Government Names Stakes to be Offered

Russian privatization officials said Thursday they would go ahead with plans to sell huge stakes of state property in industrial enterprises this year in an apparent move to help the government plug its gaping budget holes.


The Russian Federal Property Fund plans to put up for sale this year 15 percent of the country's leading oil company LUKoil, as well as an option on 4.95 percent of the oil major's shares.


Other shares on the selling list are 19.68 percent of the Russian-Belarussian oil company Slavneft, a 40 percent stake in Norsi Oil, a 20 percent stake in Arkhangelsk cellulose combine and a 5.34 percent stake in Novorossiisk Sea Shipping Co.


In addition, the government wants to sell a stake of 1.5 to 2 percent in national power company Unified Energy System in about six months, Vladimir Malin, deputy chairman of the fund, was quoted by Reuters as saying.


A planned auction for 34 percent of second-tier, Urals-based oil company ONAKO was put off until next year at the request of regional authorities in Orenburg, where the company is located, he said.


Malin said the fund would go ahead with the planned sale of 50 percent of Rosgosstrakh, Russia's biggest insurance company.


Privatization officials are keen to boost the flow of cash from sales of state property to meet this year's target of 4.2 trillion rubles ($744 million) after failing to bring in enough revenue last year.


However, it remains to be seen whether this year's privatization sales will follow the precedent of past years, when shares were sold below market price to domestic investors, many of which had insider ties to banks running the auctions.


Proceeds from the sale of the LUKoil's 15 percent stake would be split between the company and the state, with the state most likely retaining the larger amount, a company spokesman said.


Vitaly Chernyak, vice president overseeing Russian oil and gas industries at United City Bank, said the auction for LUKoil's shares would probably be a "straightforward" deal, as the company has a "good history of transparent relations with the market and outside investors."


But with LUKoil's market capitalization valued at between $7 billion and $8 billion, a 15 percent stake in the company represented "an expensive chunk of property" that only foreign capital could afford, Chernyak said.


One potential foreign buyer could be LUKoil's long-time strategic partner, Atlantic Richfield Co, or ARCO, which already owns an 8 percent stake in the Russian oil giant. ARCO also signed a $5 billion joint-venture agreement with LUKoil last year.


However, a successful bid on the new shares would effectively give ARCO a 23 percent stake in the oil major. It remains to be seen if the company management and the Russian government would relinquish ownership control of such a large share, Chernyak said.


Another likely scenario could include a buyout of the entire stake by


LUKoil management using a front company which would later resell the shares at a higher price in the form of American Depositary Receipts (ADRs), he said.


LUKoil said previously it aims to have 20 percent of its entire share capital listed in ADRs and plans to list its Global Depositary Receipts, GDRs, on the London Stock Exchange later this year.


As for the options to be offered on the company, Chernyak said the management may bid on the 4.95 percent itself in an effort to increase control. The options will likely be based on a 5 percent stake in the company held in escrow under a presidential decree from August 1995.


"This one they're likely to buy themselves," Chernyak said.


LUKoil ordinary shares closed at $14.90 Thursday, up 2.76 percent from the previous day. Preferred shares went up 1.76 percent to $10.99.