| BUSINESSWEEK ONLINE : DECEMBER 13, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- EUROPEAN BUSINESS
So You Think You Own a Russian Company (int'l edition) Citing crooked deals, Russians call for ''de-privatization'' Back in September, Moscow Mayor Yuri M. Luzhkov strutted into the ballroom of his city's five-star Marriott Grand Hotel and astounded his audience of foreign investors with a call for reevaluating Russian privatization deals--transactions that the investors had considered to be settled business. ''We must reverse this,'' declared the pugnacious leader of the Fatherland-All Russia party. One month later, his words were echoed by the Communist Party's main policy guru, Alexander A. Kravets, in a speech he delivered some 3,000 kilometers from the heart of the westward-looking capital. ''President Yeltsin sold our nation to bandits. We want to get it back,'' he told a group of veterans from the Sibneft oil refinery in Omsk, an enterprise privatized in 1995 and now controlled by two Kremlin insiders. In Russia's highly charged race to elect a parliament in December and a President next summer, the populist slogan of ''de-privatization''--or deprivatizatsia, as locals call it--has become a buzzword. Nobody, to be sure, is talking about the wholesale renationalization of the 70,000 state-owned enterprises, from oil fields to airlines, that have been put on the block since 1992. But some powerful politicians are vowing to revisit particularly controversial deals and, if adjudicators find that a transaction was illegal, rebid the assets. WESTERN VICTIMS. Foreign investors are worried--and probably for good reason. The Russian legal system often is arbitrary and corrupt, and it has little provision for investor compensation. Already, some big-name Western investors have been hit. In October, Wall Street's Kohlberg Kravis Roberts and the U.S.-Russia Investment Fund were stripped of their stake in St. Petersburg's Lomonosov Porcelain Factory by a court that struck down the company's 1993 privatization. And on Nov. 26, a Russian bankruptcy court sold a major production unit of the Sidanko oil company, in which BP Amoco PLC invested $571 million in 1997, to a competitor. In fact, the most likely targets of a de-privatization drive are oil giants whose shares are widely held by foreign investors. The deprivatizatsia thrust taps widespread popular sentiments that past privatizations have not been conducted fairly. But the prospect of a resale of previously privatized properties could trigger power struggles for assets between rival blocs of politicians and business titans. Fatherland-All Russia's Luzhkov, in his September speech, named oil companies Sibneft and Sidanko. Sibneft is linked to business titans Boris A. Berezovsky and Roman A. Abramovich, who have close ties to the Kremlin. Sidanko was sold to tycoon Vladimir O. Potanin. At the liberal Yabloko party, second-in-command Sergei V. Ivanenko says that oil company Yukos, controlled by financier Mikhail B. Khodorkovsky, as well as Sidanko and the partially privatized Moscow city telephone company, MGTS, have all violated the law. Sources say the State Property Ministry, which reports to Prime Minister Vladimir V. Putin, has an unpublished list of 200 or so companies it considers to have violated the rules under which they were privatized. The Communists, meanwhile, say they are in the process of drawing up their own list. Fiery orators such as Luzhkov, whose party is expected to do well in the elections for the State Duma, or parliament, are quick to say that any de-privatization would be done ''100% legally.'' But the implementation is sure to be politically motivated. Current privatization legislation is nebulous about what could be termed a violation: It could be anything from a piece of paper not being attached to the original tender offer to investment requirements not being fulfilled. ''The legal system is not something you want to rely on to totally safeguard an investment,'' says Dmitry V. Vasiliyev, the former head of Russia's Federal Securities Commission. He stepped down in disgust in October, after years of struggling to find political backing to help defend shareholders' rights. The U.S.-Russia Investment Fund and Kohlberg Kravis Roberts learned the hard way the perils of investing in Russia. They spent $4.5 million to buy 54% of the Lomonosov Porcelain Factory in 1998--five years after the original privatization. But on Oct. 11 came the ruling from a city arbitration court that the St. Petersburg company's privatization was illegal. The factory, founded by the daughter of Peter the Great and famous for furnishing Europe's imperial families with dining ware, is a symbol of Russian national pride. The local media have trumpeted the story as a matter of rescuing a cultural treasure from foreign control. INFLUENTIAL HELP. The company's Soviet-era managers have barred the investors from the factory, saying nonspecialists have no right to run the business. The investors are awaiting the ruling of an appeals court, which is expected to convene at the end of December. There's already talk, however, that the appeals process is just a formality and that Lomonosov could be resold by the government to the workers. ''Somebody at Lomonosov decided investors weren't strong enough to assert their rights and got a number of influential people to help them,'' says Alistair Stobie, vice-president of the U.S.-Russia Investment Fund, founded by the U.S. Congress. Russia's privatization program has always been highly controversial. It was engineered in 1992 by former Yeltsin golden boys Anatoly B. Chubais and Yegor T. Gaidar. To gain the crucial support of company managers, they gave so-called Red Directors a controlling stake in most enterprises. That tactical compromise backfired when many managers stole company assets, blocked corporate restructuring, and flouted the rights of minority investors. Most of all, privatization has come to signify the transfer of a handful of Russia's most lucrative companies to well-connected insiders at ridiculously low prices. These oligarchs, as they are known, especially Berezovsky, are hated symbols of power and greed for ordinary Russians. In the Siberian city of Omsk, for example, the desire to return property from the hands of ''Kremlin bandits'' is a common refrain. Most blame the poor state of local affairs on the fact that Berezovsky's Sibneft has such cozy relations with Omsk Governor Leonid K. Polzhaev. Before privatization, Sibneft contributed more than 60% of the local budget. Now, although it's much more profitable, it contributes only 40%. When Kravets, who is a Communist Party deputy, recently told citizens gathered at a town-hall-style meeting that he would investigate Sibneft's privatization, the standing-room-only crowd burst into applause. ''The governor doesn't make them pay taxes, and we lose out,'' alleges 69-year-old Tatiana Philemona, a retired refinery worker. There were, in fact, plenty of abuses in the heyday of privatization, when considerable political pressure was brought to bear to get state assets on the auction block quickly. Laws were violated through a mix of both bureaucratic ignorance and insider manipulation. But if there's good reason to go back and reexamine some of these deals, few have confidence that the reevaluations will be done fairly. In Russia, it seems, one injustice too often begets another. By Margaret Coker in Moscow _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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