Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Insurance Privatization As Crooked as the Rest

The results of the Audit Chamber's prolonged investigation into the privatization of Rosgosstrakh, Russia's largest insurance company, confirmed what scores of analysts have been claiming for several months now: Rosgosstrakh is another tarnished spot on the silver plate of privatization. If the sales of Yukos, Sibneft, and Sidanko have puzzled you, this one will mystify.

Rosgosstrakh is the descendent of Gosstrakh, the national insurance company of the Russian Republic of the Soviet Union. Like UES and Svyazinvest, it is organized in the form of a holding company that unites more than 80 separate insurance companies with offices across the country. By any account it is an attractive company, destined to be an industry leader, despite the fact that Russia's insurance industry lacks an up-to-date law and is in the same state as investment funds were in 1994, the age of the pyramids.

According to the law on privatization, workers are to decide which privatization method -- there are three of them -- their company is to pass on the road of transforming from a national to a private company.

Rosgosstrakh employees voted for the third option, which was designed for small companies in the red and on the verge of total collapse. According to this option, an initiative group consisting of top managers is established; the group has one year to fulfill a revival plan for the company. If it succeeds, members win the option to buy 30 percent of company stock at a predetermined price.

Very few enterprises were privatized using this third option. However, a handful of astute directors with an overloaded account payables, vacuous inventories and a dearth of orders managed to manipulate this option. A year later they packed their pockets with 30 percent. Nine managers of Rosgosstrakh intend to do the same.

Last year Rosgosstrakh received more than 2.5 trillion rubles ($480 million) in voluntary premiums and another 1.5 trillion rubles in obligatory insurance policies. Vladislav Reznik, chairman of the Rosgosstrakh holding, stated that the company covers about 15 percent of the nation's insurance industry. With this kind of market share, Rosgosstrakh is about as far away from insolvency as Michael Eisner and Disney.

Even the path to privatization at Rosgosstrakh is muddled with inconsistencies. It was the employees of the holding company that chose the third option, and not the employees of all 80 individual companies. But it is exactly the assets of this multitude of insurance subsidiaries which are being privatized. So why weren't all employees given a vote?

To the Duma's agitation, privatization has already begun at Russia's largest insurance company: 20 percent of the shares were scooped up by over 55,000 Rosgosstrakh employees -- from both the head company and 80 subsidiaries; 30 percent is being held in a type of escrow for members of the initiative group; and 50 percent is due to be sold at a cash auction this year. When asked about the 30 percent, Reznik says a company's success depends upon managers. "The best variant is when the manager is interested," he says. Strange, one may ask: Is 30 percent all he needs to "be interested?"

The Duma's case against the company is grounded on two points. First, deputies fear that once Rosgosstrakh is privatized, disgruntled policy holders who had their policies devalued overnight in 1992 will be left out to dry. Rosgosstrakh officials say, correctly, that reimbursing these policyholders is the government's affair. Policy holders think otherwise and intend to prove the legality of their case, with the first hearing scheduled in arbitration court June 20.

Second, before its privatization plan was approved by federal privatization authorities in November 1996, the company's assets were valued as of Jan. 1, 1994 at a total of 2.1 billion rubles ($368,000 at today's rate), a galaxy away from the company's current value.

Gary Peach is the editor of the weekly newsletter Capital Markets Russia.