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. Last Updated: 07/27/2016

Loans for Shares Unraveling

The government's ill-starred loans-for-shares program appeared to be at an advanced state of unraveling Friday, as Norilsk Nickel, one of the largest companies to be auctioned off, found support for a proposal to buy back its own shares on behalf of the state.


A 38 percent share in Norilsk Nickel -- which produces roughly a quarter of the world's nickel, half its platinum and turned a profit of $1.2 billion in 1995 -- was sold at auction to Uneximbank late last year for a mere $170 million.


But on Friday the company's management offered during a hearing in the State Duma to buy out Uneximbank's share and return it to the state, finding support for the deal with the bank," Norilsk Nickel's director general, Anatoly Filatov, said. "If it agrees to return the stock to the state, we will find the means to compensate the bank for what it has spent, even if that money has to come out of our company's funds."


A Uneximbank spokesman commented only that the bank was "watching developments" Friday. If carried out, Filatov's offer would represent a serious step toward reversing the privatization scheme.


With the mastermind of Russia's privatization program, Anatoly Chubais, now sacked from the government, it appeared there was now little strength left at the property committee to defend the loans-for-shares sales.


"The government is already being punished -- this is, in part, why Chubais was fired, and this is why I am probably the next one out the door," said Alfred Kokh, first deputy head of the State Property Committee, who had supervised the program.


Filatov made his offer during a plenary session of the Duma, which launched a series of privatization debates to be held in Duma committee hearings.


Under the rules of the loans-for-shares scheme, the government still owns the shares Uneximbank bought and holds in trust, with the bank gaining title to them only if the government fails to repay its loan by this September.


The apparent assumption, however, of the banks and the government had been that the loans would never be repaid.


The tender for the metals company last November had exemplified the shortcomings of the loans-for-shares scheme.


Although the company's management wanted foreign investors to take part in the bidding, the State Property Committee excluded them. Uneximbank, which proposed the loans-for-shares scheme early last year, organized the Norilsk Nickel auction on behalf of the government, and won with its offer of $170 million, despite an offer of $355 million from another top Russian bank, Rossiisky Kredit.


At either price, the sale was a bargain.


Norilsk Nickel is responsible for 90 percent of Russia's output of nickel and cadmium, 75 percent of its copper and all of its platinum. As Communist Deputy Svetlana Savitskaya put it Friday, 38 percent of this company was "sold for the price of an average office building in Moscow."


Kokh tried to defend the deal. He said the decision to bar foreigners from the auction was motivated by concern for Russia's strategic interests, but that consequently the starting price had to be low because domestic investors have less capital to invest than foreign ones.


Kokh also said that while the price may appear to have been low, the state remained the formal owner of the stock. Assuming that the government would indeed pay the money back, it would have received an interest-free loan.


"If the State Duma approves budgets which are based on loans from the IMF, on which we have to pay interest, why is it objecting to interest-free loans from domestic investors?" Kokh asked.


Kokh added that he still saw handing at least part of the shares to Uneximbank permanently as the best way to repay the loan: "But I find less and less support in the government for this plan."


He received no support at all from the deputies and as much from Filatov, who said strategic enterprises such as Norilsk Nickel had to remain state-controlled. But Filatov had a vested interest: If Uneximbank got its way, he would be replaced along with the rest of the current management.


Only a lawsuit brought by Norilsk Nickel's management-dominated board has staved off a shareholders' meeting that could have pushed through the bank's demand. And this too, was part of the plan, according to Kokh.


"Although one of the reasons we auctioned the Norilsk Nickel shares was fiscal, the other one was our intention to make the management of the company more efficient," he said.


The State Property Committee, he added, had information from the tax police and from the State Precious Metals Committee that showed the factory's management had sold nickel abroad below market rates, suggesting a high degree of inefficiency and corruption.


Filatov, who has worked for Norilsk Nickel for 39 years and who was elected director general during former general secretary and president Mikhail Gorbachev's perestroika, would not address the accusations, saying only that he was prepared for the most strenuous government investigation of his activities.


Kokh said handing over the stock was the only option left to the State Property Committee, if it wanted to replace the factory's management with new, more efficient people. The government had made the mistake earlier of giving the state's share in Norilsk Nickel to the company directors to manage, and so lost any control over the board.


It seemed Friday as though Filatov was going to get his way again. Most deputies backed repaying Uneximbank's loan by September, even though the 1996 budget does not provide for it. The chamber is likely to pass a decision ordering the repayment of the loan next week.


Leftist legislators demanded that the government be held responsible for botching the loans-for-shares scheme, and one of them, Albert Makashov, even offered Kokh the jail cell Makashov had occupied in 1993, after taking part in the former Supreme Soviet's revolt against Yeltsin.


When Makashov asked Kokh whether he was afraid of taking responsibility, the deputy minister replied, "No. I am past being afraid."