The loans-for-shares program has become mired in criticism as a blatant means to hand control of key enterprises to a few chosen banks with the right connections. Jonas Bernstein tracks how the scheme came about and why.In the summer of 1994, voucher privatization was a Russian success story. Anatoly Chubais, the lone surviving member of the Yeltsin government's original economic reform team, heralded the results of the largest sell-off of state property in history and predicted that privatization's second phase -- cash sales of shares in state enterprises -- would be as successful as the first.
But fast-forwarding to the present, that second phase of privatization is in trouble. Cash auctions have foundered in a depressed market, and it became clear early in the year that the State Property Committee would not even come close to its task of bringing some 9 trillion rubles ($1.95 billion) to the budget through the sale of state assets. To jump start the process, the government has introduced its loans-for-shares program to place some the country's largest companies in private hands in exchange for loans to the government.
Some Western observers contacted for this article were loathe to criticize the scheme in too harsh terms -- one called it "untidy," while another deemed it "unconventional." Yet since the auctions began in early November, the loans-for-shares process looks more and more like the functional equivalent of show trials: a series of staged events designed to give pre-determined outcomes the appearance of spontaneity.
Indeed, hefty chunks of some of Russia's most valuable assets -- most notably, Norilsk Nickel, the oil giants Sidanko and Yukos, and the Novolipetsky Metal Factory -- were won by the banks tapped by the government to organize the auctions, Uneximbank and Bank Menatep, in each case for bids slightly above the starting price.
The victories of what might be called the Chosen Two have been challenged most vocally by a troika of banks who were excluded from the bidding on technical grounds -- Inkombank, Alfa-Bank and Bank Rossiisky Kredit. Statements from these banks suggest that their protests stem more from the fact that they also want to be on the list of the chosen, rather than any belief in fair play. But given the size of the stakes involved, the loans-for-shares process was bound to be controversial.
"It was inevitable," said Sergei Pavlenko of the government's Center for Economic Reform. "When big chunks of state property, profitable state property, are at stake, people become crazy and really hungry."
But even if this is true, there is strong prima-facie evidence of backroom dealing in the way the auctions were carried out.
"These are highly collusive, closed deals which they are working out," said one leading Western economist who asked not to be named. Even prior to the first auction, he added, "It was clear that people were saying: 'This is mine -- stay away; you can have that one, I'll stay away from you.' There's collusion built into the rules, but there's collusion just built in generally."
Indeed, the government now admits that the process has been less than perfect. Chubais, first deputy prime minister in charge of the economy, said at a press conference Friday: "We consider it our mistake that the organization registering the applications -- a bank -- is also taking part in the auction. Not so much from the legal but ethical point of view, this was our mistake."
Likewise, Alfred Kokh, acting head of the State Property Committee, recently said banks charged with organizing auctions will not be allowed to participate in them in the new year.
So why did the government go ahead with a scheme which was bound to stir up a hornets' nest?
According to the original plan, floated by a consortium of top Russian banks in April -- its members were Inkombank, Stolichny Bank, Uneximbank, Imperial, Menatep, Vorozhdeniye and the Mezhdunarodnaya Finansovaya Kompaniya -- the banks would grant loans to the government in exchange for the right to manage shares in state enterprises. Investors would be allowed to sell their shares after a certain period, and could keep 30 percent of any profit made, with the balance going to the government. The consortium soon broke up, however, with some of its members charging that others had made separate agreements with the government.
The government's version of the loans-for-shares process was approved by an August presidential decree, and included what now appears to have been a fig-leaf: Rather than hand the shares over to a consortium of banks, the government would hold competitive auctions.
Yet not even the State Property Committee is putting much emphasis on this competitive element. The government now says that its main goal has rather been to attack the $16.2 billion budget deficit.
"I don't think competition is an end in itself," Kokh said a news conference Wednesday. The main point, he said, was that the loans-for-shares scheme would put $1 billion into the government's coffers.
But does this really explain it? Open auctions, even without the admission of foreign investors, would certainly have raised more cash for the government. Some observers also doubt that $1 billion in extra revenues are so vital that they could alone have forced the government into such an obviously flawed scheme, or indeed that it could not have found other sources to meet such short-term needs.
"There were lots of other alternatives," said Keith Crane, director of research at PlanEcon, a Washington D.C.-based consultancy. "They could increase borrowings through the bond market. They could have announced a series of initial public offerings. It's kind of silly to adopt this fairly closed, convoluted scheme for privatization just because you have a three-or four-month financing problem. If the Russian government had wanted to, they might have even been able to go to the IMF.
"I think Western financial institutions would have been much more supportive of a more open auction process than the one they adopted and provided the financing. I don't buy that it was driven by financial constraints. I think it was a political decision -- that they wanted to reward certain people."
There is also unhappiness about the fact that the way the loans-for-shares scheme has been implemented will not encourage the marshaling of investment and fresh managerial know-how for the purpose of restructuring privatizing enterprises.
"The scheme offered by the government inverts the goals of money privatization from head to toe," Sergei Burkov, chairman of the State Duma's committee on property, privatization and economic activity said in an interview with the weekly newspaper Kapital. "Enterprises are not receiving investment, and the program is pursuing strictly fiscal goals. It is not privatization, but a primitive dividing up of property for the sake of financial groups close to the government."
Some observers believe that the government was also hell-bent on transferring as much property as possible prior to Sunday's parliamentary elections, just in case conservative forces were to strengthen their political position in the country and put a block on any further significant privatization.
"There's some good that might come out of [loans-for-shares]: They're getting the state out of ownership of some things, and that, per se, is good," said the Western economist. "But one has to weigh this against the negative factors, including a possible backlash threatening the sustainability of the privatization program."
But whatever the government's motivations may have been, analysts worry that the controversy has provided ammunition for opponents of economic reform, who have long charged that privatizatsiya is nothing more than prikhvatizatsiya -- "grabitization."
Such as they are, the loans-for-shares auctions have been marred by constant changes in the list of state assets to be sold off. Critics say that lobbying in the corridors of power explains why foreign investors were excluded from key auctions, and how some enterprises managed to get themselves struck altogether from the list of companies to be auctioned. The original list of 46 enterprises has shrunk to 15.
"At the slightest doubt we struck enterprises off," Prime Minister Viktor Chernomyrdin said last week.
Of course, the fix does not appear to have been in for every auction. Real competition appears to have operated in the sales of shares in one or two of the smaller companies on offer, such as the Mechel metal plant, with the result that the buying prices were commensurately higher.
The first auction took place Nov. 3, when a 40.12 percent stake in the Surgutneftegaz oil company went on the block. The company had managed to include among the conditions of the tender a promise to pay off its 1.026 trillion tax arrears. This was interpreted by many analysts as a way of dampening the interests of "outsiders."
If so, it worked. Surgutneftegaz's pension fund won the auction for a promised loan of 400 billion rubles ($88 million) to the state. There were only two other bidders; one of them, the state oil company Rosneft, was disqualified for missing the registration deadline. Kokh, acting head of the State Property Committee, declared himself happy with the outcome.
"The worst forecasts never came true," he said. "Foreigners did not buy Surgutneftegaz. Everything went as it was planned."
Whether or not his last comment was a Freudian slip, fears that the auctions were nothing more than Potemkin competitions were only enhanced with the tenders for the 38 percent Norilsk stake or for a 51 percent stake in Sidanko and a 78 percent stake in Yukos, Russia's fourth and second largest oil companies, respectively.
The Nov. 17 Norilsk auction was bound to draw attention, given the value of the stakes involved. The company, which controls 35 percent of the world's known nickel supplies, is a price-forming factor in the world nickel market. It is also a major producer of cobalt and platinum-group metals.
Uneximbank, which was authorized by the State Property Committee to collect applications and bids from potential participants in the Norilsk auction, won the tender with a $170.1 million offer, just $100,000 above the starting price. Bank Rossiisky Kredit, through its sister company Kont, had offered twice as much as Uneximbank, but its bid was thrown out due to "insufficient financial guarantees," as the State Property Committee put it. Rossiisky Kredit promised to challenge the results in court.
"It is possible that the State Property Committee is right," wrote Segodnya's economic columnist Rustam Narzikulov on the decision to disqualify Rossiisky Kredit. "However the State Property Committee hardly excluded Kont from the ranks of the contestants out of a striving for strict observance of the rules for carrying out the auctions. Simply, the owner of [the] Norilsk Nickel [stake] was known in advance, and the appearance of a competitor was probably taken by the persons making the decision as the height of indecency."
The tenders of Sidanko, LUKoil and Yukos stakes also drew intense interest, given that their reserves are each estimated to be on par with those of Western giants like America's Exxon. On Dec. 7, the AKB Mezhdunarodnaya Finansovaya Kompaniya (International Financial Co.), a bank closely affiliated with Uneximbank, won the tender for 51 percent of Sidanko with a bid of $130 million, just $5 million over the starting price. A bid by Rossiisky Kredit was disqualified by Uneximbank for arriving 24 minutes late.
The same day, LUKoil, Russia's largest oil company, in conjunction with Bank Imperial, which has had close links to Gazprom, Russia's natural gas monopolist, won a tender for 5 percent of its own shares for $111 million plus payment of tax arrears. Imperial organized the auction.
One Western oil analyst called the prices paid for the Sidanko, Yukos and LUKoil shares "ludicrously low." Indeed, the U.S.-based Arco oil company paid $250 million for a 6 percent stake in LUKoil earlier this year, effectively nearly 50 percent more than the loans-for-shares price.
The Yukos auction came the next day, and with it, perhaps the greatest uproar. Suspicions that the fix was in for Yukos were already raised back in early November, when a top official of Bank Menatep, the State Property Committee's authorized representative for organizing the tender, announced: "There should be no two opinions about this: We will get Yukos." It did. Menatep won the auction for a 45 percent Yukos stake and a simultaneous investment tender for another 33 percent, after throwing out a bid from the competing troika. Yukos declared itself perfectly happy with the results, having had for some time a close relationship with the bank.
Potential Yukos bidders were required to make a $350 million deposit. Menatep had rejected the payment made on behalf of Inkombank, Alfa-Bank and Rossiisky Kredit for various technical reasons, including that part of the deposit had been made in the form of GKOs -- short-term state treasury bills. This despite the fact that the Finance Ministry had suggested allowing payment in the form of treasury bills, and that the Central Bank had announced its readiness to "create a mechanism" for receiving such payments.
The day prior to the Yukos auction, Kokh, of the State Property Committee, and Vladimir Sokolov, chairman of the Russian Federal Property Fund -- made it official: They told reporters that deposits could only be made in "cash," not GKOs.
"We don't accept 'kerenki'," said Sokolov, using the derisive term for the all-but-worthless currency printed by Alexander Kerensky's government in 1917.
After an embarrassed pause, Sokolov added: "Of course, I didn't mean GKOs."
One question, as the auctions plough ahead, needs to be asked. Just where did the winning banks come up with the cash? How could Menatep, a bank with assets that would not put it anywhere near even the bottom of the Fortune 500 list, afford to swallow Yukos, an oil giant with estimated reserves considerably higher than those of the U.S.-based Exxon?
Inkombank, Alfa-Bank and Bank Rossiisky Kredit have been asking precisely this question about Menatep, the Yukos auction's organizer and winner. They claim that with the Yukos win, Menatep, which is Russia's 9th largest, has accumulated $1.1 billion in unfulfilled investment obligations to privatizing enterprises -- about 10 times its capital. According to Rossiisky Kredit, Menatep owes two major chemical plants alone $450 million in promised funding.
And as always, there are several theories about where this kind of money is coming from.
At the end of November, Inkombank president Vladimir Vinogradov charged that "some banks" which have Finance Ministry accounts and deposits (Menatep fits this description) use these funds to credit subsidiary enterprises, which then "go to auctions, win them, and return these funds to the budget." As a result, Vinogradov said, "all are indebted to one another through promissory notes." The Finance Ministry has denied the charge.
Other theories involve undeclared foreign investors, or connections to the tens of billions of dollars in illegal capital flight that has fled Russia over the past few years and could soon start looking for ways to return.
"The banks are illiquid," said Alex Goodwin, chief executive officer and president of Sector Capital, an investment firm. "We know that the system is overextended. So what are they paying with? Was it really an advance payment, or was it a promissory note? Maybe the loans-for-shares program is really a notes-for-shares program. Or, maybe these banks are shilling for someone -- not necessarily foreigners; maybe they're shilling for Russian money that's in Swiss banks, but not in their banks."
Late last week, Menatep, along with Yukos and seven other banks and companies signed a declaration on joint activity for investing in and developing Yukos. Menatep head Mikhail Khodorkovsky said Yukos' planned development projects will cost about $40 billion dollars over the next 10 years. Khodorkovsky told Commersant Daily that he and his co-signatories "welcomed" foreign investors, but that "we ourselves will be controlling strategically important enterprises."
The fact is, the investment capital needed to modernize Russian industry exists, only not in Russia. Yet the whole loans-for-shares scheme has been characterized by ambivalence toward the question of foreign participation. The need for investment and management know-how which foreigners could bring has slammed up against the entrenched interests of enterprise managers and the government's fear that it would be seen as selling off the family jewels.
An August presidential decree on the loans-for-shares scheme opened the bidding to foreign banks and in September, a month before the first auction, Chubais told reporters that the "participation of foreign investors, both banks and non-banks, is welcome in every way." Yet a month later -- in the midst of the parliamentary electoral campaign in which nationalist credentials were at a premium -- the government announced that foreigners would be barred from bidding for shares in a number of strategic companies. Following the Norilsk auction in November, Chubais defended the exclusion of foreign investors.
Some experts believe that the realities of Russia's capital market means that the eventual participation of foreigners is inevitable.
"Right now the only good decision is to finish the task and to prepare for the next round of privatization -- one more open for foreign investors and more competitive for share bidders," said Sergei Pavlenko of the government's Center for Economic Reform.
And according to PlanEcon's Keith Crane, "shady dealing" has been a feature of privatization throughout the former Communist bloc.
"I think it's par for the course when you have these massive amounts of assets changing from an owner which was really not an owner -- the state -- into private hands," he said.
Indeed, the first phase of Russia's process -- voucher privatization -- was probably not much cleaner: In July 1994, Izvestiya estimated that up to 70 percent of the property sold at voucher auctions had ended up in the hands of people picked in advance.
Analysts say, however, that the danger with the loans-for-shares scheme is that it is yet another sign of a trend toward monopolism in the Russian economy -- of a symbiosis between the state and a small number of "chosen" large financial-industrial structures.
"What is a concern in the case of Russia is that you don't get this Italian-style capitalism, where there's a small group of commercial banks that are very politically attuned and you get major investment and buyout decisions made for political reasons," said Crane.
Indeed, it is perhaps a sign of the times that one Russian newspaper has called Menatep Nash Bank -- "Our Bank," a reference to Our Home Is Russia, Chernomyrdin's political party. And Commersant Daily recently wrote of Uneximbank: "This bank perfectly conforms to the model of state capitalism which is being erected today in Russia."
proportion of shares min. bid price market
offered (%) for the bloc value
($m) (MTindex $m)
1. Surgutneftegaz* 40 66.66 (sold at 88) 108***
2. Norilsk Nickel 38 170 (sold at 170.1) 228.899
3. Novolipetsk Metal 14.84 30 (sold at 31) 31.310
4. LUKoil** 5 35 (sold at 35.01) 161.01
5. Sidanko 51 125 (sold at 130) not listed
6. Yukos 45 150 (sold at 159) not listed
* The winner had to pay company's tax debt of $222 million to the government.
** The winner had to pay company tax debt of $111 million to the government.
*** As of 11/21/95; only the Surgutneftegaz holding company is an actively traded stock: the figure quoted here, from Rinaco-Plus, is for the oil company, a less traded stock and not part of the MT index.
-- Source of Bid Information: State Property Committee
But fast-forwarding to the present, that second phase of privatization is in trouble. Cash auctions have foundered in a depressed market, and it became clear early in the year that the State Property Committee would not even come close to its task of bringing some 9 trillion rubles ($1.95 billion) to the budget through the sale of state assets. To jump start the process, the government has introduced its loans-for-shares program to place some the country's largest companies in private hands in exchange for loans to the government.
Some Western observers contacted for this article were loathe to criticize the scheme in too harsh terms -- one called it "untidy," while another deemed it "unconventional." Yet since the auctions began in early November, the loans-for-shares process looks more and more like the functional equivalent of show trials: a series of staged events designed to give pre-determined outcomes the appearance of spontaneity.
Indeed, hefty chunks of some of Russia's most valuable assets -- most notably, Norilsk Nickel, the oil giants Sidanko and Yukos, and the Novolipetsky Metal Factory -- were won by the banks tapped by the government to organize the auctions, Uneximbank and Bank Menatep, in each case for bids slightly above the starting price.
The victories of what might be called the Chosen Two have been challenged most vocally by a troika of banks who were excluded from the bidding on technical grounds -- Inkombank, Alfa-Bank and Bank Rossiisky Kredit. Statements from these banks suggest that their protests stem more from the fact that they also want to be on the list of the chosen, rather than any belief in fair play. But given the size of the stakes involved, the loans-for-shares process was bound to be controversial.
"It was inevitable," said Sergei Pavlenko of the government's Center for Economic Reform. "When big chunks of state property, profitable state property, are at stake, people become crazy and really hungry."
But even if this is true, there is strong prima-facie evidence of backroom dealing in the way the auctions were carried out.
"These are highly collusive, closed deals which they are working out," said one leading Western economist who asked not to be named. Even prior to the first auction, he added, "It was clear that people were saying: 'This is mine -- stay away; you can have that one, I'll stay away from you.' There's collusion built into the rules, but there's collusion just built in generally."
Indeed, the government now admits that the process has been less than perfect. Chubais, first deputy prime minister in charge of the economy, said at a press conference Friday: "We consider it our mistake that the organization registering the applications -- a bank -- is also taking part in the auction. Not so much from the legal but ethical point of view, this was our mistake."
Likewise, Alfred Kokh, acting head of the State Property Committee, recently said banks charged with organizing auctions will not be allowed to participate in them in the new year.
So why did the government go ahead with a scheme which was bound to stir up a hornets' nest?
According to the original plan, floated by a consortium of top Russian banks in April -- its members were Inkombank, Stolichny Bank, Uneximbank, Imperial, Menatep, Vorozhdeniye and the Mezhdunarodnaya Finansovaya Kompaniya -- the banks would grant loans to the government in exchange for the right to manage shares in state enterprises. Investors would be allowed to sell their shares after a certain period, and could keep 30 percent of any profit made, with the balance going to the government. The consortium soon broke up, however, with some of its members charging that others had made separate agreements with the government.
The government's version of the loans-for-shares process was approved by an August presidential decree, and included what now appears to have been a fig-leaf: Rather than hand the shares over to a consortium of banks, the government would hold competitive auctions.
Yet not even the State Property Committee is putting much emphasis on this competitive element. The government now says that its main goal has rather been to attack the $16.2 billion budget deficit.
"I don't think competition is an end in itself," Kokh said a news conference Wednesday. The main point, he said, was that the loans-for-shares scheme would put $1 billion into the government's coffers.
But does this really explain it? Open auctions, even without the admission of foreign investors, would certainly have raised more cash for the government. Some observers also doubt that $1 billion in extra revenues are so vital that they could alone have forced the government into such an obviously flawed scheme, or indeed that it could not have found other sources to meet such short-term needs.
"There were lots of other alternatives," said Keith Crane, director of research at PlanEcon, a Washington D.C.-based consultancy. "They could increase borrowings through the bond market. They could have announced a series of initial public offerings. It's kind of silly to adopt this fairly closed, convoluted scheme for privatization just because you have a three-or four-month financing problem. If the Russian government had wanted to, they might have even been able to go to the IMF.
"I think Western financial institutions would have been much more supportive of a more open auction process than the one they adopted and provided the financing. I don't buy that it was driven by financial constraints. I think it was a political decision -- that they wanted to reward certain people."
There is also unhappiness about the fact that the way the loans-for-shares scheme has been implemented will not encourage the marshaling of investment and fresh managerial know-how for the purpose of restructuring privatizing enterprises.
"The scheme offered by the government inverts the goals of money privatization from head to toe," Sergei Burkov, chairman of the State Duma's committee on property, privatization and economic activity said in an interview with the weekly newspaper Kapital. "Enterprises are not receiving investment, and the program is pursuing strictly fiscal goals. It is not privatization, but a primitive dividing up of property for the sake of financial groups close to the government."
Some observers believe that the government was also hell-bent on transferring as much property as possible prior to Sunday's parliamentary elections, just in case conservative forces were to strengthen their political position in the country and put a block on any further significant privatization.
"There's some good that might come out of [loans-for-shares]: They're getting the state out of ownership of some things, and that, per se, is good," said the Western economist. "But one has to weigh this against the negative factors, including a possible backlash threatening the sustainability of the privatization program."
But whatever the government's motivations may have been, analysts worry that the controversy has provided ammunition for opponents of economic reform, who have long charged that privatizatsiya is nothing more than prikhvatizatsiya -- "grabitization."
Such as they are, the loans-for-shares auctions have been marred by constant changes in the list of state assets to be sold off. Critics say that lobbying in the corridors of power explains why foreign investors were excluded from key auctions, and how some enterprises managed to get themselves struck altogether from the list of companies to be auctioned. The original list of 46 enterprises has shrunk to 15.
"At the slightest doubt we struck enterprises off," Prime Minister Viktor Chernomyrdin said last week.
Of course, the fix does not appear to have been in for every auction. Real competition appears to have operated in the sales of shares in one or two of the smaller companies on offer, such as the Mechel metal plant, with the result that the buying prices were commensurately higher.
The first auction took place Nov. 3, when a 40.12 percent stake in the Surgutneftegaz oil company went on the block. The company had managed to include among the conditions of the tender a promise to pay off its 1.026 trillion tax arrears. This was interpreted by many analysts as a way of dampening the interests of "outsiders."
If so, it worked. Surgutneftegaz's pension fund won the auction for a promised loan of 400 billion rubles ($88 million) to the state. There were only two other bidders; one of them, the state oil company Rosneft, was disqualified for missing the registration deadline. Kokh, acting head of the State Property Committee, declared himself happy with the outcome.
"The worst forecasts never came true," he said. "Foreigners did not buy Surgutneftegaz. Everything went as it was planned."
Whether or not his last comment was a Freudian slip, fears that the auctions were nothing more than Potemkin competitions were only enhanced with the tenders for the 38 percent Norilsk stake or for a 51 percent stake in Sidanko and a 78 percent stake in Yukos, Russia's fourth and second largest oil companies, respectively.
The Nov. 17 Norilsk auction was bound to draw attention, given the value of the stakes involved. The company, which controls 35 percent of the world's known nickel supplies, is a price-forming factor in the world nickel market. It is also a major producer of cobalt and platinum-group metals.
Uneximbank, which was authorized by the State Property Committee to collect applications and bids from potential participants in the Norilsk auction, won the tender with a $170.1 million offer, just $100,000 above the starting price. Bank Rossiisky Kredit, through its sister company Kont, had offered twice as much as Uneximbank, but its bid was thrown out due to "insufficient financial guarantees," as the State Property Committee put it. Rossiisky Kredit promised to challenge the results in court.
"It is possible that the State Property Committee is right," wrote Segodnya's economic columnist Rustam Narzikulov on the decision to disqualify Rossiisky Kredit. "However the State Property Committee hardly excluded Kont from the ranks of the contestants out of a striving for strict observance of the rules for carrying out the auctions. Simply, the owner of [the] Norilsk Nickel [stake] was known in advance, and the appearance of a competitor was probably taken by the persons making the decision as the height of indecency."
The tenders of Sidanko, LUKoil and Yukos stakes also drew intense interest, given that their reserves are each estimated to be on par with those of Western giants like America's Exxon. On Dec. 7, the AKB Mezhdunarodnaya Finansovaya Kompaniya (International Financial Co.), a bank closely affiliated with Uneximbank, won the tender for 51 percent of Sidanko with a bid of $130 million, just $5 million over the starting price. A bid by Rossiisky Kredit was disqualified by Uneximbank for arriving 24 minutes late.
The same day, LUKoil, Russia's largest oil company, in conjunction with Bank Imperial, which has had close links to Gazprom, Russia's natural gas monopolist, won a tender for 5 percent of its own shares for $111 million plus payment of tax arrears. Imperial organized the auction.
One Western oil analyst called the prices paid for the Sidanko, Yukos and LUKoil shares "ludicrously low." Indeed, the U.S.-based Arco oil company paid $250 million for a 6 percent stake in LUKoil earlier this year, effectively nearly 50 percent more than the loans-for-shares price.
The Yukos auction came the next day, and with it, perhaps the greatest uproar. Suspicions that the fix was in for Yukos were already raised back in early November, when a top official of Bank Menatep, the State Property Committee's authorized representative for organizing the tender, announced: "There should be no two opinions about this: We will get Yukos." It did. Menatep won the auction for a 45 percent Yukos stake and a simultaneous investment tender for another 33 percent, after throwing out a bid from the competing troika. Yukos declared itself perfectly happy with the results, having had for some time a close relationship with the bank.
Potential Yukos bidders were required to make a $350 million deposit. Menatep had rejected the payment made on behalf of Inkombank, Alfa-Bank and Rossiisky Kredit for various technical reasons, including that part of the deposit had been made in the form of GKOs -- short-term state treasury bills. This despite the fact that the Finance Ministry had suggested allowing payment in the form of treasury bills, and that the Central Bank had announced its readiness to "create a mechanism" for receiving such payments.
The day prior to the Yukos auction, Kokh, of the State Property Committee, and Vladimir Sokolov, chairman of the Russian Federal Property Fund -- made it official: They told reporters that deposits could only be made in "cash," not GKOs.
"We don't accept 'kerenki'," said Sokolov, using the derisive term for the all-but-worthless currency printed by Alexander Kerensky's government in 1917.
After an embarrassed pause, Sokolov added: "Of course, I didn't mean GKOs."
One question, as the auctions plough ahead, needs to be asked. Just where did the winning banks come up with the cash? How could Menatep, a bank with assets that would not put it anywhere near even the bottom of the Fortune 500 list, afford to swallow Yukos, an oil giant with estimated reserves considerably higher than those of the U.S.-based Exxon?
Inkombank, Alfa-Bank and Bank Rossiisky Kredit have been asking precisely this question about Menatep, the Yukos auction's organizer and winner. They claim that with the Yukos win, Menatep, which is Russia's 9th largest, has accumulated $1.1 billion in unfulfilled investment obligations to privatizing enterprises -- about 10 times its capital. According to Rossiisky Kredit, Menatep owes two major chemical plants alone $450 million in promised funding.
And as always, there are several theories about where this kind of money is coming from.
At the end of November, Inkombank president Vladimir Vinogradov charged that "some banks" which have Finance Ministry accounts and deposits (Menatep fits this description) use these funds to credit subsidiary enterprises, which then "go to auctions, win them, and return these funds to the budget." As a result, Vinogradov said, "all are indebted to one another through promissory notes." The Finance Ministry has denied the charge.
Other theories involve undeclared foreign investors, or connections to the tens of billions of dollars in illegal capital flight that has fled Russia over the past few years and could soon start looking for ways to return.
"The banks are illiquid," said Alex Goodwin, chief executive officer and president of Sector Capital, an investment firm. "We know that the system is overextended. So what are they paying with? Was it really an advance payment, or was it a promissory note? Maybe the loans-for-shares program is really a notes-for-shares program. Or, maybe these banks are shilling for someone -- not necessarily foreigners; maybe they're shilling for Russian money that's in Swiss banks, but not in their banks."
Late last week, Menatep, along with Yukos and seven other banks and companies signed a declaration on joint activity for investing in and developing Yukos. Menatep head Mikhail Khodorkovsky said Yukos' planned development projects will cost about $40 billion dollars over the next 10 years. Khodorkovsky told Commersant Daily that he and his co-signatories "welcomed" foreign investors, but that "we ourselves will be controlling strategically important enterprises."
The fact is, the investment capital needed to modernize Russian industry exists, only not in Russia. Yet the whole loans-for-shares scheme has been characterized by ambivalence toward the question of foreign participation. The need for investment and management know-how which foreigners could bring has slammed up against the entrenched interests of enterprise managers and the government's fear that it would be seen as selling off the family jewels.
An August presidential decree on the loans-for-shares scheme opened the bidding to foreign banks and in September, a month before the first auction, Chubais told reporters that the "participation of foreign investors, both banks and non-banks, is welcome in every way." Yet a month later -- in the midst of the parliamentary electoral campaign in which nationalist credentials were at a premium -- the government announced that foreigners would be barred from bidding for shares in a number of strategic companies. Following the Norilsk auction in November, Chubais defended the exclusion of foreign investors.
Some experts believe that the realities of Russia's capital market means that the eventual participation of foreigners is inevitable.
"Right now the only good decision is to finish the task and to prepare for the next round of privatization -- one more open for foreign investors and more competitive for share bidders," said Sergei Pavlenko of the government's Center for Economic Reform.
And according to PlanEcon's Keith Crane, "shady dealing" has been a feature of privatization throughout the former Communist bloc.
"I think it's par for the course when you have these massive amounts of assets changing from an owner which was really not an owner -- the state -- into private hands," he said.
Indeed, the first phase of Russia's process -- voucher privatization -- was probably not much cleaner: In July 1994, Izvestiya estimated that up to 70 percent of the property sold at voucher auctions had ended up in the hands of people picked in advance.
Analysts say, however, that the danger with the loans-for-shares scheme is that it is yet another sign of a trend toward monopolism in the Russian economy -- of a symbiosis between the state and a small number of "chosen" large financial-industrial structures.
"What is a concern in the case of Russia is that you don't get this Italian-style capitalism, where there's a small group of commercial banks that are very politically attuned and you get major investment and buyout decisions made for political reasons," said Crane.
Indeed, it is perhaps a sign of the times that one Russian newspaper has called Menatep Nash Bank -- "Our Bank," a reference to Our Home Is Russia, Chernomyrdin's political party. And Commersant Daily recently wrote of Uneximbank: "This bank perfectly conforms to the model of state capitalism which is being erected today in Russia."
proportion of shares min. bid price market
offered (%) for the bloc value
($m) (MTindex $m)
1. Surgutneftegaz* 40 66.66 (sold at 88) 108***
2. Norilsk Nickel 38 170 (sold at 170.1) 228.899
3. Novolipetsk Metal 14.84 30 (sold at 31) 31.310
4. LUKoil** 5 35 (sold at 35.01) 161.01
5. Sidanko 51 125 (sold at 130) not listed
6. Yukos 45 150 (sold at 159) not listed
* The winner had to pay company's tax debt of $222 million to the government.
** The winner had to pay company tax debt of $111 million to the government.
*** As of 11/21/95; only the Surgutneftegaz holding company is an actively traded stock: the figure quoted here, from Rinaco-Plus, is for the oil company, a less traded stock and not part of the MT index.
-- Source of Bid Information: State Property Committee
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