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. Last Updated: 07/27/2016

Privatization Phase Two: No More Guesswork

Second of Two Parts Buying Russian companies under the voucher privatization program, which ended this week, was often nothing more than a crapshoot. Western investors, who prefer to make deliberate decisions based on reams of spreadsheets and financial data, usually scrambled to amass vouchers to bid for companies they knew little about. At the end of the day, they could wind up with a 25 percent share and a seat on the board of a bankrupt company or an insignificant 5 percent stake in a profitable concern. The new post-voucher privatization program, in which enterprises will be sold for cash, could take much of the unknown out of the mercurial privatization process, boosting foreign and Russian investment and increasing share values across the board, Russian and Western brokers predict. Even though prices will probably be substantially higher than in the old program, investors will take to the system because it more closely resembles Western privatization. "A number of Western investors looked at the voucher process and said, "I don't like the idea of buying securities in a zoo,'" said an executive with the Troika Dialog brokerage house who asked not to be named. "Now, they will pay more money but at least they know what they are getting." Under the new program, signed Friday by Prime Minister Viktor Chernomyrdin, the government will advertise in newspapers the company and the percentage to be sold, Oleg Kanachov, a deputy prime minister for privatization said in an interview. More important, 51 percent of the cash from the tenders will be retained by the companies. This will bring about a dramatic change in two key areas. First, companies will begin privatization with an infusion of capital, which could increase their chance of success. Voucher privatization was largely a cashless system. Second, companies are likely to make more financial information available to investors because it boosts share values, the executive said. Directors lacked motivation to provide financial information under the old system because many were forced to privatize and wanted to maintain control of their companies. Now, directors will find that the more information they make available, the higher the bid will be for shares. "This is the first time in the process where they are going to have a cash incentive to meet the market at least halfway because they need money," the Troika Dialog executive said. The cash sales, which will be based on new higher valuations of companies, could resonate through Russia's fledgling stock markets and bring workers their first real benefits from privatization. Shares to be sold in the new program will come from companies not yet privatized at all and from the stakes held by the state in companies auctioned off under voucher privatization. In the latter, workers and managers often had controlling interests. When investors buy at the higher prices set at the investment tenders, they will set a value that will reflect on the shares held by workers and managers. This could induce them to sell their shares, possibly to the outside investor, who will then have the power to force the company to restructure. There is still much that is not known and much that will be confusing about the post-voucher program. Kanachov said the State Property Committee has yet to formulate the regulations to govern how the program works. There is no schedule yet for the tenders and it is unclear what will be put up for sale since privatization is no longer mandatory. The new program will allow regions to choose among different variants of privatization and the voucher to be used in regional sell-offs. And there is nothing that will lessen the general risks of investing in Russia. "The process is simplified. However, any foreign investor who is coming into the market clearly has to take into consideration the political instability and the ever-changing tax and legal regime in which they will be operating," said Marcus Rhodes, a senior audit specialist at accountants Arthur Andersen.