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. Last Updated: 07/27/2016

Luzhkov Orders Probe, Rent Review for GUM

Mayor Yury Luzhkov has ordered an investigation into the privatization of Russia's biggest department store and told officials to find a way to make GUM pay the city most of its rent revenues, a Moscow government spokesman said Thursday.

GUM was sold to private investors in 1993, leaving the city holding a zero stake in the flagship store off Red Square, but the spokesman warned that the store's privatization could be reversed if irregularities are uncovered.

"The building is the city's property and Luzhkov believes they are cheating the city," said Yury Zagrebnoi, a spokesman for the city government, adding that the city receives only a tiny portion of the company's huge rental revenues. "The Chubais-style privatization left the city with not a single share in GUM."

Luzhkov's threat to reverse GUM's privatization echoes statements made by new privatization minister Vladimir Polevanov that "wrongly" privatized companies should be renationalized and that foreign investment poses a threat to Russia's national security. Some 14 percent of GUM's stock is owned by foreigners, according to Zagrebnoi.

Polevanov, who was attacked by President Boris Yeltsin this week for his "inept statements," has also suggested that much of the Moscow privatization experience should be implemented in other Russian regions.

Moscow won exemption from the more radical aspects of the national privatization program after President Boris Yeltsin backed Luzhkov in a vitriolic battle with former State Property Committee chairman Anatoly Chubais.

GUM, which holds a 49-year lease on some 15,000 square meters of Russia's best retail space, pays the city about $70 dollars per square meter, Zagrebnoi said. At the same time, the company rents out much of its retail space to stores like Galleries Lafayette and Reebok at rates of up to $4,000 per square meter, he added.

Zagrebnoi said Luzhkov had instructed Moscow Property Committee officials to "find a legal way to make GUM pay the city 85 percent of its rental revenues." Officials at the Moscow Property Fund could not be reached for comment Thursday.

The city's rent revenues -- which could be worth an estimated $70 to $100 million a year -- would then go toward the renovation of the 19th-century shopping mall which is expected to double its retail space, Zagrebnoi said.

"The city would invest in reconstruction, earning a natural right to take part in future profits," he added.

GUM's financial director Vyacheslav Vechkanov declined to comment on the issue Thursday, saying only that the decisions of the city government had come as a total surprise.

"We pay rent punctually," he said.

GUM announced plans for a $250 million reconstruction project last October and has hired the British estate agency Erdman Lewis to conduct a feasibility study.

Moscow authorities tried once before to reverse GUM's privatization in February 1993 when the City Council charged the store's sell-off was illegal. The charges were later dropped.