The Russian government has announced an ambitious privatization programme for 1998 under which it plans to sell substantial equity stakes in 37 major companies of an estimated total value of over US$5 billion. The enterprises listed include such giants as Aeroflot airlines, oil company Rosneft, and pipeline operator Transneft. To implement the programme, Russia has adopted a new Law on the Privatization of State Property and on the Fundamentals of the Privatization of Municipal Property in the Russian Federation (Law No. 123-FZ, dated July 21 1997). The Law modifies some of the existing rules on the privatization of state assets, adopts new safeguards in response to past abuses, and contemplates the introduction of new players into the privatization process.
A key innovation is that the government must now submit annual privatization plans to the Russian Parliament, together with the annual budget (Article 4 of the Law). This reflects a new emphasis on maximizing and controlling cash revenues from privatization. A second important change involves the agencies supervising privatization. Previously, two main government bodies supervised the privatization process: the State Property Management Committee (GKI) and the Russian Federal Property Fund (RFFI). Essentially, the GKI cleared the plans for each privatization and supervised its initial stages; the RFFI acted as trustee for the state in conducting asset sales. Under Articles 7 and 10 of the Law, these bodies may be replaced by a new federal body for the management of state property and as-yet undesignated 'specialized institutions' which will act as trustees and will conduct sales of state property. Further decisions are expected regarding the bodies to play these roles.
State controls over privatizing enterprises have also been changed and, to some extent, strengthened. Under Articles 5 and 15 and other provisions of the Law, the state can retain a golden share in a privatized open stock company. In a change to previous law and practice, this share is now described as a 'special right' of the state, entitling it to appoint representatives to the board of directors and audit commission, call extraordinary shareholders' meetings and add items to their agenda, and veto specified decisions.
The approved mechanisms for conducting sales of privatizing enterprises have also changed somewhat. For example, in response to past criticisms of 'investment tenders' (in which investors acquired state shares, and were then supposed to make capital investments over a three-year period), Article 16 has established a new category of sales known as 'commercial tenders with investment or social conditions'. The winning bidder may be required to make investments, fulfil certain criteria, or pay off debts of the enterprise, among other things. Contrary to past practice, the investor can acquire ownership of the shares only after all its investment obligations have been fulfilled. In the interim, the investor can vote the shares, except with respect to certain major issues.
Other approved methods of privatization include the reorganization of state enterprises (now generally called 'unitary' enterprises) into open stock companies; special cash and other auctions; and in-kind investments of state property into commercial entities in exchange for equity. Most of these methods have, in fact, already existed for some time, based on evolving practices and regulations of the GKI, Presidential Decrees, and other legislative sources. The Law's provisions now provide a clearer and firmer legal basis, and will doubtless be followed by additional legislation to fill in the details.
The Law contains numerous other interesting provisions. Article 24 suggests the possibility of future issues of convertible bonds or warrants, whose holders would be entitled to buy equity securities of privatizing companies. Article 27 confirms that newly-privatized open stock companies will remain liable for the obligations of their predecessor entities to employees, under collective employment contracts. It also suggests that within three months of the registration of the newly-privatized enterprise, its employees can 'propose a review' of the existing collective employment contract, and if desired attempt to negotiate a new contract.
Brian L Zimbler and Elena Zharikova
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