 18 860 1.84 55 864 5.45
July 01 1 033 813 883 910 85.5 76 502 7.40% 16 024 1.55 57 377 5.55
Aug. 01 1 042 163 900 012 86.36 68 574 6.58% 15 737 1.51 57 840 5.55
Sept. 01 1 055 983 905 400 85.74 74 975 7.10% 14 467 1.37 61 141 5.79
Oct. 01 1 069 618 916 342 85.67 77 119 7.21% 14 012 1.31 62 145 5.81
Nov. 01 1 086 204 941 847 86.71 67 671 6.23% 14 555 1.34 62 131 5.72
Dec. 01 1 105 023 953 524 86.29 74 700 6.76% 14 365 1.3 62 434 5.65
2011
Jan. 01 1 127 834 990 578 87.83 66 767 5.92% 12 857 1.14 57 632 5.11
The source: the dada of the Central Bank of Russia.
SO OS
(U TO
30 28 26 24 22 20 18 16 14 12 10
a J
CTO-
2006 2007 2008
ra (D ra Q ra
2009
ra (U ra Q ra
2010
011
20 18 16 14 12 10 8 6 4 2 0
ro
CD >
■a
CD ^
u O
E
CD
the average weighted interest rate on RUR loans extended from the beginning of the year, %
the average weighted interest rate on loans in foreign currency extended from the beginning of the year, %
'the average weighted period of lending as regards RUR loans extended from the beginning of the year, years
'average weighted period of lending as regards loans extended in foreign currency from the beginning of the year, years
The source: the data of the Central Bank of Russia.
Fig. 16. The average weighted data on mortgage housing loans in RUR and foreign currency extended from the beginning of the year
The average weighted period of lending as regards RUR mortgage housing loans extended since the beginning of the year varied throughout 2010 between 16.5 and 16.2 years, while that regarding mortgage housing loans in foreign currency extended since the beginning of the year initially rose from 11.1 to 14.2 years and then fell to 12.8 years (Fig. 16).
In 2009, a significant increase of up to 60.82% in the share of five credit institutions with the largest assets in the total volume of mortgage housing loans extended that year gave way to a drop in the above value to 54.18% in 2010 and a redistribution of volumes between other groups (Fig. 17). If in 2009 the largest share of the overdue debt was registered with the third group (4.56%), in 2010 it was the second group whose portfolio of mortgage housing loans was of a higher risk (4,65%).
(fl
T5 100%
90%
u 80%
o 70%
CD 60%
b 50%
J3 40%
13 > 30%
<u 20%
-C 10%
c 0%
Q.
3
13
M
o
CD
TO -C
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5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0%
ra -t-» O
Groups of credit institutions ranked by total assets (in descending
order)
the share of the group in the total volume of mortgage housing loans extended to individuals in 2010
the share of the group in the total volume of mortgage housing loans extended to individuals in 2009
the share of overdue debt in the outstanding debt of the group in 2010 the share of overdue debt in the outstanding debt of the group in 2009
The source: the data of the Central Bank of Russia.
Fig. 17. Dynamics of the volumes of extended mortgage housing loans and the overdue debt by the group of credit institutions ranged by the size of assets
In 2010, the share of foreign currency mortgage housing loans in the volume of mortgage housing loans extended during a quarter and that in the volume of the outstanding MHL debt kept decreasing (Fig. 18) from 6.25% in the 4th quarter 2009 to 4.03% in the 4th quarter 2010 and from 19.6% in the 4th quarter 2009 to 15.95% in the 4th quarter 2010, respectively. However, a decrease in the share of the overdue debt on mortgage housing loans in foreign currency in the total volume of the overdue debt in the beginning of the year (39.06%) was replaced by growth by the end of that year (43.42%).
^^ the volume of mortgage housing loans in foreign currency as a
percentage of the total volume of the extended loans with accrued result from the beginning of the year the outstanding debt on mortgage housing loans in foreign currency as a percentage of the total outstanding debt
the overdue debt on mortgage housing loans in foreign currency as a percentage of the total overdue debt
The source: the data of the Central Bank of Russia.
Fig. 18. The ratio of RUR mortgage housing loans to mortgage housing loans
in foreign currency
In the three quarters of 2010, AMHL refinanced 34,167,000 mortgage loans for the total amount of RUR 37.1 billion, which figure is equivalent to 18.2% in quantitative terms and 15.8% cash terms of the total number mortgage loans extended in that period.
In 2008, the share of AMHL on the market of refinancing of mortgage housing loans amounted to 26.69%, while in 2009, to 35.78%. In the first half of 2010, AMHL dominated on the market of refinancing; AMHL accounted for 75.53% of that market.
According to AMHL's data, as of December 2010 the minimum average rate on the refinanced AMHL loans which complied with the relevant AMHL standards amounted to 10.85% in the Privolzhsky Federal District, while the maximum one to 11.42% in the North Caucasian Federal District (Table 33). The average weighted term of the refinanced AMHL loans varied by the federal district from 16.2 years to 19.3 years. The average amount of the mortgage loan refinanced by AMHL amounts to RUR 1,011,000.
Table 33
Individual indices of the mortgage housing market by the federal district
as of December 1, 2010.*
u .5 fe S
£
ni £
oj 'S
t o
Z
.a 13
*i» 'IS
u Is
u
fe 13
-i -8
m to
■a 23
JS H
o
f
•IS
№
fe -¡3 §
"¡3 O
13
•is
a
a
The number of refinanced loans (units)
Loans refinanced by AMHL, million RUR**. Average weighted term 16.8
of the loans refinanced by
AMHL, years**
Average interest rate on 10.99 loans refinanced by AMHL, %**
36 423 4 315 3 766 1 413 36 824.8 4 938.5 4 258.0 1 615.3
17.3
11.18
16.2
10.89
17.3
11.13
379 12 486 4 379 8 367 1 318 452.3 11 409.2 4 423.8 8 099.9 1 627.8 19.3 17.2 16.3 16.2 16.8
11.42
10.85
11.30
10.90
11.24
* accrued from the beginning of the year
** on standard AMHL products The source: OAO AMHL.
After a drop in the volumes of mortgage housing lending and refinancing in 2008, the minimum share of the loans refinanced by AMHL in the total volume of MHL debt was registered late in 2008. From that moment, the share of AMHL kept growing in the 3rd quarter 2010 and amounted to 15.4% (Fig. 19).
As of November 1, 2010, AMHL refinanced 4119 mortgage loans extended under the Military Mortgage program for the total amount of about RUR 8 billion, as well as 828 loans with utilization of the maternal capital for the total amount of over RUR 936 million.
Early in 2011, the President signed the law which permitted all the women who had got the second child (regardless of the fact whether the child reached the age of three years old) to utilize the maternal capital for repayment of the mortgage loan. Furthermore, under the new law households with children will have an opportunity to use the maternal capital to repay mortgage loans received both before and after December 31, 2010.
As seen from the Strategy of Development of Mortgage Housing Lending in the Russian Federation till 2030, solution of the housing problem is still related to mortgage. Mortgage is considered as an instrument which regulates real-estate prices and has the following parameters:
- loans are extended for the period of up to 30 years;
- the interest rate is fixed at the level of the consumer price index plus 2-3%;
- the down payment is to be made in the amount of at least 30% (in case of absence of mortgage insurance);
- the share of loans with mortgage insurance and the down payment of 10% should not exceed 1/5;
- the procedure for repayment of loans should provide for use of flexible schemes of debt management.
The source: the Rusipoteka's data.
Fig. 19. The share of loans refinanced by AMHL in the total volume
of MHL debt
The quantitative parameters of the Strategy suggest that after the mortgage market has got through the following three stages - recovery to the pre-crisis level (2010-2012), complete recovery and attainment of sustained growth rates (2013-2020) and full market saturation (2021-2030) - mortgage will be affordable to 60% of Russian households (17% in 2009) with the mortgage loan debt amounting to 15.5% of the GDP. The main obstacles in implementation of the above strategy are both the shortage of financial resources for mortgage and actual volumes of commissioning of housing. Suffice to say that with 90 million square meters of housing in 2015 (the above value was stated in the Housing federal purpose program) it will be necessary to increase by more than 50% the volume of commissioning of housing as compared to the existing one, however, even that will be far short of the target, that is, commissioning of 1 sq. m per capita annually in Russia.
6.6. The Military Economy and Military Reform in Russia
From the financial perspective, the year of 2010 started with a unusually early (of 12/04/2009) notification of the national military organization's chief controllers of such a critical development as "the 2010 budget obligation limits", which, in principle, allowed all the military departments a timely delivery of respective obligations to recipients of budget funds. However, like in the previous years, the planned volumes and timelines once again were not met, plans altered momentarily, while prices of military products were on the upswing.
The "power" ministries and the respective military leadership failed to exercise a due control over the last year's military-economic processes. This ascertainment is particularly true, as far as the Ministry of Defense is concerned, which was half-way towards completion of its reorganization, while running, at the same time, transition of the Armed Forces (AF) of Russian Federation to some "new look". The document on the new look has not ever been made available for the at-large public's review and comments, while views on it it have been changing constantly through the end of the year. Meanwhile, a string of official legal documents was adopted and promulgated, including, first and foremost, the new Military Doctrine of RF1 ,which builds on individual provisions of the Strategy of National Security of RF2, and engendered a number of the national military structure (MS) leadership representatives' statements in the media. The Commander-in- Chief and other participants in the meeting of the Collegiums of the Ministry of Defense held on 5 March assessed progress en route to the new look and specified annual objectives. Specifically, Mr. N. Makarov the Head of the Staff Quarters, asserted that, "now as many as 85 brigades have been formed. All of them are in the state of permanent combat readiness... They are fully manned, equipped with arms and military hardware"3. However, it was futile an attempt to ensure a "full" manning of the brigades and to sustain it through the end of the year, as there were no young men ready for conscription and willing to serve in the army. By the end of the year, it became clear that the brigades would not be fully manned in the years to come, either. Mr. Makarov's also produced an inaccurate ascertainment of economic aspects of the process: "The best option is to have a genuine draft-based army. But the state so far has not been in a position to afford such a financial burden... 4
The biggest changes occurred in the highest echelon of military brass. The number of military-administrative districts was reduced from recent 6 to 4 ones and the respective number of operative strategic commands (OSKs) was established ahead of pre-set timelines. Concomitant with the processes were relocations of organizational structures, which involved costs of relocation and provision of service and support. However, it is a waste of time to look for the respective figures in the federal budget, as the information is classified, while the budget classification remains imperfect.
A notable development for AF became completion of the reforming of reduced units and transition of all others under the "permanent combat readiness" category, which implied transition of the bulk of AF from the division-based structure to the brigade-based one, which
1 Decree of the RF President of 05.02.2010 and the Military Doctrine of RF approved with it//Nezavisimoye voyennoye obozreniye. 2010. 12-18 February (№05).
2 Decree of the RF President of 12.05.2009 and the Strategy of National Security of RF approved with it//Krasnaya zvezda. 2009. 2-26 May (№ 88).
3 Ibid.
4 Ibid.
suggests a greater mobility. The changes resulted in "extra" officers with no housing who found themselves "out of service". There have been no unambiguously positive comments on the brigade-based structure. Meanwhile, being the most mobile branch of troops, the Airborne Forces has retained the division-based structure. But critical comments on the novelty are often hushed.
Yet more dangerous is the fact that the year of 2010 saw continuous disinformation of the civil society and the military, including the supreme level of the military and political command. To cite a particular example that implies far-reaching consequences, suffice it to mention a statement that the ratio of the AF support and training costs to their development costs, or more precisely, development of arms and military hardware, in RF allegedly does not quadrate with records posted by most modern states. Several years ago, when Russia would spend nearly 30% of the national defense budget on equipping its AF with arms and military hardware (AMH), Mr. Yu. Baluyevsky, the then-head of the Staff Quarters reckoned1: "The whole world is following the pattern: some 60 per cent is spent on procurement of arms and R&D, while some 30-40 per cent - on money allowance and matters associated with the material provision and military training of armed forces". The statement disclosed the rationale behind the RF Security Council's decision of 25 June 2005. It became known later that at the time the Security Council set a task of "changing the ratio of the ongoing support and technical equipping of the Armed Forces towards the latter and to hit the level of 50:50 by 2011 and further the one of 30:70 in favor of technical equipping - by 2015"2.
Meanwhile, the level of costs of development and procurement of arms worldwide was: in the US - 36.2% of the nation's overall defense expenditures, in UK - 30.4%, France - 36.2%, and Germany - 24.2%3. In other words, there is rock-solid evidence that Russia was no maverick in this respect, as far as leading military nations are concerned. They have not boosted the share of spending on arms ever since, either. For example, between 2005 and 2010, the US spent, on a year-on-year basis, 62.1%, 64.2%, 61.7%, 58.6%, 63.1% of the nation's total defense spending. An RF Ministry of Defense's periodical regularly updates on these data4, but the military bosses and red tape ignore even domestic analysts' materials.
The declared total "optimal" number of the AF staff accounts for 1 mln., of whom 150,000 are officers, while another 150,000 are sergeants and contracted specialists. Hence the need to man 700,000- plus positions with conscripts. That, in our view, became a consequence of the original erratic ascertainment that entailed a misconception of Russia being short of funds to transit to a draft-based army. Therefore, the policy setback implied "revisiting" conscription, which means both restrictions of some of the military's rights and freedoms and an exceptionally low level of money allowance due (MA). An earlier IET research, which included a survey on conscription-aged residents5, evidenced that a 1.2 average nationwide salary would
1 Rossiyskaya Gazeta. 2005. 1 November (№245). URL: http://www.rg.ru/2005/11/01/baluevsky.html
2 Comments of the Defense and Security Committee of the Federation Council on Federal Act "On the Federal Budget for 2011 and the planned period of 2012 and 2013". №3.5-07/1681 of 30.11.2010.
3 For objective information, including transparency of military spending, see Reports by the UN Secretary-General №№ A/59/192 u A/60/159, 2004
4 Korotcheko V. Project voennogo byudgeta SSHA na 2010 finansovy god//Zarubezhnoye voyennoye oboz-reniye. 2009. № 11
5 Reforma systemy komplektovaniya voennoy organizatsii Rossii ryadovym i mladshim komandnym sostavom / Pod red. Ye.T. Gaidara i V.I.Tsymbala. Nauchnye trudy № 39P. M.: IEPP, 2002; Problemy i praktika perekhoda voyennoy organizatsii Rossii na novuyu system komplektovaniya./ Pod red. Ye.T. Gaidara i V.I.Tsymbala. Nauchnye trudy: Working papers # 75P. Moscow, IET, 2004.
suffice to attract new draftees; instead, the conscripted military are paid an amount 40-fold smaller than that. The approach conflicts with most of citizenry's interests, but it suits two main groupings: army jobsters and around-the-army fixers, who make money on 1) the citizens' fear of the army and desire to dodge conscription; and 2) on kickbacks and other embezzlement schemes in the course of allocation, under the smokescreen of secrecy, of huge funds on R&D works and arms procurements.
6.6.1. The Army Recruitment Problem
Last year, as many as 700,000 young men born in 1992 reached the conscription age. For reference, in the early -1990 the birth rate in RF plummeted more than twice vis-à-vis the 1980s, hence the number of future conscripts will fall short of making up even the 2010 figures and will account for slightly over 600,000. Given past records, 1/3 of them will be discarded due to health problems. Plus, Russian universities will shortly offer some 1m tuition opportunities (with roughly a half of them targeting young men), so practically every masculine higher school graduate can enroll to the university and enjoy a conscription deferment. The situation is further aggravated by many Russians' willingness, to reside and work overseas, while retaining the RF passport.
Hence, today, it is mostly those who used to enjoy deferments earlier who form the bulk of the conscription reserve (CR), with ex-students dominating the group. That is why the number of university-educated conscripts is on the upsurge: in the spring 2009, they accounted for 31,000 (out of the total of 305,500 conscripts), in the autumn of 2009 - 43,000 (271,000), in the spring of 2010 - 45,000 (270,600), and in the autumn of 2010 - 44,000 (278,800).
The conscription reserve, which the head of the State Operational Mobilization Department has recently estimated at the level of 3 mln, should exhaust within next two or three years. The above data allow assessing both current challenges to, and meager future opportunities for, filling in 700,000 positions with conscripts; as well the exercise can shed some light on magnitude of the corruption potential the system engenders.
Let us start with economic incentives potential bribe-givers may have. With the average nationwide monthly salary currently in the region of Rb. 19,000, while in service, the conscript can "earn" a miserable Rb. 500 a month, plus another Rb. 3,000 (cash equivalent of other kinds of military allowance combined). Hence, what the conscript and his family loose annually is: (19 - 0.5 - 3) * 12 = Rb.186,000. The total loss of all the conscripts' families combined will make up astounding Rb. 130 bln. Let us note that in the past, when the bulk of conscripts was formed by fresh higher school graduates, the IET calculations assumed their salaries would account, on average, for just 70% of the average salary nationwide. This adjustment can now be dumped, as we see the tendency to compulsory recruitment of fresh university graduates to the army. It goes without saying, this material factor (alongside the fear of hazing) pushes prospective conscripts and their parents to check out conscription exemption "services".
Now, let us depict interests of those who "facilitate" that under and beyond the legal framework. The past years' record shows there are 1.4 mln. conscription notifications sent out annually. That is to say, they fail to cover (due to various reasons, including corruption) 3-1.4 mln.=1.6 mln. young men of conscription age. Consequently, provided only a half out of 1.4 mln. of recipients of conscription notifications is actually enlisted, it means that the other half of them, i.e. 0.7 mln., will be exempted from conscription because of some reasons (possibly, corruption-based ones), too. So, the number of individuals who have dodged the annual con-
scription campaign will total 1.6 mln.+07 mln.= 2.3 mln. The Military Prosecutor's office, INDEM foundation and media reports estimate the costs of conscription exemption "services" rendered by medics, lawyers and staff at military commissariats within the range from Rb. 300,000-more in megapolises to 30,000 in regions1.
Assuming the amount of the bribe per each given conscription dodger averages Rb. 60,000, the criminogenic capacity in the area can very roughly account for 2.3 mln. * Rb.60, 000 = Rb.138 bln. The figure is way greater than budget expenditures required for transition to draft, which by the IET estimates, do not exceed Rb. 90 bln, or less than 1% of the 2010 defense budget (Rb. 1,276 bln.)2. Meanwhile, the annual increase in defense spending accounts for some 20%, but all the funds are spent on procurements and R&D.
So, while saving on a decent pay service to draftees, the government de-facto withdraws the same amount from budgets of conscripts' families, which form the most disenfranchised fraction of the society. At the same time, while resorting to the illegal "services", other citizens are stripped of an amount roughly matching the one needed to transit to the draft system.
From the military perspective, such a policy can engender the following outcomes: on request of the Defense Committee of the State Duma, the Head Department of Military Training (HDMT)of AF RF ( outgoing letter ref. № 533.3.1211 of 16.09. 2002) unveiled expert comments in this respect. Proceeding from the model "professional" (ie. basing on at least a five-year military training program) soldier's combat capacity (which equivalents 1), after 6 months of military service and training the respective index accounts for 0.1 and after 12 months in service - 0.3. As a reminder, while drawing its comparisons across different nations' military capacity, the UN experts disregarded troops in service for less than half a year.
Notwithstanding the above HDMT's assessments and failing to officially produce their own, the present military leadership argue that 2-3 months is a period sufficient to train a modern soldier.
While commenting on results of the spring stage of conscription, the SOMD head asserted that "<C> enlisted between April and May, already in June the soldiers took part in "Vostok-2010" strategic exercise and performed not that bad"3. However, there exists absolutely polar evidence: "While gearing up for the exercise, a simple decision was made - that is, against any law, to halt dismissal of conscripts by deploying any qualified soldiers just to prepare training areas, rather than to even partake in the future exercise"4. Assurances of a "credible level of military training" were also been shrugged off by the current head of HDMT and Troop Service5: "there is a question no one so far has produced a clear answer to: how to make a qualified troop out of a conscript in the span of one year?". He also added that without modern training capacities, this is an unrealistic objective in principle. AF RF have no such training capacities, nor the troops' military efficiency matters at the end of their servicerather, the are needed earlier than that. At this juncture, commanders of military units and detachments are doomed to a constant renewal of their troops (while some of them are booties,
1 Web-page of the RF Ministry of Interior, 27.10.2010: http://mvdrf.ru/news/49341. - Access date 07.02.2011.
2 Report of the Federal Treasury on execution of the federal budget of RF: http://www.roskazna.ru/store/ re-ports_file571.xls. - Access date 9.02.2011.
3 Aleksandrov A. Itogi pryzyvnoy kampanii // Krannaya zvezda. 2010. 27 July (№ 133); 28 July-3 August (№ 134).
4 Goltz A. Gotovim pushechnoye myaso // Voenno-promyshlenny kuryer. 10-16 November (№44).
5 Evnevich V. Lazer v rukakh soldata // Voenno-promyshlenny kuryer. 2010. 4-10 August (№ 30).
others are getting ready for dismissal), which makes it hard to arrange a normal military training.
Giving such troops even the most cutting-edge weapons will not save their commanders' day, as soldiers would have no time to master them, nor would they appreciate any incentives to take care of them. So an army, wherein the bulk of troops are in service just for one year, is and will be unlikely to ensure a due combat efficiency. And it is not accidental then that the chief commander of Airborne Forces was compelled to form 5"primary engagement" battalions and man them solely with draftees. Meanwhile, other Airborne Forces' units are manned with conscripts, which effectively make them look like and operate as training attachments.
Perhaps this very approach might be worth legitimizing, but legislators ruled otherwise. They were at pains to urgently amend an act in compliance with which "rookies" can be deployed on combat missions after 3 months in service, rather than after 6, as the document stated earlier. The head of SOMD used to accentuate that if the length of service would be reduced to 1 year, conscripts would fill positions that "do not determine the armed forces' combat efficiency". Now it means that AF comprises 70% of such positions. Plus, strictly speaking, such a category of positions has not ever been identified in legal terms, and its arbitrary usage appears illicit.
Meanwhile, both RF and other countries are confronted with an urgent imperative of answering a more general question as to what the ultimate objective of conscription is. For Russians, the answer should be built on requirements set by the Strategy of National Security of RF until 2020. The document emphasizes that military threats form just a fraction of a general list of threats to Russia and the nation should get ready to counter them all. In all fairness, life has already made us face the challenge of a non-traditional deployment of individuals recruited from the civic sector to ensure the national security. Specifically, last summer, during the period of wildfires, as many as 8.500 - 10,000 troops and some 1,000 units of specialized military hardware were deployed to fight the fires on a daily basis1. Art. 59 of the RF Constitution does not suggest that the citizen's duty to defend the Motherland implies only repelling an invasion. That is why all the RF citizenry should be trained to exercise their constitutional duty. If conscription is retained to serve that purpose, it should be reduced chiefly to a short-term but practical survival course. Having completed the initial phase, only the best and the brightest should be picked and offered to voluntary stay in service for a handsome allowance and lucrative preferences. That is the way professionals in the key security areas should be recruited, otherwise the level of safety of military service and the one of military efficiency of most of troops would remain low2.
The problem, which aggravated in 2010, concerns junior commanders, who are represented overseas by the institution of warrant officers and sergeants. Experts are unanimous: "Modern ways of fighting war are determined not by generals -to a significant extent they depend upon command which sergeants demonstrate on the tactical level"3.
Until recently, Russia has had too many officers and the national equivalent to the US CWO, who were supposed to exercise control over privates, but in fact could and did nothing in this respect. These positions were slashed, with reference made to other countries, mostly the US's, army wherein the officers/soldiers ratio allegedly was 1:16. Meanwhile, our reform-
1 Tikhonov A. Ne chislom, a umeniyem//Kransya zvezda. 2010. 17 August (№148).
2 Litovkin V. Opyat prizyv, opyat problem//Nezavisimoye voyennoye obozreniye. 2010. 9-15 April (№13).
3 McDermot R. Armiya nachinayetsya s serzhanta// Voenno-promyshlenny kuryer. 2010. 14-20 April (№ 14). 496
ers lost sight of the much-needed category of warrant officers and did not give thought to well-trained sergeants, either. As a result, our new staff and military service system was doomed to failure: there are no such qualified sergeants in AF as yet - their training has just kicked off and its pace is too low. Hence no hope for the reign of law and order in military barracks.
That a special category of military counselors will be up to the job seems quite problematic, too. Such officers will be assigned to every unit with the number of troops over 75, which suggests there will be 10,000 such counselors in AF, plus 20,000-strong MP and priests. The Ministry of Defense will sure rake up some cash on their subsistence and transition to new uniforms (some Rb. 25 bln.), and on travel subsidies to parents to see their conscripted sons to their stationing locations (the number of concerned parents was over 10,000 at the heyday of the autumn conscription campaign), but not on transition to draft.
Equally critical was another challenge Russia faced last year - namely, training the renewed officer corps. As the Soviet legacy, the military universities network proved excessive and so did the number of military university graduates, who struggled to find a position in AF. As a temporary solution, they were offered to fill in sergeants' positions, with all their perks untouched. A considerable part of them opted for an early retirement, though, and it is highly unlikely already retired and now retiring officers will be provided with long-promised housing and decent pensions.
6.6.2. Problems of Design, Production and Supplies of Arms
The inadequate closeness of "power" agencies and absence of the civilian control add to the dire situation with supplies to the military.
From the economic perspective, an analysis should encapsulate all the list of items of military supplies (IMS), including both an extensive set of items earlier supplied to AF via the logistic arm and weaponry and military hardware (WMH), which used to be supplied via the Head of the Inventory Service. Today, these structures have been reorganized, consolidated and fell under the "non-military" part of the MOD's new structures. Those include the inventory system of the Strategic Nuclear Forces (SNF), by which Russia still maintains a rough parity with the US, and Non-Nuclear Forces (NNF), by which Russia catastrophically fell behind its major rival. In addition, those are strategic reconnaissance, communications, navigation and space control systems (SCS), missile attack warning system (MAWS) of the anti-ballistic and airspace defense (ABD and ASD).
Tactical weapons on theaters of war (TW), or in, a new interpretation, - on operational avenues of strategic command authorities - were traditionally considered the second critical group of IMS.
The third critical group of IMS is formed by means of military power projection from one theater of war to another. Given the time factor, the group comprises military airlift (MA) and the respective means of provision of its functioning.
Meanwhile, there exists an increasing need for developing the fourth group of IMS that secure operations of the AF command authority, various units and attachments, as well as solitary troops, with account of means of automated cut-through command and control, information collection and control, and conduct of "information wars".
All these groups should have been expected to post some military-economic progress in 2010, for the volume of funding earmarked under the State Defense Order (SDO) was greater than in the previous years. But the actual capacity of the military-industrial complex that in
principle operates to meet demand of both domestic, as well as overseas customers, was not factored in.
The above is evidenced by open data collected from domestic media, fragmented public statements by representatives of the RF military and political command authority, and references of the international Institute of Strategic Studies. The Table below (Table 34) characterizes the dynamic of main IMS of the first group.
Table 34
Dynamic of Equipping AF with Main Models of Strategic Arms
IMS group Model Quantity Quantity in Quantity in Dynamic Dynamic Notes
in 2008 2009 r. 2010 r. 08-09 09-10
Strategic NS (Delta III, RSM-50) 6 6 5 0 - 1 Reduction appropriate
with MC BM (Delta IV, RSM-54) 4 4 4 0 0 Unchanged
In the Navy (Delta IV, RSM-52) 2 2 2 0 0 Unchanged
(Northern, Tayfoon 2 2 2+1 (re- 0 0 Unchanged
Pacific arms) serve)
np. 955 1 1+2 (under 1+ 2 (under 0 0 Failure to develop MC,
(MC «Bulava») construc- construction NC were not passed into
tion) service. Overspending
NS- total 15 15 14 0 -1 12 units in service. The
with MS BM SB with 252 c 252 BM c 236 BM -16 combat capacity of the NS
BM SB SB SB grouping is down
Missile Com- PC-20 (SS-18) 80 75 68 - 5 - 7 Partial use of old MC to
plexes of SRF PC-12M(SS-25) 254 201 180 - 53 - 21 launch SA, particularly
Silo-based/ PC-18 (SS-19) 126 100 72 - 26 - 28 for commercial purposes.
mobile profit= ?
Topol-M (SS-27) 48 54 50 +6 +11 The military capacity of
silo-based / mobile /15 new BM is on the rise, but
fails to compensate for the
retirement of old ones
PC-24 0 0 ? 0 +? Production and supplies
in progress
MC with warheads 508 430 430 - 78 0 The general military
(WH), total (Br) with with 1605 with 1605 +5 0 capacity of SRF is intact
1600 WH WH WH
Long-range Tu-160 15 16 16 + 1 0 Strengthened
aircraft Tu-95MC6 (H6) 32 32 32 0 0 Unchanged
(the 37th Air Tu-95MC16(H16) 32 32 31 0 - 1 Weakened
Force wing) Aircraft with cruise 79 80 79 +1 -1 SNF military capacity is
missiles with 884 with 900 with 856 down, but NNF capacity
ALCM ALCM ALCM is on the rise
Missile Attack KA CnPH 5
Warning P.HC CnPH 10 10 9 0 - 1 Reduction in the number,
means; but modernization
MC BMD SH-11 36 32 32 - 4 0 Weakened
SH-08 64 68 68 +4 0 Approximate balance
C-300nMY (SA-10) ---- 1900 1900 0 0 Inclusion in the strategic
BMD is inappropriate
C-400/Triumf ? 64 64 0 0 Inclusion in the strategic
BMD is inappropriate
Airspace Force Spacecraft (SC); No quantitative data on SC, except for ... ... Positive effect thanks to
launch and control some dual use ones (GLONASS) dual-use means and com-
means mercial launches
Source: The Military Balance. London: IISS, 2008-2010.
From the military-economic standpoint, it is important to consider effects from budget investments in this group of weapons and to examine the extent to which the declared plans were implemented. To this end, suffice it to analyze quantitative data on composition of means over the past three years. As evidenced by Table 34 (whose columns of dynamics of volumes of funds are quite illustrative), with all the huge funding pouring in, the effects were negligible, if not negative.
The military capacity of offensive arms, particularly, the naval component, was on decline. The idea to unify all Russian ballistic missiles proved a failure. Bulava, a naval version of the unified design, is not ready for passing into service, while three nuclear submarines, which 498
had ben supposed to be equipped with Bulava were launched armless. As a reminder, the Constructor General of Bulava and the previous Defense Minister kept assuring the submarines equipped with these missiles were long to pass into service.
Production of new ground-launched missiles failed to compensate for retirement of old ones. Hence, our most powerful component of the strategic triad weakened, too. Plus, in the aftermath of the noted "unification" it was found out that all the variants of missiles, including the tactical "Iscandar", should be produced by one and the same plant in the town of Vot-kinsk, whose capacity fall short of meeting the planned aggregate volume of output.
The Air Force, too, saw no rise in its military capacity. The growth in the number of bombers, which (as the military strategists reckoned) should have resulted in a rhythmic modernization of the 15 existing aircraft and production of another 15 next-gen ones by 2012, was put at jeopardy. The number of cruise missiles with nuclear warheads did not soar, either (judging indirect characteristics of the balance of forces)1. As to non-nuclear variants of equipping the missiles (for the purposes of NNF), foreign references additionally inform just of equipping them with GPS/GLONASS-controlled targeting devices. Notably, foreign publications cite GPS on the first place as a more advanced and precise system, as it might be this year that GLONASS might match the desirable precision characteristics.
The foreign reference materials refer to the destructive role played by some Russian experts' assurances that the domestic ADMS under the AA defense could shoot down ballistic missiles. That C-300 and C-400 can target short- and midrange ballistic missiles does not make any difference to the national AA defense, as the threat they pose is negligible. Since 2008 foreign sources have begun attributing our complexes, which earlier fell under the category of ADMS, to AA defense, and Russia proved the most equipped with strategic antimissile systems country worldwide. Judging the outcomes of the November NATO Summit, the Europeans do not consider our ADMS as a prospective element of the European AA system.
It is most likely that the "joint" Russia-NATO AA defense will be limited with exchange of information of a missile attack, while Europe will become home to strategic silo-based components developed on the basis of offensive complexes Minuteman-2 (and that is what the US wanted). Numerous experts, including the late Dr. Yegor Gaidar, Director of the IET, cited the military and political danger stemming from this destabilizing move and raised their objections both in Russia and in the US.
The data on dynamics of other IMS does not appear encouraging, either. As noted above, with the rise of SCAs and the need to project troops from one direction to another, the focus of attention should be on equipping Russian Air Force with military cargo aircraft and helicopters, and, perhaps, some other means of urgent transportation, which are not there as yet. Joint declarations by the Russian and Ukrainian military leadership on renewal (after some modernization) of the cooperative production of a uniquely efficient Antonov-124 and a smaller Antonov-70 seem inspiring, albeit they were made before, too. The past efforts resulted in their rejection by representatives of Russia's MIC and even those of the Russian Air Force, who were reluctant to "share" with "foreigners" prospective lucrative receipts and possibilities for their private use. Overall, in 2010, the Air Force received 4 combat aircraft, but lost 6 other ones in accidents.
1 The Military Balance. London: IISS, 2008-2010.
The military-economic conclusion by the first three groups of IMS is evident: despite an increasingly growing volume of spending, there has been no adequate surge in the number of modern weaponry across the groups in question.
The situation with the fourth group, which is designated for cyberwar, is yet gloomier. Without much details, let us note that the modern soldier is, as a rule, equipped with protected communication and data transmission/receipt, and positioning and navigation gear; infra-red and laser target capture devices; and, if need be, outside arms, friend-or-foe devices, and many other gadgets, which he can control using a backpack PC. That is why the main reason behind the voluntary recruitment to, and professionalization of, such armies is the need to bring all the soldier's respective skills to perfection.
Unfortunately, Russia's AF have found themselves in a completely polar situation, with troops having no access to even the most primitive means of communications. The greatest "achievement" so far became the permission to privates to use cell phones they buy for themselves - a great economy of scale, indeed, in the eyes of those keen to retain a "cheap" conscription-based army. It seems that they train cannonfodder, rather than a modern army. Nonetheless, the Minister of Defense is confident that, "in 2010, a new military composition of the Army and Navy was created, the military command and control system, the ones for logistics and supplies and military training underwent a fundamental change"1.
However, there exist other assessments. In the logistics and supplies sphere, the 2010 level of economic crimes was up by 10% compared with the prior year and worth a total of Rb. 2 bln.-plus, 2 while kickbacks in the state defense area hit 40%. The Defense Minister was bold in characterizing the situation: When I Came to the Ministry of Defense, frankly, I was flabbergasted by the volume of thievery, and that sensation is till with me. Financial debauchery and impunity of the people whom no one ever audited"3.
6.6.3. The Military-Fiscal Policy and the Problem of Openness
Once the peak of the economic crisis was over, the level of stability of the financial and economic planning on the federal level rose substantially. While the 2009 federal budget underwent 7 modifications, the last year's one was modified only twice: in July and October4. Between the moment the RF President approved the first version 5 of the federal budget and the moment of adoption of the third one6 appropriations under section 02 «National Defense» rose from Rb. 1,257 bln to 1,278 bln., or by 1.7%, with a 3.7% general increase in federal spending over the period in question. On a year-on-year basis the appropriations in question plunged by 2.9% in real terms7, along with a 0.2p.p. contraction in their volume relative to GDP - down to 2.87% of GDP .
1 The Military Balance. London: IISS, 2008-2010.
2 Kostyukova I. Korruptisya v oborone//Vzglyad. 2010. 19 November. URL: URL: http:// vz.ru/politics/ 2010/11/ 19/448506.html/
3 Pavlikova O., Ukolov. R. Korruptsia atakuet // Profil. 2010. 29 November (№ 44).
4 The April changes per Federal Act № 71-FZ of 4 May 2010 r. practically did not affect the expenditure part of the budget.
5 On the federal budget for 2010 and the planned period of 2011 and 2012: Federal Act № 308-FZ: passed by the State Duma on 24 October 2009.
6 On introduction of amendments to the Federal Act «On the federal budget for 2010 and the planned period of 2011 and 2012»: Federal Act № 278-FZ: passed by the State Duma on 21 October 2010.
7 With the use of the index- GDP deflator (the first Rosstat's estimate for 2010 - 110.3%). 500
The level of secrecy of the 2010 federal budget expenditure slightly reduced compared with the previous year (Table 35), despite the Rb. 28, 268 bln.-worth increase in secret appropriations due to the double adjustment of the budget. Secret appropriations disappeared from expenditure sub-section 0704 «Secondary vocational training», but were still retained in subsections 0701 «Preschool education», 0801 «Culture» and 0908 «Physical culture and sport». The proportion of secret appropriations in sections 04 «National economy» and 05 «Housing and utilities» continued to rise, with the respective annual increase rate in the latter section exceeding 12 p.p.
Table 35
Proportion of Secret Appropriations in the Federal Budget Expenditures
in 2003-2010, as %
Code and name of the Section (sub-section) that comprises secret expenditures 2004 . 2005 . 2006. 2007 . 2008 . 2009. 2010
1 2 3 4 5 6 7 8
The federal budget expenditures, total 9.73 9.83 11.33 11.80 10.33 11.92 10.42
0100 GENERAL PUBLIC ADMINISTRATION ISSUES n/a 1 n/a 3.67 6.28 5.52 8.66 4.75
0108 International relations and international cooperation 31.88 18.04 - 0.01 < 0.01 3.66 -
0109 The state material reserve 97.73 93.33 82.86 89.23 92.18 90.17 85.08
0110 Fundamental research - - 2.13 1.22 1.12 0.97 0.32
0114 Other general public administration issues n/a n/a 0.05 0.72 0.28 4.42 1.05
0200 NATIONAL DEFENSE 37.22 38.40 42.06 42.77 45.33 46.14 45.74
0201 The Armed Forces of RF 35.39 36.11 33.07 35.59 37.11 39.04 38.36
0204 Mobilization preparation of the economy 100.0 100.0 100.0 100.0 100.0 100.0 100.0
0205 Preparation for and participation in provision of the collec- - - 100.0 100.0 100.0 - -
tive security and peacekeeping activities
0206 Nuclear arms complex 100.0 100.0 100.0 100.0 100.0 100.0 100.0
0207 Implementation of international obligations in the sphere of 100.0 41.05 45.22 46.90 50.65 100.0 100.0
military-technical cooperation
0208 Applied research in the area of national defense n/a n/a 98.37 93.94 93.69 93.20 91.32
0209 Other issues in the national defense area n/a n/a 2.49 8.79 24.38 29.21 41.19
0300 NATIONAL SECURITY AND LAW ENFORCEMENT 23.33 20.79 28.52 31.64 31.07 31.84 31.94
0302 Interior Ministry bodies 3.40 3.01 4.76 6.31 5.16 4.97 4.27
0303 Interior Ministry troops 13.21 11.10 11.76 10.31 9.80 10.25 8.26
0306 Security bodies 100.00 98.91 97.80 95.49 97.31 99.05 97.07
0307 Border Guard bodies 19.73 22.88 100.00 98.97 97.62 100.00 98.61
0309 Population and territory protection from emergency situa- 43.69 41.74 59.02 62.39 50.65 51.39 50.48
tions of natural and technogenetics situation, civil defense
0313 Applied research in the area of national security and law n/a n/a 73.95 66.41 64.43 75.49 92.09
enforcement activity
0314 Other matters in the area of national security and law en- n/a n/a 8.26 50.71 39.95 56.32 67.82
forcement activity
0400 NATIONAL ECONOMY n/a n/a 0.05 0.02 0.44 0.64 1.56
0411 Applied economic research n/a n/a - - 5.23 5.84 5.61
0412 Other matters in the national economy area n/a n/a 0.12 0.06 < 0.01 0.31 4.47
0500 HOUSING AND UTILITIES SECTOR n/a n/a - 3.42 0.85 6.96 19.26
0501 Housing n/a n/a - 4.22 5.69 15.97 20.79
0700 EDUCATION - - 2.76 2.69 2.39 2.55 3.59
0701 Preschool education - - 2.03 2.17 2.44 2.48 3.91
0702 General education - - 1.51 1.91 2.14 2.00 3.45
0704 Secondary vocational training - - 1.06 1.03 1.02 0.86 -
0705 Professional training and retraining - - 16.85 15.78 17.22 1.80 9.40
0706 University and post-graduate professional education - - 3.15 2.93 2.53 3.08 4.08
0709 Other matters in the sphere of education - - 0.30 0.33 0.28 0.29 0.61
1 Not applicable due the change of the structure of the budget classification.
(continued) table 35
1 2 3 4 5 6 7 8
0800 CULTURE, MOTION PICTURE INDUSTRY, MASS - - 0.17 0.17 0.21 0.17 0.17
MEDIA
0801 Culture - - 0.14 0.10 0.16 0.10 0.09
0804 Periodical media and publishing - - 13.46 7.45 2.57 2.62 3.59
0806 Other matters in the sphere of culture, motion picture indus- - - 0.02 0.15 - - -
try and mass media
0900 HEALTH CARE, PHYSICAL CULTURE AND SPORTS - - 4.30 3.99 2.57 4.14 3.01
0901 Stationary medical assistance - - 5.61 4.66 2.94 3.24 2.41
0902 Outpatient medical assistance n/a n/a n/a n/a n/a 13.94 3.75
0905 Rehabilitation n/a n/a n/a n/a n/a 14.07 10.73
0907 Sanatorium-epidemiological well-being n/a n/a n/a n/a n/a 2.09 0.64
0908 Physical culture and sports - - 0.28 0.26 0.24 0.42 0.62
0910 Other matters in the sphere of health care, physical culture - - - - - 1.74 1.01
and sports
1000 SOCIAL POLICY - -1003 Social security of the population - - - - - 0.01 -0.02 -
1100 INTERBUDGETARY TTRANSFERS - - - - 0.16 - -
1101 Subsidies to budgets of the RF Subjects and municipal enti- - - - - 0.50 - -
ties
Source: the IET calculations by the 2003-2010 federal budget data (the 2003-2007 data have been adjusted to the respective sections and subsections of the budget classification that took effect as of January 2008). Estimates made on the basis of Federal Act № 185-FZ of 23.07.2010 are given in italics.
The lowering of the transparency rate of the federal budget over the past three years makes it possible to estimate it only using complementary sources. In this particular case, we used materials of a Ministry of Finance's memorandum to the bill. The document enable us to restore a structure of expenditures across sections and subsections of the classification for the previous, July, variant of the federal budget Act1, and a conclusion of the Committee of Defense and Security of the Federation Council on the October version of the bill2. This way of data aggregation undoubtedly affects the accuracy of the estimates.
Absolute and relative values of main components of direct military appropriations of RF in the federal budget and their change relative to the final variant of the 2010 federal budget Act are given in Table. 36 (the re-calculation into the 2009 prices was made with the use of the Rosstat's first estimate of the index-deflator of GDP for 20103).
Table 36
Direct Military Appropriations in the Federal Budget on Section 02 «National Defense»
2010, as Rb Allocated proportion, as % / change vs.
Section and subsections mln / the Change 2010/2009 as 2009, as p.p.
same in the Rb. mln./ increase as % In the 2010 federal In GDP
2009 prices budget
1 2 3 4 5
NATIONAL DEFENSE 1 278 027 -34 184 12,46 2,87
1 158 682 -2,87 0,34 -0,20
The Armed Forces of the Russian Federation 959 563 -17 959 9,36 2,16
869 958 -2,02 0,34 -0,13
Mobilization and out-base training 2 607 -1 260 0,03 0,01
2 363 -34,78 -0,01 -
:On introduction of amendments to the Federal Act «On the federal budget for 2009 and the planned period of 2010 and 2011»: Federal Act № 185-FZ: passed by the State Duma on 07 July 2010.
2 Conclusion of the Defense and Security Committee of the Federation Council № 3.5-07/1466 of 26 october 2010.
3 On production and use of the gross domestic product (GDP) for 2010. M.: Rosstat, 31 January 2011. See: http://www.gks.ru/bgd/free/B04_03/IssWWW.exe/Stg/d01/17vvp31.htm.
(continued) table 36
1 2 3 4 5
Mobilization preparation of the economy 4 895 1 057 0,05 0,01
4 438 31,27 0,01 -
Preparation for and contribution to provision of 11 087 9 788 0,11 0,02
collective security and peacekeeping operations 10 051 3 713,09 0,11 0,02
Nuclear weapons complex 18 755 -2 077 0,18 0,04
17 003 -10,89 -0,01 -0,01
Implementation of international obligations in 4 210 -638 0,04 0,01
the military-technical cooperation area 3 817 -14,32 -0,01 -
Applied research in the national defense area 148 680 -28 100 1,45 0,33
134 797 -17,25 -0,20 -0,09
Other issues in the national defense area 128 229 5 004 1,25 0,29
116 255 4,50 0,12 -
Source: the IEP calculations
Military appropriations out of other sections of the federal budget are presented in Table 37 (with estimates made on the basis of the July version of the federal budget Act given in italics). It should be noted that rather an impromtu novelty in the form of Rb. 2bln. that popped up in the summer in Section 01 "General public administration matters» "on construction of new production capacities of JSC "Concern PVO "Almaz-Antey" on manufacturing perspective next-gen ADMS"1 is not presented in the Table, albeit it was factored into subsequent calculations.
Appropriations on housing construction by the Ministry of Defense by Section 02 "National defense" increased by 37% in real terms on a year-on-year basis, and by another 34% -by Section 05 "The Housing and utility", which nonetheless, did not ensure attainment of the declared goal of provision of the military with permanent housing by 2010. The federal budget appropriations on the so called housing certificates increased by 54% (see Table 37), and the ones on the mortgage system for the military - by 47%.
Table 37
Direct and Indirect Military Expenditures across Other Sections of the Federal Budget
2010, as Rb Allocated proportion, as % / change vs.
Name of subsection mln / the Change 2010/2009 as 2009, as p.p.
Or nature of appropriations same in the Rb. mln./ increase as % In the 2010 federal In GDP
2009 prices budget
1 2 3 4 5
In Section 03 «National security and law enforcement activity»
Law enforcement forces 66 433 2 578 0,65 0,15
60 230 4,47 0,06 -
Security agencies 201 507 2 936 1,96 0,45
182 691 1,63 0,14 -0,01
The border guard structures 77 427 -9 937 0,75 0,17
70 196 -12,40 -0,06 -0,03
The RF MES forces and civil defense 46 140 323 0,45 0,10
41 831 0,78 0,03 -
In Section «National economy»
Organization of the alternative civil service 6 -1 <0,01 <0,01
5 -9,34 - -
Subsidies to transportation organizations that 1 069 -112 0,01 <0,01
exercise procurements of motor vehicles for 970 -10,33 - -
completion of the mobile component of motor
columns.
Subsidies to the functioning of the Russia- 55 -30 <0,01 <0,01
NATO coordination center 50 -37,65 - -
1 Memorandum of the RF Ministry of Finance to bill № 389589-5, submitted to the State Duma on 11 June 2010, p 40.
(continued) table 37
1 2 3 4 5
Construction of special and military objects 21 —2 <0,01 <0,01
19 -9,34 - -
FTP «Industrial utilization of weaponry and 15 131 9 401 0,15 0,03
military hardware (2005—2010)» 13 718 217,75 0,10 0,02
Subsidies to "Rostekhnologii"public corpora- 36 -12 <0,01 <0,01
tion 33 -27,24 - -
Realization of public functions associated with 3 544 -497 0,03 0,01
provision of the national defense 3 213 -13,39 - -
Contributions to authorized capital and subsi- 23 185 -20 402 0,23 0,05
dies to organizations of the defense and indus- 21 020 -49,25 -0,19 -0,05
trial complex
Classified expendtures 22 282 9 546 0,22 0,05
20 201 89,59 0,11 0,02
In Section 05 «Housing and Utilities Sector»
FTP «Industrial utilization of weaponry and 1 418 -880 0,01 -
military hardware (2005—2010)» 1 286 -40,63 -0,01 -
Provision of the military with the departmental 125 916 29 531 1,23 0,28
and permanent housing 114 158 34,90 0,37 0,06
Classified expenditures 35 708 18 028 0,35 0,08
32 374 125,67 0,20 0,04
In Section 07 «Education»
The RF Defense Ministry's expenditures 44 511 -1 961 0,43 0,10
40 355 -4,63 - -0,01
Classified expenditures 14 576 952 0,14 0,03
13 215 7,76 0,02 -
In Section 08 «Culture, motion picture industry, mass media»
The RF Defense Ministry's expenditures 4 893 903 0,05 0,01
4 436 25,57 0,01 -
Classified expenditures 207 -13 <0,01 <0,01
188 -6,54 - -
In Section 09 «Health Care, Physical Culture and Sports»
The RF Defense Ministry's expenditures 33 339 -837 0,33 0,07
30 226 -2,70 0,01 -0,01
Classified expenditures 10 186 -2 655 0,10 0,02
9 235 -22,33 -0,02 -0,01
In Section 10 «Social Policy»
The RF Defense Ministry's pension plans 125 908 -1 487 1,23 0,28
114 151 -1,29 0,05 -0,02
The FSB pension plans 18 956 -368 0,18 0,04
17 185 -2,10 -0,01 -
Procurement of housing for the retired and 18 048 5 765 0,18 0,04
designated for retirement military 16 363 54,39 0,07 0,01
Complementary monthly material allowance to 396 -14 <0,01 <0,01
the disabled due to the military injures 359 -3,65 - -
Provision for conduct of refurbishment of indi- 401 47 <0,01 <0,01
vidual housing owned by the families of military 363 14,74 - -
that have lost the breadwinner
Compensations to family members of the de- 975 -596 0,01 <0,01
ceased military 884 -40,28 -0,01 -
Relief and compensations to the military, indi- 11 226 -2 175 0,11 0,03
viduals equaled to them, and those dismissed 10 178 -17,61 -0,02 -0,01
from their ranks
Social support and rehabilitation of disabled 71 -42 <0,00 <0,00
because of military actions and combat trauma 64 -39,40 - -
In Section 11 «Interbudgetary transfers»
Subsidies to CATEs' budgets 8 876 -3 490 0,09 0,02
8 047 -30,25 -0,03 -0,01
Development of, and support to the CATEs' 2 690 -2 974 0,03 0,01
social and engineering infrastructure 2 439 -54,94 -0,03 -0,01
Running the primary military and conscription 1 998 -255 0,02 <0,01
records in territories with no military commis- 1 812 -12,33 - -
sariats in place
(continued) table 37
1 2 3 4 5
One-time allowance to a conscript's pregnant 1 977 715 0,02 <0,01
wife and the monthly allowance for a conscript's 1 792 66,40 0,02 -
child
Residents relocation from CATE 527 -840 0,01 <0,01
478 -63,74 -0,01 -
Material security for specialists of the nuclear- 4 165 473 0,04 0,01
arms complex of RF 3 776 14,32 0,01 -
Complementary monthly material security for 645 -70 0,01 <0,01
disabled due to the military injury 585 -10,67 - -
Source: the IEP calculations.
Appropriations on the military personnel of the Ministry of Defense in real terms practically remained unchanged (with no raises in money allowance and pensions to the military in 2010), while out of Rb. 283 bln. earmarked to the Ministry of Defense in compliance with the federal budget Act on money allowances to the military as much as Rb. 22,894 bln. was saved across all 12 target expenditure items, or thrice as big as the prior year's figure (Rb. 7, 637 bln.).That is to say, the expenditure item 'Military personnel" continues seeing a surplus whose existence cannot be ascribed to the quality of planning.
The target expenditure item "Military training" was crossed out from the 2010 budget classification. Appropriations for fuel and lubricants rose by 7% in real terms, but failed to compensate for the accelerated price rise for diesel fuel and jet fuel, all the more so, as by the end of the year the MoD had saved Rb. 8,105 bln. (16.5% of the earmarked amount) under the target expenditure item "Payment for, and storage of, special fuel and fuel and lubricants". The actual cut-backs on procurements of fuel and lubricants still failed to notably improve military training indicators in the Army and Navy compared with the prior year, when MOD had to cover a substantial fraction of its needs at the expense of its own inventories. The Ministry's actual spending on food supplies was up by 31.5% on a year-on-year basis, while those on material support dwindled again - this time by 16%.
The 2010 appropriations on military pensions in nominal terms were increased by 8.9% vs. the prior year, which can be ascribed just to the rise in the cohort of military pensioners due to cuts in the officer corps and liquidation of the institution of senior warrant officers. The MoD managed to save as much as Rb. 658 mln. on the target expenditure item "Pension provision".
The 2010 direct military appropriations (Table 38) calculated according to the UN military expenditure standard accounted for 4.5% of the nation's GDP, while, having been factored into appropriations associated with the past military activity (military pensions, utilization of chemical weapons, etc.), they hit 5.0% of Russia's GDP.
Execution of the 2010 federal budget with regard to military expenditures did not display any drastic differences vs. the 2009 figures. Specifically, the Federal Treasury reports evidence a Rb 3,113 bln.-worth excess of the limit of expenditures by the consolidate budget quarterly breakdown over appropriations by section 02 "National defense" earmarked in compliance with the effective budget Act, which was noted since February. The said excess hit its peak in November (Rb. 15,863 bln.) and subsequently slid to 10,711 bln. by the end of the year. While assessing the executive branch's discretionary powers, a benchmark reference point is stipulated in part 1Art. 24 of the 2010 federal budget Act, which capped an increase in military appropriations at the expense of above-the-plan budget revenues in the frame of the consolidate budget quarterly breakdown with Rb. 8,879 bln. Consequently, by results of 2010, section 02 "National defense" posted savings worth a total of Rb. 1,546 bln., though 14,833 bln. was overspent on subsection 0201 "Armed Forces of RF" and another Rb. 4, 418
bln. was overspent on subsection 0208 "Applied research in the defense area", and both amounts were compensated for by savings across other subsections of section 02 "National defense". In addition, a substantial reallocation of budget funds occurred in the MoD's budgets wherein savings on just fuel and lubricants (in other words, on military training) and money allowance to the military accounted for Rb. 31 bln. One can only guess on what the saved funds were spent.
Table 38
Aggregate Indicators of the Federal Budget Military Expenditures and Other Associated Expenditures
Expenditure Amount of appropriations, as Rb. mln Proportion of appropriations, as % / its change vs 2009 r., as p.p. In the 2009 federal GDp budget
Overall direct military appropriations 2 020 637 19,70 4,54
1,09 -0,18
Aggregate direct and indirect military appropriations related to the 2 204 479 21,49 4,95
current and past military activity 1,18 -0,20
Aggregate appropriations across sections "National defense" and 2 366 702 23,08 5,32
"National security and law enforcement activity" 0,57 -0,39
Source: the IET calculations
The situation with the savings and overspending deserves a greater attention, for the aforementioned spare expenditures on the MoD's military personnel proved substantially greater than figures the Federal Treasury references to in it federal budget execution reports. Table 39 gives a better idea of the size of spare amounts and cushions between the military budgets and reports on its execution. The Table was compiled on the basis of the data Russian Federation supplies annually by results of execution of military expenditures to the UN Secretary-General.
Table 39
Unallocated Appropriations in RF Expenditures on the Military Personnel in
2000-2009, as Rb. Mln.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
22 465 37 291 40 692 61 743 61 850 53 629 78 188 88 399 113 259 127 685
Source: Objective information on military issues, including transparency of military expenditures: Reports by the UN Secretary- General, 2001-2010.
The aforementioned "unallocated appropriations" accounted for between 9 and 17% of the section "National defense" (or 0.25-0.47% of GDP) and proved many-fold greater than, for example, expenditures on the notorious 2004-2007 Federal Target Program1, on transition to draft so ingloriously failed by MoD as its customer and coordinator. Reasons behind, and the sense of, such a stubborn demonstration of the failure to allocate quite a sizable fraction of the nation's military spending are of course mind-boggling.
The monthly dynamic of execution of expenditures across the largest subsections of the section "National defense" between 2008 and 2010 is presented in Fig. 20-22. It is quite visible that the trend to contraction of the "budget overhang" accumulating by the end of the year, which manifested itself in 2009, the next year remained only in the R&D spending. Mean-
1 According to the Federal Treasury, the Government spent on this FTP as much as Rb 84,377 (See: URL: http://fcp.economy.gov.ru/cgi-bin/cis/fcp.cgi/Fcp/ViewFcp/View/2007/166/ . Access date: 10.02.2011). 506
while, the two-month deadline for conclusion of contracts in the beginning of the year is not met, while the peak of making advance payments shifts to March and April.
Source: the IET calculations basing on the Federal Treasury data.
Fig. 20. Execution of the Federal Budget Expenditures by Sub-Section 0201 «The Armed Forces of the Russian Federation » in 2008-2010
Source: the IET calculations basing on the Federal Treasury data
Fig. 21. Execution of the Federal Budget Expenditures by Sub-Section 0207 «Applied research in the area of national defense» in 2008-2009
Source: the IET calculations basing on the Federal Treasury data.
Fig. 22. Execution of the Federal Budget Expenditures by Section 0208 «Other Matters in the
Area of National Defense » in 2008-2010
Table 40 evidences that long-standing trends continue to persist in the Federation Subjects' military expenditures - the ones on mobilization and out-of-army training generally do not exceed the amount of transfers from the federal budget on exercising the primary military registration. (See Table 37).
Table 40
Military Expenditures of the Consolidated Budgets of the Federation Subjects
in 2004-2010, as Rb. mln*
Name of the sub-section of the expenditure classification 2003 2004 2005 2006 2007 2008 2009 2010
The Armed Forces of the Russian - - - 35 0,5. 03 - -
Federation - - - 0,1 0,3 0,3 - -
Modernization of the Armed - - - - - 10 - -
Forces of the Russian Federation - - - - - 0,5 - -
and military establishments
Mobilization and out-of-army 13,1 - 65,6 899,3 1 351,9 1 797,9 2 116,0 2 003,7
training 13,2 - 65,6 808,6 1 245,6 1 702,2 2 021,6 1 958,4
Mobilization preparation of the 449,7 532,4 485,4 708,3 861,2 1 137,2 1 045,4 1 298,4
economy** 405,6 500,6 468,6 692,8 840,9 1 063,9 989,7 1 247,8
Other matters in the national - - 109,6 32,8 07 44 <0,1
defense area - - 97,5 32,1 5,7 0,5 4,4 <0,1
Ministry of Interior forces 14,6 12,4 9,9 35 10 03 - -
12,7 12,2 9,9 1,4 1,0 0,3 - -
Security agencies 37 67 0,3 16,5 01 00 60,0 <0,1
2,1 6,5 0,3 16,5 0,1 0,0 60,0 <0,1
Border Guard bodies - - 01 -
Population and territory protec- 6 511,0 7 968,2 11 184,6 15 636,4 19 118,4 23 895,8 23 865,0 27 218,0
tion from emergency situations 6 244,1 7 281,3 10 958,9 14 367,0 18 292,6 21 456,7 21 712,6 25 527,4
of natural and technogenetics
situations, civil defense
*numerator - as allocated, common denominator - as eramarked.
** had not been included in the section "National defense" until 2005. Source: the Federal Treasury.
Table 41 presents Russia's military expenditures over the period of 1999-2010. To avoid double count the data do not comprise the ones presented in Table 40.
Table 41
Key indicators of the RF military expenditure in 1999-2010
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
1 2 3 4 5 6 7 8 9 10 11 12 13
1. In nominal terms (in current prices), as Rb.bln
Execution of the federal 115,6 191,7 247,7 295,4 355,7 430,0 581,1 681,8 831,9 1 040,8 1 188,2 1 276,5
budget expenditures by Section "National Defense" in the
current budget classification a
The federal budget appropria- 93,7 209,4 214,7 284,2 354,9 427,4 578,4 686,1 839,1 1 031,6 1 192,9 1 278,0
tions by Section "National
Defense":
in the current budget classi-
fication
placed into other sections of - - - - - - 44,3 77,7 91,3 126,5 202,4 270,8
the budget classification b
In a comparable budget 93,7 209,4 214,7 284,2 354,9 427,4 622,6 763,9 930,4 1 158,1 1 395,3 1 548,8
classification
Military expenditures, the UN - 202,6 294,4 325,9 447,0 499,0 665,0 822,1 850,2 1 127,2 1 176,4 -
datac
Overall direct military appro- 128,9 270,4 283,4 357,7 464,2 552,7 770,3 1 003,9 1 214,4 1 502,8 1 832,5 2 020,6
priationsd Direct and indirect military 144,0 304,6 329,6 460,1 602,3 638,8 855,1 1 090,4 1 375,6 1 645,4 1 999,5 2 204,5
appropriations associated with the current and past military activity, combined e
2. In real terms (in the 2009 prices)f, as Rb. bln
Execution of the federal 1 051,4 1 123,6 1 090,7 1 106,8 1 092,5 1 126,9 1 253,2 1 174,4 1 230,9 1 298,6 1 409,2 1 276,5
budget expenditures by Section "National Defense" in the
current budget classification
The federal budget appropria- 952,3 1 227,5 945,3 1 063,9 1 090,1 1 120,0 1 229,3 1 181,9 1 240,6 1 287,0 1 414,7 1 278,0
tions by Section "National
Defense":
in the current budget classi-
fication
placed into other sections of - - - - - - 94,1 133,9 135,0 157,8 240,1 270,8
the budget classification
In a comparable budget 852,3 1 227,5 945,3 1 063,9 1 090,1 1 120,0 1 323,4 1 315,7 1 375,6 1 444,9 1 654,8 1 548,8
classification
Military expenditures, the UN - 1 187,6 1 296,4 1 220,3 1 373,0 1 307,6 1 413,4 1 416,0 1 257,0 1 406,3 1 395,3 -
data
Overall direct military appro- 1 172,4 1 584,9 1 247,8 1 339,1 1 425,8 1 448,4 1 637,3 1 729,2 1 795,4 1 875,1 2 173,3 2 020,6
priations Direct and indirect military 1 309,9 1 785,4 1 451,2 1 722,9 1 849,9 1 674,2 1 817,6 1 878,1 2 033,7 2 052,9 2 371,4 2 204,5
appropriations associated with the current and past military
activity, combined
3. In real terms (in the 1999 prices)f, as Rb. bln
Execution of the federal 115,6 123,5 119,9 121,6 120,1 123,9 135,8 129,1 135,2 142,8 154,9 140,3
budget expenditures by Section "National Defense" in the
current budget classification
The federal budget appropria- 93,7 135,0 103,9 117,0 119,8 123,1 135,2 129,9 136,4 141,5 155,5 140,5
tions by Section "National
Defense":
in the current budget classi-
fication
placed into other sections of - - - - - - 10,3 14,7 14,8 17,4 26,4 29,8
the budget classification
In a comparable budget 93,7 135,0 103,9 117,0 119,8 123,1 145,5 144,7 151,2 158,9 181,9 170,3
classification
(continued) table 41
1 2 3 4 5 6 7 8 9 10 11 12 13
Military expenditures, the UN - 130,6 142,5 134,2 151,0 143,8 155,4 155,7 138,2 154,6 153,4 -
data
Overall direct military appro- 128,9 174,3 137,2 147,2 156,8 159,2 180,0 190,1 197,4 206,1 238,9 222,2
priations Direct and indirect military 144,0 196,3 159,5 189,4 203,4 184,1 199,8 206,5 223,6 225,7 260,7 242,4
appropriations associated with the current and past military
activity, combined
4. Military burden on the economy, as % of GDP
Execution of the federal 2,40 2,62 2,77 2,73 2,69 2,53 2,69 2,53 2,50 2,52 3,06 2,87
budget expenditures by Section "National Defense" in the
current budget classification
The federal budget appropria- 1,94 2,87 2,40 2,63 2,69 2,51 2,68 2,55 2,52 2, 50 3,07 2,87
tions by Section "National
Defense":
in the current budget classi-
fication
placed into other sections of - - - - - - 0,20 0,29 0,27 0,31 0,52 0,61
the budget classification
In a comparable budget 1,94 2,87 2,40 2,63 2,69 2,51 2,88 2,84 2,80 2,81 3,60 3,48
classification
Military expenditures, the UN - 2,77 3,29 3,01 3,38 2,93 3,08 3,05 2,56 2,73 3,03 -
data
Overall direct military appro- 2,67 3,70 3,17 3,31 3,51 3,25 3,56 3,73 3,65 3,64 4,72 4,54
priations Direct and indirect military 2,99 4,17 3,69 4,25 4,56 3,75 3,96 4,05 4,14 3,99 5,15 4,95
appropriations associated with the current and past military
activity, combined
5. By purchasing power parity (in current prices), as USD bln .
Execution of the federal 21,9 26,8 30,2 31,9 34,2 36,2 45,6 48,0 52,9 57,1 64,4 64,3
budget expenditures by Section "National Defense" in the
current budget classification
The federal budget appropria- 17,7 29,3 26,2 30,7 34,1 35,9 45,4 48,3 53,4 56,6 64,7 64,4
tions by Section "National
Defense":
in the current budget classi-
fication
placed into other sections of - - - - - - 3,5 5,5 5,8 6,9 11,0 13,6
the budget classification
In a comparable budget 17,7 29,3 26,2 30,7 34,1 35,9 48,9 53,8 59,2 63,6 75,6 78,0
classification
Military expenditures, the UN data - 28,3 35,9 35,2 42,9 42,0 52,2 57,9 54,1 61,9 63,8 -
Overall direct military appro- 24,4 37,8 34,6 38,6 44,6 46,5 60,5 70,7 77,2 82,5 99,3 101,7
priations Direct and indirect military 27,2 42,6 40,2 49,6 57,9 53,7 67,1 76,8 87,5 90,3 108,4 111,0
appropriations associated with the current and past military
activity, combined
For reference
GDP deflator, as % to the 172,5 137,6 116,5 115,5 113,8 120,3 119,3 115,2 113,8 117,9 102,0 110,3
prior year Public administration final 140,1 155,2 133,1 117,6 121,9 117,2 123,3 123,4 116,5 118,5 105,2 118,6
consumption expenditure deflator g, as % to the prior
year Purchasing power parityh, as 5,29 7,15 8,19 9,27 10,41 11,89 12,74 14,20 15,72 18,22 18,45 19,86
Rb/USD_
a For 2010 - the Federal Treasury preliminary data on execution of the federal budget.
b The Defense Ministry expenditures and secret expenditures by sections 04-09 and 11 of the federal budget in 2005-2010.
c The RF Government did not submit the 1999 data to the UN; the 2010 data will be submitted in 2011, inclusive of expenditures on the Ministry of Interior forces, the Board Guard and civil defense,
d Including on the Ministry of Interior forces, the Board Guard, civil defense, and other elements of the military organization
e Inclusive of pensions due to the military.
f Deflated by means of the public administration final consumption expenditure deflator. g,h For 2010 - as estimated by the IET.
Sources: the 1999-2010 federal acts on federal budget and its execution; Natsionalnye scheta Rossii v 19972009 godakh: Stat. sb./ Rosstat. M., 2005-2010; Obyektivnayay informatsiya po voennym voprosam, vklyuchaya transparentnost voennykh raskhodov. Doklady Generalnogo Sekretarya OON 2001-2010; Rosstat; the Federal Treasury.
6.6.4. Conclusions and Recommendations
Launched with benevolent intensions but designed in private, the transition of Russia's AF to the "new look" produced controversial outcomes: cuts in the excessive number of officers and volume of assets and diminishment of the government's obligations with regard to provision of housing to the military, on the one hand, and a great number of grievous failures, on the other. The central drawback is negligence of needs of the bulk of the military and even more so - of the civil society's. The rising number of economic crimes is a perfect proof of flaws in the transformation of MoD and AF RF. Behind the crimes are numerous factors and the abundant disinformation in particular, whose roots are in bureaucracy, and rarely does the Commander-in-Chief conceive of it as lies. The most recent evidence of crudity was the decision to create the national airspace defense and, accordingly, to increase the number of officers in AF RF by 70,0001.
The remedy lies only in frankness, openness of plans, transparency of budgeting and the budget classification (to be maintained according to the UN standards and the civilized nations' experience), control over public spending and the so called "extrabudgetary" revenues and expenditures. Public control over military spending is critical.
The recommendation is not new, but ignoring it now is pregnant with not just continuation of the past deficiencies, but irreparable consequences. The country is unlikely to be saved by brave assurances and orders the President gave at a recent meeting of the AF leadership: "All the planned measures.. .on reforming should be most thoroughly calculated and secured logis-tically. To this end, the military budget was adjusted and control over spending was organized. I draw attention of all the leadership of the Ministry of Defense: all these processes should be completed in coordination with other government structures, so that we will have here an absolute accuracy"2.
In 2011, the military spending increase by 20% vs. the 2010 figures, with the increment spent on weaponry for the army. But new arms will be given to untrained and forced to service troops. None of the military leadership has bothered even to entertain the idea of reallocating a tiny fraction of the said 20% increase to ensure a voluntary, draft-based recruitment to AF RF. No one cared to better train troops, improve their military skills and combat efficiency. Corruption interests prevailed, and that became a major threat to Russia's national security.
1 Mokhov V. Vopros gosudarstvennoy vazhnosti//Krasnaya zvezda. 2011. 3 February (№17).
2 Telmanov D. Serdyukov prodolzhit voennuyu reform s absolutnoy tochnostyu"// GZT.ru. 11.2010. - URL: http://www.gzt.ru/topnews/politics/-serdyukov-prodolzhit-voennuyu-reformu-s-/336314.html. Access date: 10.02.2011.
6.7. The Year of 2010 - Completion of the Municipal Counter-Reform
When compared with 2009, the last year did not bring anything new into processes in the municipal self-governance area. Dr. Emil Markwart, President of the European Club of Experts on Local Self Government and one of prominent experts in this area, wittily labeled the processes "centralization, vertikalization and partyzation" of local self-governance1. His words are proved by the following last year's processes:
• Inclusion in the law on local self-governance of amendments that provide for a possibility not to establish a local administration in a settlement, which is the administrative center of a municipal district, while the municipal district administration may exercise the respective functions;
• Conducted by regional administrations, the "managerial revolution" has been unfolding in cities and municipal districts in many RF Subjects. The ultimate objective of the revolution became abolition of direct mayoral elections and introduction of the institution of city managers;
• "modernization" of the electoral system aimed at the increase of the nationwide parties' role in local elections.
6.7.1. Consolidated Administrations of the Municipal District and the District Center2
In the spring of 2010, the Legislative Assembly of Leningrad oblast submitted to the State Duma a legislative initiative which allowed one to establish a consolidated administration for a municipal district and a settlement that forms its administrative center. The authors of the initiative believe that would reduce administrative costs and lower the level of uncertainty of residents of municipal district centers about which administration they should appeal to in order to solve their problems.
Originally, this legislative initiative was blocked and failed to mobilize the expert commu-nity3 and a number of federal structures' support. More specifically, the Legal Department of the State Duma4 submitted its negative comments to the profile State Duma Committee for self-governance: the Legal Department fairly believed that, had the bill in question been passed, it would have cast a doubt upon the possibility of implementation of the principles underpinning the local self-governance bodies' independence, transparency and accountability. The RF Government did not render its support to the bill, either. The State Duma Committee for self-governance first considered the bill at its meeting on 2 June 2010. Having
1 Markwart E. Vse mestnoye samoupravili po vertikali. Ot vyborov merov tozhe reshili otkazatsya// L-Online. 27.12.2010 - URL: http://kommersant.ru/doc.aspx?DocsID=1564980&print=true. Access date: 26.01.2011.
2 This problem was discussed in a greater detail in the IET's monthly reports. See: Starodubrovskaya I., Mironova N. Novaya initsiativa po ogranicheniyu prav poseleniy ostanovlena: nadolgo li? // Rossiyskaya eko-nomika v 2010 godu: tendentsii i perspektivy. Ezhemesyachy obzor. M.:, IET, 2010; Starodubrovskaya I., Mironova N. Predstavleniya o mestnom samoupravlenii Evropy i Rossii raskhodyatsya vse dalshe// Rossiyskaya ekonomika v 2010 godu: tendentsii i perspektivy. Ezhemesyachy obzor. M.:, IET, November 2010.
3 Motyakova O. "K voporsu o vozmozhnosti obyedineniya rayonnoy i goroddskoy administrat-sii//Munitsipalnyaa vlast, № 2 (March-April) 2010, pp. 14-15. An appeal by the European club of experts in local self-governance to Y. Mildon, head of the Congress of Local and Regional Authorities of the Council of Europe.
4 The drafting of the document was commissioned by the State Duma Council of 9 February 2010 (Minutes № 175, p. 28).
found "legal uncertainties" and contradictions to Russia's international obligations therein, the Committee recommended MPs to decline the bill. However, in the mid-summer the Committee's opinion reversed at 180 degrees, and on 7 July 2010 the amendment to the federal Act № 131-FZ, which foresees that in the event no local administration is to be established in an urban municipal entity, its mandate has to be assigned to the district administration, was passed by the State Duma in the first reading.
While preparing the amendment for the second reading, the scope of the amendment's effect was broaden - the possibility to establish consolidated administrations was likewise foreseen for both urban settlements and any other settlements that form administrative centers of municipal districts. Meanwhile, the MPs dumped the idea of a meticulous regulation of consolidation procedures and left the problem of setting concrete mechanisms of interaction between the municipal district and the settlement at the discretion of those local self-governance bodies which would seek to establish a consolidated administration. That occurred shortly after a de facto failure of an attempt to regulate these problems in the law in the course of preparation of the amendment for the second reading.
In its final form, the amendment reads that the Statute of a municipal district and a settlement that forms its administrative center may provide for establishment of the local district administration to which the exercise of powers of the local administration of the said settlement should be assigned. While forming a contest commission in a municipal district, one-third of its members should be appointed by the municipal district's representative body, another one-third - by the representative body of the settlement, and the remaining one-third -by the legislative body of the RF Subject upon submission of the supreme public official of the RF Subject. In November 2010, the RF President signed the respective amendments into the law1.
It was not for the first time that the idea of establishment of consolidated administrations arose in the course of the debate on municipal reform, but it had earlier been considered in an absolutely different context. While discussing the draft of Federal Act № 131-FZ "On general principles of organization of local self-governance in RF", it was proposed to provide for a possibility to establish consolidated administrations at the settlement level. That would help quench the cadre hunger and optimize costs. To cite an example, Germany boasts a similar experience, and numerous provisions of the municipal reform have become a replica of the Germany's local self-governance mechanisms. However, the proposal was discarded at that stage. The new municipal law provided for a mandatory formation in each municipal entity of not only the representative body of local self-governance, as before, but the municipal entity's head and local administration as well.
The effective mechanism of consolidated administrations bears an utterly different ideological load, for it constitutes an attempt to remedy, by means of raw power, an objective conflict that emerges under the two-tier municipal governance system. To grasp its very core, it should be noted that, according to the general rule, district centers appear the strongest settlements, with the greatest development potential and concentration of the most valuable resources. In the circumstances, the district authorities' interests with respect to allocation and employment of these resources are objectively polar to the settlement' authorities' ones. Corruption-driven problems aside, there emerges a conflict of interests between deployment of
1 Federal Act of 29.11.2010.№ 315-FZ "on introducing amendments to the Federal Act "On general principles of organization of local self-governance in RF".
resources for the sake of development and their use for equalization purposes. Solving it necessitates bringing the conflict into the institutional framework, forming rules of the game that could ensure a balance of interests and fuel efficacy of implementation of each of them. Needless to say, creation of consolidated administrations does not solve the problem, and the latent conflict is still there, as brilliantly exemplified by formation of a local budget as cited in V. Chernikov's paper: "While drafting the district budget, the administration will have to be at pains to slash the part of spending for which the administrative center can qualify. As far as the city's budget is concerned, the same administration should strive to get a maximum possible piece of the budget cake from the district's budget. As these two things are impossible to do simultaneously, the administration will have to choose whom to block with, and here already is the conflict between two representative bodies, neither of which has a right to consent for infringement of its respective municipality's rights"1.
Evidently, a conflict of this kind can be solved solely by means of the "administrative resource", which, in the overwhelming majority of cases, takes sides with the district administration. Hence a drastic weakening of one of the conflicting parties - namely, the district center, which in most cases forms the municipal district's development force. At this junction, there are practically no mechanisms left to counter the district authorities' diktat in this regard. As well, a contracted head of the consolidated administration, who has been appointed thanks to the regional and district authorities' joint efforts and pursues the municipal district's stance on all debatable issues sees no opposition to his activites. At this point, Anatoly Lokot, MP, was right to assert that, "This amendment and the Act on the whole open up a mechanism under which there will be no local self-governance at the district center settlement level ... In our opinion, it launched a mechanism of liquidation of local self-governance as a whole"2.
Meanwhile, notably, that such novelties may have an adverse impact not only on the state of local self-governance. Our research showed that district heads often take a fairly conservative stance on compression of the development system, the social sphere restructuring and other similar processes capable of optimizing budget spending and creating more favorable conditions for economic growth. The center of gravity for the local rimland residents, a strong district center could counterbalance the trend and generate incentives to, and conditions for, activation of these processes. However, striking such a balance in the conditions of a consolidated administration does not seem warranted.
That said, the authors of the bill emphasize its other pluses - namely, the possibility to cut back on managerial costs and shape a single center of responsibility to which residents should bring their problems; however, such a presentation of the problem gets us back to the early 2000's, with their general debates on contours of the municipal reform options. At the time, opponents to the two-tier local self-governance model used to assert, time and again, that the model tended to engender increased administrative costs, the taxpayer's great uncertainty about which body was responsible for tackling which matters, and additional corruption risks3. The warnings were not heard of, as the two-tier structure was conceived of bearing fundamental advantages vis-à-vis any other structures: it was alleged to ensure economies of scale coupled with financial equalization and a due account of needs and interests. The back-
1 Mestnoye samoupravleniye. № 12 (207) December 2010, p. 9.
2 Ibid., p. 1
3 See, for example: Problemy reformy mestnogo samoupravleniya: strukturnye i finansovye aspekty//Konsortstium po voprosam prikladnykh ekonomicheskikh issledovaniy: M. : IEPP, 2005.
ground of the municipal reform demonstrated that once withdrawn from the context of a formed institutional matrix and a real system of interests, such advantages remain merely theoretical. The two-tier model's defects were implemented in full, while its efficiency manifested itself primarily in intensification of centralization and cuts of the guarantees for local self-governance. Hence a more global than the problem of consolidated administrations question: to what extent is the selected model of municipal reform generally adequate to Russia's conditions and can it in principle allow local communities' (where such communities really exist) self-organization mechanisms to flourish? The answer to the question clearly lies beyond the frame of the present review, though.
6.7.2. Renunciation of Direct Mayoral Elections
Yet another trend is gaining momentum now. It is associated with the increasingly widespread municipal entity governance model, under which the municipality head is elected from the representative body, while the administration is run by a city manager contracted with a regional authorities' vigorous participation. Such a model ensures a maximum possible blockage of the local community's influence on formation of the municipal bodies of power and ensures a greater influence on them by the RF Subject's leadership.
The strive for abandonment of elections of municipal entities' heads has been clearly visible through the period following the transition to appointment of governors. Attempts to directly replicate the region-level model at the municipal one faced serious legal challenges, as they contradicted the RF Constitution. However, some other ways to solidify the "vertical" were found - that is, limiting the municipal entities' independence, broad practiced prosecution of "disloyal" city mayors, and, finally, downplaying the local communities' role in elections of heads of municipal entities1. In a situation when the municipality head is elected from the local representative council, the voters cast their ballots for the composition of the latter, but cannot express his opinion on whether this or that candidate qualifies for the municipality head. It is the instrument that was substantially activated in 2010.
As concerns the practice of contracting heads of local administrations, which the model in question also provides for, the mechanism is fairly widespread around the globe. However, there causes behind its rise were absolutely different from Russia's. In the US, for example, during the so-called municipal revolution of the 1920s the call for professional administration of municipal entities was in a sense the at-large public's reaction to monopolization of the political sphere by individual groups that had been dominating municipal elections and getting stock of the municipal policies. But the Western nations' assessments of the background in question are far from being unambiguous. Experts note that Europeans are restoring the institution of direct elections: "the Europeans have seen for themselves that there is no efficient
1 During his recent live TV public Q & A session, PM V. Putin voiced the federal authorities' stance on the issue. Mr. Putin believes that direct elections of municipality heads in tandem with an insufficiently efficient civil society form the cause for criminalization of the regional and local power. (Minutes of a special TV broadcast "Talk with Vladimir Putin. Continuation"// The official website of the Chairman of the Government of Russian Federation. 16 December 2010. http://www.moskva-putinu.ru/. Access date: 26.01.2011). Experts note: «The push for abolition of elections is going on under a vehement participation of governors, who often promote such decisions citing a "political decision on introducing city managers nationwide" made on the federal level. Source: Index politicheskogo vliyaniya glav 100 krupneyshikh gorodov Rossii // IA REGNUM. Posted: 01:07 23.12.2010 - at http://www.regnum.ru/news/polit/1359603.html. Access date: 26.01.2011.
local governance, but a strong self-governance"1. For example, the increasing number of German municipal entities favors a local administration model under which the Burgmeester runs both the City Hall and the local representative council.
That said, it is impossible to draw a direct comparison between the Russian city manager model and the Western one. As the 'GOLOS' association noted in a statement in the aftermath of recent Russian municipal elections, "This analogy is not applicable, as the mechanism of appointment of the contracted head of administration fixed in the Russian law may not be appreciated as free elections, because the rationale for the provision of the RF Subject authorities with the right to appoint 1/3 of members of the contest commission raises doubts"2. The vehicle the Western nations would employ to bolster democratic mechanisms is used in Russia as an instrument of further centralization.
Available data suggest that introduction of the institution of city manager resulted in abolition of direct mayoral elections in 43 regional capital cities3. To cite specific examples, in 2009, direct elections were abolished in Samara, Stavropol, Ryazan, Tyumen, Kazan, Ufa, Tver, among other cities. In 2010, the woeful list expanded to include Nizhny Novgorod, Smolensk, Blagoveschensk, Elista, Vladimir, Kurgan, Orenburg. Chelyabinsk, Perm, and Ekaterinburg, to name a few more cities.
Notably enough, the peculiarity of 2010 became expansion of the process onto the urban centers exemplary for their strong and independent local governments, such as Chelyabinsk, Ekaterinburg and Perm. On 15 September 2010, at their working meeting in Ekaterinburg representatives of the civic coalitions for retaining direct mayoral elections from the above three cities agreed on establishment of a nationwide civic network to defend the elections. According to Mr. Igor Averkiev, chairman of the Perm civic chamber, the civic network organizers' cumulative efforts would unlikely be limited with resistance to abolition of mayoral elections, as there are other profound challenges associated with the Russian authorities' attempts to debar the populace from the possibility to exert a direct influence on authorities, including abolition of gubernatorial elections and current manipulations with majority and proportional election systems4. Despite the coalition's efforts, direct elections were abolished in all the three cities.
In Chelyabinsk, the elections were abolished in 2010, almost immediately after Mr. Mikhail Yurevich, the former mayor, had been appointed the governor. Interestingly, once elected as the mayor of Chelyabinsk, Mr. Yurevich succeeded in amending the city's Statute, which had earlier provided for existence of a city manager, while despite local residents elected Mr. Yurevich the mayor, he was supposed to exercise powers of the chairman of the local representative body.
In the city of Perm, the procedure of abolition of direct mayoral election was launched in the spring of 2010, with the final decision taken in the summer. The initiative faaced an ener-
1 Markwart E. Vse mestnoye samoupravili po vertikali. Ot vyborov merov tozhe reshili otkazatsya// L-Online. 27.12.2010 - URL: http://kommersant.ru/doc.aspx?DocsID=1564980&print=true. Access date: 26.01.2011.
2 From the first statement of the GOLOS association by results of a long-term monitoring of municipal campaigns for the elections set for October 10, 2010 (the stages of nomination, registration and the start of the campaign trails). Moscow, 6 September 2010 - URL: http://golos.org/a3878.html . Access date: 26.01.2011.
3 Meram postavili "dvoyki" za ikh vliyatilnost// RBK 23.12.2010. URL: http://top.rbc.ru/politics/23/12/2010/ 519860.shtml?from=qip . Access date: 26.01.2011.
4 Protivniki otmeny vyborov obyedinyayutsya//Obschestvennaya kampaniya "Sokhranim pryamye vybory glavy Permi". 16.09.2010 - URL: http://www.vyborpermi.ru/node/358 . Access date: 26.01.2011.
getic protest from a public coalition named "For direct elections" founded by 7 local civil society organizations. While as many as 79% of local residents (the Levada Center data) upheld the idea of retaining direct mayoral elections of the city administration's head1, the representative body decided otherwise.
In the periphery of Perm Kray, in the city of Kudymkar, the ex-center of Komi-Pemyatsky Autonomous Okrug, developments took a far dramatic turn. In August 2010, seven members of the local Duma stepped down from office and refused to take part in the representative body's work. As a result, the Duma lost its legitimacy. The rebel Duma members claimed that the main reason for their demarche was the exhaustion of any other ways to maintain the dialogue with the regional executive authorities on the method of election of the local administration head. It cannot be ruled out of course that there were certain economic and political interests behind the demarche; however, an out-of-the-world region managed to establish an unprecedented for today's Russia precedent2.
Similar attempts to abolish mayoral elections in urban settlements in Sverdlovsk oblast and Khanty-Mansy autonomous okrug sparked serious conflicts. In some of these localities, the push for the Federation's model was repelled, too. Thus, by contrast with Perm, having known the local residents' views, deputies in the city of Surgut refused even to put up the issue of changes in the local administration system for public hearings and retained direct elections of the city's head. According to monitoring of the socio-political situation in Surgut run by the Committee for socio-political analysis and public relations under the Okrug administration, 89% of residents approved general direct election of the city's head, while another 8% favored the concept of city manager, and the remaining 3% found it difficult to answer or believed the city's head should be appointed3.
Overall, according to the available information, as many as 11 out of 20 Russia's largest cities have so far managed to retain direct elections4.
6.7.3. Modification of the Election System
The tendency of embedding the local self-governance system in the vertical of power also manifests itself in modification of the electoral law. Back in 2005, municipal entities were granted the possibility to choose between the majority system and the mixed or purely proportional systems of municipal elections. In April 2009, the federal legislature made another step forward by establishing a new order according to which at the municipal elections run by the proportional system the right to put up the list of candidates can be granted solely to branches of a political party which, in compliance with the federal law, enjoys the right to take part in elections. Prior to the novelty, the same right had been granted to electoral associations formed by public associations (public organizations, movements) during elections to local self-governance bodies. Nowadays, public associations that do not constitute political parties
1 Posted on the website "Rossiyskaya gazeta. Permsky krai. 25 May 2010. Ilya Izotov. "Levada-Center": 79 percent of Perm's residents spoke for retaining the direct mayoral elections. http://www.rg.ru/2010/05/25/reg-ermkray/opros-anons.html.
2 Buntari s okrainy. // Expert.ru. 12.08.2010. - URL: www.expert.ru/2010/08/12/bunt_okraina/. Access date: 26.01.2011.
3 Surgutchane za pramyie vybory glavy goroda//Obschestvennaya kompaniya "Sokhranim pramyie vybory glaavy Permi. - URL: http://www.vyborpermi.ru/node/271. Access date: 26.01.2011.
4 Index politicheskogo vliyaniya glav 100 krupneyshikh gorodov Rossii // IA REGNUM. Posted: 01:07 23.12.2010. - at http://www.regnum.ru/news/polit/1359603.html. Access date: 26.01.2011.
enjoy the right for just putting forward candidacies for their inclusion in a party ticket, and this is exercised following procedures set by the Federal Act "On political parties". Meanwhile, the problem of securing guarantees of realization of the passive electoral right of citizens who do not hold membership in a political party or an electoral association proved having been delegated to the regional level.
The string of tendencies has been recently complemented by another bill on the proportional system at local elections. Submitted by the RF President, the bill reads that no less than a half of deputy mandates in the representative body of a municipal district or an urban district with the overall number of deputies being 20 and more is to be allocated between lists of candidates put up by electoral associations in proportion to the number of votes each such list of candidates has received. An RF Subject's law can provide for a necessary for access to such an allocation of deputy mandates minimum rate of votes received by the list of candidates, which may not exceed 5% of ballots cast by voters who have taken part in the voting. These changes concern some 1,200 representative bodies of municipal entities1.
As concerns elections of representative bodies of other municipal entities, including representative bodies of municipal districts and urban districts with the number of deputies under 20, there may be used the proportional electoral system, or the mixed, or the majority one. The terms of the use of a specific electoral system in such municipal entities are set by an RF Subject's law.
In connection with the aforementioned changes, the bill in question establishes requirements to deputies included in a faction, as well as to factions in representative bodies of municipal entities. The requirements are similar to those set for deputies included in a faction, as well as to factions in the RF Subjects' legislative (representative) bodies of state power. More specifically, the faction comprises all the deputies elected on a party ticket; as well, it may comprise deputies who have run in a single-member constituency or in a multi-mandate one. The faction may comprise a single deputy elected on a party ticket. The deputy of the faction is bound to hold membership in the political party of whose faction he is a member. The deputy elected on a party ticket may not quit the faction. Failure to comply with these requirements results in early termination of the deputy powers.
While assessing the tendencies to strangling the local self-governance, experts point out to a direct connection between the abrogation of direct mayoral elections and the increase of the role the federal parties play in localities. These de facto are two sides of the same coin. "It so happens that under such a scenario the municipality administration is formed under the regional authorities' intervention, on the one hand, and under the federal authorities' intervention, on the other (Russian parties are notorious for their utter centralization and their federal leadership permanently interfering in their regional and local branches' operations")2.
Key Take-Aways
Transformation of local self-governance into an impotent appendix of the vertical of power is a process that has advanced for several years already, thus not being the distinct character-
1 Prezident vnes v Dumu zakonoproekt o proportsionalnoy systeme na mestnykh vyborakh// The state Internet channel "Rossiya". 14.12.2010. 09:06. - URL: http://www.vesti.ru/doc.html?id=413763&cid=5. Access date: 26.01.2011.
2 From the first statement of the GOLOS association by results of a long-term monitoring of municipal campaigns for the elections set for October 10, 2010 (the stages of nomination, registration and the start of the campaign trails). Moscow, 6 September 2010 - URL: http://golos.org/a3878.html. Access date: 26.01.2011.
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istic of 2010 only. That is why let us note just two peculiarities of the period in question that characterize the unfolding tendencies.
First, the violation of guarantees of self-governance in Russia drew the international community's attention. In the autumn of 2010, the Congress of Local and Regional Authorities of the Council of Europe presented the third Report on the state of Russian democracy in the light of implementation of the European Charter on Local Self Government. The Report highlighted serious negative tendencies in the sphere concerned1. More specifically, in order to improve the national legislation in the local-self-governance area, Russian authorities were recommended to:
• Abolish recent amendments to art. 74 of federal Act of 6 October 2003 № 131-FZ "On general principles of organization of local self-governance in the Russian Federation" that concern dismissal of city mayors so that to guarantee for them the possibility to freely exercise their powers in office without being concerned of interference or political pressure by legislative bodies or governors;
• Continue to improve the division of powers between federal, regional and local government bodies and undertake measures on cutting the number of combo mandates and spheres subjected to them;
• Appropriate respective funding for local authorities or permit them to collect taxes, as per the Charter, to make them able to exercise their mandate in the area of the public services delivery;
• ensure that integration of localities is done only upon holding consultations with respective elected assemblies.
The above list does not comprise all the Congress's recommendations, making it clear nonetheless that they question consistency of some fundamental provisions of the municipal law and recent amendments adopted to further the process of introduction of substantial limits with regard to local authorities' autonomy and de facto putting them under the regional authorities' political control with the European Charter.
Second, the increasing number of experts has made an unconsoling diagnosis to the state of Russia's public administration, with the key word therein being degradation. That said, the process in question is in many ways determined by upsetting the balance in the public governance system, striving to control the whole shooting match out of the center, dumping legitimate channels of the population's influence on adoption of managerial decisions. Let us cite two expert opinions on the issue: Evgeny Gontmakher, Head of the Center for Social Policy of the Institute of Economics of RAS: "Degradation of the state has reached such a stage when, enchanted by mirages of "vertical of power" and "managed democracy", the political elite has lost control over the ongoing processes in the country"2. EmilMarkwart, President of the European Club of Experts on Local Self Government: "By all accounts the degradation of public institutions and local self-governance will not just continue, but exacerbate. The populace and the power will be increasingly drifting apart"3.
1 Sovet Evropy postavil Rossii neuteshitelnyi diagnoz.//Echo planet Itar-Tass. 10 November 2010. http://ekhoplanet.ru/world_500_8910.
2 Gontmakher .E. Gosudarstvo i obschestvo. Modernizatsiya dlya svoikh. Posted: 20.12.2010 r. - URL: http://www.4cs.ru/materials/wp-id_1342/. Access date: 26.01.2011.
3 Markwart E. Vse mestnoye samoupravili po vertikali. Ot vyborov merov tozhe reshili otkazatsya// L-Online. 27.12.2010 - URL: http://kommersant.ru/doc.aspx?DocsID=1564980&print=true. Access date: 26.01.2011.
