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. Last Updated: 07/27/2016

Loans-for-Shares Deals Not Complete Disaster

The news that Uneximbank has started the first stage of what is certain to be a protracted battle with the management of Norilsk Nickel provides some heartening evidence that 1995's controversial loans-for-shares scheme was not all bad.

The focus of criticism of the scheme has been that the auctions for shares in 12 big Russian companies were rigged to help insiders with close connections to government.

First Deputy Prime Minister Anatoly Chubais has more or less confessed his guilt on these charges, admitting that the basic procedure, which placed the auctions under the control of banks that were also allowed to bid, was fundamentally flawed and will be reviewed.

But before condemning the whole scheme, it makes sense to await the outcome of long-term developments like the boardroom battle now brewing in the icy, arctic city of Norilsk.

Uneximbank clearly used insider status as organizer of an auction to help it win its 38 percent stake in Norilsk Nickel, Russia's biggest mining company, for what was considered the modest price of $170.1 million.

But Uneximbank has just used its stake to start what could be some very major reforms that would have been unthinkable if the shares had stayed in government hands. It has called an extraordinary general meeting, and the agenda apparently includes serious challenges to the existing management. The privatization ministry has given its support. The battle should be interesting.

Taking into account extra revenue like investment commitments and promises to pay back taxes, and also considering that the government retains a 70 percent interest in any upside on resale of the shares, the $1 billion raised from the loans-for-shares scheme was close to market values.

But raising revenue is only the tip of the iceberg of a much broader agenda in the loans-for-shares scheme.

Politically, Chubais wished to take as much property as possible out of the suffocating grip of state control before the election season, which would inevitably turn the political climate away from free market reform and toward the communists.

More deeply, Chubais used the sales as a means of attacking his ultimate enemies, the heads of large former state companies -- the silent backers of the gray oligarchy that stands for Russia's current version of inefficient, bandit capitalism.

These directors effectively stand above the control of shareholders or the Russian government. For instance, Chubais spent most of the last six months of 1995 in a desperate battle to try to force the oil companies to pay taxes that they readily admitted they owed, but that the government, wracked by political uncertainty and corruption, is simply unable to collect.

Shareholders similarly have little control over the actions of directors and cannot influence them to publish real accounts, restructure, create open trading systems or take serious measures to raise profits.

The real issue is whether the new private shareholders can unseat the rump of factory directors and make the companies operate in a more conventional way. It is now a question of whether the banks can actually deliver on restructuring the companies and whether the government can establish its power to regulate them.

The government may have lost a little cash by rigging the auctions in the loans-for-shares scheme, and it has certainly cast a shadow over the probity of the privatization ministry.

But this may have been the price necessary to secure the allies needed to get Russia's biggest companies onto the market, restructure them and get them into the habit of paying at least a modest amount of tax.