BISNIS
OCT 95

IMI: RUSSIA'S NEXT PRIVATIZATION: "LOANS-FOR- SHARES" NOT "SHARES FOR FOREIGNERS"

SUMMARY

1. THE GOR'S SHARE MORTGAGE PROGRAM IS SET TO BEGIN IN NOVEMBER WITH SHARE PACKETS IN 16 MAJOR COMPANIES OFFERED AS SECURITY IN EXCHANGE FOR LOANS. BIDDERS WILL COMPETE ON THE AMOUNT OF THE LOANS OFFERED TO THE GOR AND WILL RECEIVE DEFINED RIGHTS TO MANAGE THE SHARES AS WELL AS 30 PERCENT OF THE CAPITAL GAIN ON THEIR SUBSEQUENT SALE, TO BE CONCLUDED WITHIN THREE YEARS. CONTRARY TO EARLIER ASSURANCES, FOREIGN INVESTORS WILL BE BARRED FROM BIDDING FOR EIGHT OF THE FIRMS, INCLUDING LUKOIL, SIDANKO AND NORILSK NICKEL. GKI STATES THAT THIS RESTRICTION WAS IN KEEPING WITH GOR REGULATIONS ON FOREIGN INVESTMENT IN "STRATEGIC" SECTORS. THE RESTRICTION RAISES QUESTIONS BOTH ABOUT WHETHER THE GOR IS SEEKING TO MAXIMIZE REVENUE OR IMPROVE ITS INVESTMENT CLIMATE. END SUMMARY

GKI ANNOUNCES FOREIGNERS EXCLUDED FROM SHARE SALES

2. ON TUESDAY OCTOBER 17, GKI (GOSKOMIMMUSHESTVO - THE STATE COMMITTEE FOR THE MANAGEMENT OF STATE PROPERTY) PUBLISHED IN ROSSISKAYA GAZYETA THE RULES FOR IMPLEMENTING ITS SHARE MORTGAGE OR "LOANS FOR SHARES' PROGRAM. OF 29 MAJOR COMPANIES INCLUDED IN THE PROGRAM, THE ANNOUNCEMENT COVERED 16 FIRMS. FOREIGN INVESTORS (INCLUDING RUSSIAN FIRMS WITH MORE THAN 25 PERCENT FOREIGN OWNERSHIP) WERE EXCLUDED FROM PARTICIPATING IN BIDDING FOR EIGHT OF THESE COMPANIES.

FROM A BANK CONSORTIUM TO SHARE MORTGAGE

3. THIS PROGRAM ORIGINATED IN A PROPOSAL LAST SPRING FROM A CONSORTIUM OF RUSSIAN BANKS, WHICH OFFERED TO PROVIDE LOANS TO THE GOR IN EXCHANGE FOR ASSUMING MANAGEMENT OF STATE OWNED SHARE PACKETS IN KEY ENTERPRISES. THE GOR VERSION OF THE PROGRAM, ANNOUNCED BY FIRST DEPUTY PRIME MINISTER CHUBAYS IN SEPTEMBER, PROPOSED TO OFFER CUSTODY OF SHARE PACKETS AS SECURITY FOR CREDITS THROUGH CLOSED TENDERS. IN RETURN FOR LOANS, WHICH CARRY AN INTEREST RATE OF LIBOR PLUS 0.5 PERCENT, THE WINNER WOULD CONTROL THE SHARES IN QUESTION AND MANAGE THEIR SALE WITHIN A THREE YEAR PERIOD. AT THE TIME OF THE SALE PRINCIPAL WOULD BE REPAID AND THE LENDER WOULD RECEIVE THIRTY PERCENT OF THE GAIN BETWEEN THE SALES PRICE AND THE ORIGINAL LOAN AMOUNT.

4. WHEN THE GOR ANNOUNCED THE PROGRAM AND PRESENTED THE LIST OF ENTERPRISES, ACTING GKI CHAIRMAN ALFRED KOKH ANNOUNCED THAT THE PROGRAM WOULD BE OPEN TO BOTH RUSSIAN AND FOREIGN INVESTORS. HOWEVER, THE OFFICIAL ANNOUNCEMENT STATES THAT FOREIGN INVESTORS WILL NOT BE ALLOWED TO TAKE PART IN MORTGAGE AUCTIONS OF STATE HOLDINGS IN LUKOIL AND SIDANKO OIL COMPANIES, NORILSK NICKEL, NOVOROSSISK SHIPPING CO., OKB SUKHOY AIRCRAFT MANUFACTURER, THE ULAN UDE AVIATION PRODUCTION ASSOCIATION, TEKHSNABEXPORT AND THE PROGRESS AVIATION COMPANY. THE "MOSCOW TIMES" QUOTED AN UNIDENTIFIED RUSSIAN OFFICIAL AS STATING THAT THE DECISION WAS AUSED BY "STRATEGIC SECURITY INTERESTS OF THE RUSSIAN BCONOMY".

FOREIGN INVESTMENT FIRMS ANALYZE CONSEQUENCES

5. OPINIONS ON THE IMPACT OF THE "NO FOREIGNERS" RULING VARY. EXPERTS SPECULATE THAT IT WAS A COMPROMISE BETWEEN THE GOVERNMENT'S NEED TO REALIZE AT LEAST 3 TRILLION IN BUDGETARY REVENUES THIS YEAR FROM THIS PROGRAM AND STRONG OPPOSITION FROM INDUSTRIAL AND RUSSIAN BANKING LOBBIES. A CS FIRST BOSTON OFFICIAL TOLD THE PRESS THAT "THESE PROJECTS ARE NOT DESIGNED FOR WESTERN STRATEGIC INVESTORS AND THEIR INTEREST HAS BBBN VERY LIMITED." AT A MOSCOW CONFERENCE ON SECURITIES MARKETS THIS WEEK, ACTING CHAIRMAN OF THE GKI, ALFRED KOKH, EVADED QUESTIONS PERTAINING TO THE LOANS-FOR-SHARES ISSUE BY SPEAKING GENERALLY ON THE GOR'S 1995 PRIVATIZATION EFFORTS AND LEAVING QUICKLY WITHOUT TAKING ANY QUESTIONS. AT THAT SAME CONFERENCE, PROMINENT RUSSIAN AND WESTERN SECURITIES EXPERTS SUGGESTED THAT FOREIGNERS HAD ALREADY WRITTEN OFF PARTICIPATING IN THE TENDERS DUE TO THE COMPLEXITY OF THE TENDER PROCEDURES AND RUMORS OF INSIDE DEALS ALREADY BEING STRUCK. OTHER EXPERTS CLAIM THAT THE DECISION COULD DECREASE THE REVENUE COLLECTED BUT WILL HOT AFFECT THE GENERAL INVESTMENT IN THE COUNTRY. SOME ANALYSTS PREDICTED THAT RUSSIAN BANKS WOULD ACQUIRE CONTROL OF THE SHARE PACKETS AT LOW IMPUTED PRICES AND LATER ARRANGE SALES TO AN ASSOCIATED COMPANY AT LITTLE PREMIUM. SOME ANALYSTS PREDICTED THAT RUSSIAN BANKS WOULD ACQUIRE CONTROL OF THE SHARE PACKETS AT LOW IMPUTED PRICES AND LATER ARRANGE SALES TO AN ASSOCIATED COMPANY AT LITTLE PREMIUM.

QKI EXPLANATION: "IT'S ONLY A LOAN"

6. ACCORDING TO GKI THE RESTRICTIONS ON FOREIGN INVESTMENT WERE IN ACCORD WITH A DECEMBER 1993 DECREE LIMITING FOREIGN PARTICIPATION IN PRIVATIZATION IN THE FIELDS OF ENERGY, TRANSPORTATION AND THE MILITARY INDUSTRIAL COMPLEX. THE KEY OBJECTIVE FOR GKI APPEARS TO BE MEETING THE REVENUE TARGET AND ATTRACTIVE SHARE PACKETS WERE BEING OFFERED TO THIS END. IT WAS LESS IMPORTANT TO "REALIZE" THE VALUE OF THESE SHARES SINCE THEY WERE NOT ACTUALLY BEING SOLD. THE EVENTUAL SALE OF THE UNDERLYING SHARE PACKETS WOULD BE SUBJECT TO AGREEMENT BETWEEN THE "MORTGAGE LENDER" AND THE RUSSIAN FBDERAL PROPERTY FUND. ASSET VALUE MAXIMIZATION WOULD BE A KEY CRITERION AT THAT TIME.

LOANS-FOR-SHARES PROGRAM: UPCOMING EVENTS

7. THE FIRST AUCTION UNDER THE PLAN WILL TAKE PLACE ON NOVEMBER 3 WHEN A 40.12 PERCENT STAKE IN THE OIL COMPANY SURGUTNEFTEGAZ, ONE OF THE TOP THREE OIL COMPANIES IN RUSSIA, WILL BE MORTGAGED. THE REMAINING AUCTIONS ARE SCHEDULED TO TAKE PLACE ON NOVEMBER 17 WITH THE EXCEPTION OF SIDANKO, WHICH WILL BE HELD ON DECEMBER 7.

FOLLOWING IS THE LIST OF UPCOMING AUCTIONS:

Note: If your browser does not support tables, you may view this in text form.
SOM/DOLLAR EXCHANGE RATE
ENTERPRISE PERCENT OF
CHARTER
CAPITAL		 STARTING PRICE
(USD)
LUKOIL 5 PERCENT 35 MILLION
NAFTA MOSCOW 15 PERCENT 16 MILLION
SIDANKO 51 PERCENT 125 MILLION
NOVOLIPETSK METAL 15 PERCENT 30 MILLION
NORILSK NICKEL 38 PERCENT 170 MILLION
WEST SIBERIAN METAL 15 PERCENT 8.5 MILLION
MECHEL 15 PERCENT 5 MILLION
NOVOROSSIISK
SHIPPING		 35 PERCENT 27 MILLION
NORTHWEST
SHIPPING		 25.5 PERCENT 6 MILLION
KIROVLESPROM 20 PERCENT 1 MILLION
BOR 51 PERCENT 8 MILLION
TEKHSNABEXPORT 51 PERCENT 10 MILLION
OKB SUKHOY 51 PERCENT 12 MILLION
ULAN-UDE
AVIATION		 38 PERCENT 10 MILLION
ARSENYEV
AVIATION		 51 PERCENT 10 MILLION
ARSENYEV
AVIATION		 51 PERCENT 10 MILLION

LOANS-FOR-SHARES HAS ITS "OWN SHARE" OF PROBLEMS

8. IN ADDITION TO THE RULING ON FOREIGNERS THE LOANS-FOR-SHARES PROGRAM HAS OTHER PROBLEMS. A GROWING NUMBER OF THE ENTERPRISES ON CHUBAYS' LIST ARE TRYING TO OPT OUT OR PROPOSE THEIR OWN APPROACH. LUKOIL MAY BE CONSIDERING THE "REPURCHASE" OF THE GOR'S FIVE PERCENT STAKE THAT WAS TO BE INCLUDED IN THE SHARE MORTGAGE PLAN. THE PRESIDENT OF FAR EASTERN SHIPPING CO. TOLD REUTERS LAST WEEK THAT HE DOES NOT WANT TO COOPERATE WITH THE GKI PROGRAM. YUKOS, SIDANKO AND NORILSK NICKEL HAVE PUT FORWARD DEMANDS THAT AIM TO LIMIT ACCESS OF OUTSIDE (NOT JUST FOREIGN) INVESTORS. A SIDANKO VICE PRESIDENT ADDED THAT THE GOR REJECTED ITS PROPOSAL TO ALLOW SOME PARTICIPATION BY FOREIGN INVESTORS AND TO CUT THE STAKE FROM 51 TO 40 PERCENT. GAZPROM'S PRESIDENT, WHO MANAGED TO KEEP HIS COMPANY OFF THE LIST ALL-TOGETHER, PROMISED TO PREVENT ANY ATTEMPTS TO TAKE ANY CONTROL OF THEIR STOCK.

COMMENT

9. WITHOUT FOREIGN PARTICIPATION TO ADD TO DEMAND, THE MORTGAGE AUCTION OF THESE SHARES PACKETS WILL LIKELY YIELD LOWER PRICES. SURGUTNEFTEGAZ'S STARTING PRICE AT THE AUCTION IS AS LITTLE AS ONE-TENTH OF SOME ESTIMATES OF THE COMPANY'S VALUE. THE COMBINED STARTING PRICE FOR STAKES IN 16 COMPANIES IS LESS THAN U8D 500 MILLION.