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Russian left-wingers are trying to bring oligarchs to justice

Russian left-wingers are trying to bring oligarchs to justice

20.04.2012 — Analysis

Russia is willing to nationalize a number of large enterprises inefficiently operated by their owners. At the moment, the RF State Duma is discussing renationalization draft laws prepared by the communists and socialists. Deputies think that the prerequisites for the law on nationalization have been existing for a long time; however, they are afraid that officials, as usual, will misrepresent its essence and will use it to lay their hands on the property of disagreeable businessmen. The experts interviewed by the RusBusinessNews columnists believe that inefficient owners can be clean forgotten, if the government starts the war on offshore money laundering and corruption.

The RF State Duma Committee on Property offered the Parliament to adopt a law on nationalization. The deputies were given two draft bills to study: "On restitution of state ownership of formerly alienated state and municipal property privatized and owned by legal entities and individuals" and "On compensated seizure (nationalization) of property of socially inefficient owners". The first document was crafted by the Communist Party of the Russian Federation (CPRF); the second document - by the Fair Russia Party.

The communists suggest that the law on nationalization should be applied to the core sectors of economy: the military industrial complex, electric power industry, transport and infrastructure-related industries. In giving explanation to this choice, Sergey Gavrilov, the chairman of the RF State Duma Committee on Property, said that many strategic privately-owned enterprises were ransacked or suffocated without investment injections.

In the opinion of the communists, the compensated seizure approach will provide fair conditions for transfer of factories to efficient owners and will improve the country's economy on the whole. They offer to buy out enterprises at the privatization price, though taking into account the investment that has been made. The CPRF deputies promise a fair price to those who actually invested in production. The capitalization that has "come with the wind" - for example, through increasing prices for raw materials - should be disregarded, in their opinion.

Unlike CPRF, Fair Russia prefers a more conservative approach. "We do not need any sweeping reforms, Alexander Burkov, the leader of "fair Russians" in the Middle Urals, a deputy of the RF State Duma, explained to RusBusinessNews. - The law draft offered by CPRF is purely political. It does not clearly outline the process of renationalization and is very obscure about the mechanism of industrial property appraisal. The document says nothing about what should prudent acquirers expect. In the meantime, some enterprises have changed hands 5-10 times since the Chubais time".

The socialists prefer to talk about nationalization - an efficient form of economy management that has long been used in many countries. In their opinion, the government should restitute its ownership of backbone enterprises with more than 1 thousand employees, where collective employment agreements are violated and salaries are not paid. This list can be further extended if it includes factories where non-compliance with industrial safety regulations results in death of workers as well as factories causing severe damage to environment.

In the opinion of A. Burkov, large corporations sponsored by the government should also be subject to nationalization. He reminded that in the middle of the crisis of 2008 the government granted assistance to Evraz Group in the amount of 1.8 billion US dollars. This amount would be sufficient to buy out the controlling stake of Roman Abramovich's holding company; however, it is still in hand of the Russian oligarch. Just the same, the federal government squandered an opportunity to gain possession of 45% of shares of UC RUSAL, whose financial standing did not offer much to brag about.

Ivan Grachev, the chairman of the RF State Duma Committee on Energy, points out that the similar situation can be observed in power generation. He is sure that the industries supported by the state budget must be controlled by the government.

The Member of Parliament thinks that there will be no problems with the appraisal of core enterprises: The law "On Appraisal Activities in the Russian Federation" provides effective methods of property valuation. As for any differences that may arise, they can be settled in court. The problem is of another kind: Many public and quasi-public companies lack financial transparency, thus allowing money to flow into offshore banks. Therefore, the law on nationalization should be complemented by the law on management of state-owned stocks.

Entrepreneurs share I. Grachev's opinion that state-owned property management is rather inefficient. Dmitry Baskov, General Director of Ural Nickel, LLC, believes that inefficient and non-transparent companies should be renationalized so that they could be revived through new philosophy of development: For example, more advanced technologies should be deployed or an enterprise should be reengineered to focus on technologies instead of products. Very few state-owned companies make such commitment - the examples of enterprises smashed up by the managers appointed by officials are much more numerous.

Having control of the Izhmash Concern, OJSC, the government let it go to the wall. With export contracts in hand, the manufacturer of Kalashnikov assault rifles demonstrated negative profitability year in year out. The net worth of the parent company and a number of its subsidiaries making cars and motor bikes turned out to be less than the authorized capital. The anti-crisis management team that came in 2011 from the Rostekhnologii State Corporation found out that the enterprise had been divided into thirty legal entities, and only seven of them were connected with production. The organizational structure was extremely complicated: For example, the Izhmash Concern holding company was to report to another holding company - Izhevsk Mashzavod, OJSC". The accounting documentation pertaining to the rifles exported to other countries was also a mess.

The situation with Izhmash makes it clear why officials are resisting so vigorously privatization of small blocks of shares of state-owned companies. The RF Ministry of Energy thinks that minority shareholders should be kept away of Transneft, OJSC, as the company deals with strategic projects. Consequently, small holders can veto the transactions that are interesting to the government. Zarubezhneft, OJSC, also wouldn't like to encounter problems while making "strategic" decisions.

The experts admit that there are clashes between majority and minority shareholders, but to use these differences as justification for turning of the Transneft Open Joint-Stock Company into "a special-purpose company intended for implementation of intergovernmental agreements in the oil production sector" is economic nonsense.

Even the communists disapprove of public control, anticipating that corrupt officials will use the law on nationalization in their fight against honest entrepreneurs. "We are well aware of sabotaging and misinterpreting federal laws by local officials, shares his grievances Nikolay Yezersky, a deputy of the RF State Duma. - For example, the law "On Bankruptcy" repeatedly is used as a tool in raider attacks on prudent owners. Sometimes "phony debts" engineered for a company are sufficient to take it over.

Russian regions are wary of the legislative initiative spearheaded by the communists. Yevgeny Kafeyev, the vice-speaker of the Kurgan Regional Duma, suggests giving up all attempts to reinvent the wheel: "The government already has an array of tools that help it to deal with inefficient top managers. It should fine-tune the existing laws by conferring additional powers to government authorities in making decisions on insolvent enterprises". He doubts that the nationalization proponents will succeed in outlining clear-cut requirements to transfer of enterprises into the government's hands. The line between good faith and bad faith is hard to find. The parliamentarian points out that sometimes it takes years for business owners to arrive at solution of environmental problems, for instance.

Konstantin Selyanin, the director of the financial markets department at Ural Interregional Bank, thinks that the term "inefficient owner" should be abandoned. In his opinion, none of the entrepreneurs would keep loss-making businesses as an asset. If an owner keeps on showing losses and yet does not sell the non-performing business, it means that the profit is channeled into offshore. Capital export and money laundering are the issues of primary concern and responsibility of the government. It certainly happens that losses are caused by actions of government authorities or poor market conditions; however, the law on nationalization has nothing to do with this: owners need preferential loans, tax breaks, etc.

The argument asserting that nationalization will help to call the owners who do not upgrade their business to order does not hold water. According to K. Selyanin, by no means all enterprises should be modernized: Sometimes it is much more feasible to "squeeze" an enterprise dry and to build new and modern manufacturing facilities at its site.

The experts think that all talks about renationalization have an adverse impact on the Russian investment climate. These talks stem from the early 90s when the state-owned property, as most of the Russians believe, was plundered. That is why today it is offered either to return the property to the state or to collect a compensating tax from business owners.

Konstantin Selyanin agrees that privatization in Russia was not fair, but does not recommend bringing up nationalization ideas: "All privatization transactions of the 1990s should be investigated, crooks should put to prison and the issue should be closed. It is very important for the country to rely on unbreakable long-established rules if it is interested in its development. If the rules are regularly revised, the right of ownership can be kissed goodbye".

Konstantin Dzhultayev, Vladimir Terletsky

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