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. Last Updated: 07/27/2016

Nationalization on the Quiet

Nationalization comes in two forms: primitive and "creeping." For the moment, the Russian authorities have successfully subdued the former by firing Vladimir Polevanov, the former chairman of the State Property Committee, who had publicly stated his intention to renationalize some key privatized industries.

But dramatic nationalization in the form of primitive expropriation of private property, often with compensation to investors, is readily recognizable and, hence, more easily resisted.

Creeping nationalization, on the other hand, stealthily subverts the owner's control of his property without dramatic gestures, and for that reason seldom causes a public row and rarely provides compensation to investors.

One example of this is a resolution recently issued by Mayor Yury Luzhkov that will strengthen the city's control over privatized enterprises by increasing the Moscow government's stake in them.

Under the resolution, additional common shares will be issued to the city government, while non-voting preferred shares already held by the Moscow authorities will be converted into common voting shares.

The resolution ignores the provisions of Russia's four-year-old antimonopoly law, which prohibits government interference in the activities of commercial enterprises.

It also upsets the delicate balance created in Russia's privatization law between maintaining the government's right to manage its shareholding interests in partially privatized companies and protecting such enterprises and their shareholders against attempts by the government to go beyond its remit.

As evidence of this balance, the privatization law requires that no more than 20 percent of shares held by the government in a partially privatized company may be common voting shares; the rest must be non-voting convertible preferred shares, which automatically convert into common shares upon their sale to private shareholders in the course of privatization.

The new resolution contradicts federal legislation on several counts. Under the new Civil Code and the existing Joint Stock Company Regulation, additional shares cannot be issued or preferred shares converted into common shares without the shareholders' consent. It remains to be seen if outside shareholders will willingly vote to dilute their shareholding in order to accommodate the wishes of the city government.

The city government's new resolution is almost certainly only the opening shot in what promises to be a messy fight between the Moscow authorities and the shareholders of privatized companies. Luzhkov has already won one battle with the federal authorities last month, when President Boris Yeltsin agreed to let the capital go its own, more conservative way on the second stage of Russia's privatization program.

This latest incident confirms that the dilution of existing shareholdings has become a favorite tactic of recalcitrant directors and bureaucrats and that this issue must receive urgent attention.

Likewise, the incident shows that while Russia may never again be able to blithely wipe out private property in a pen stroke, the specter of creeping nationalization is already on the horizon.

Leonid Rozhetskin, a graduate of Harvard Law School and a native of St. Petersburg, is now in private practice in Moscow.