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. Last Updated: 07/27/2016

City's 'Golden Shares' Worry Investors

a move that could scare off potential investors, the Moscow city government intends to extend its control of more than 100 key construction companies for another three years under so-called "golden shares" arrangements.


According to documents obtained by The Moscow Times and a source close to some of the companies, Mayor Yury Luzhkov has put together a list of 105 construction and building materials enterprises in which the city wants to extend the life of its golden shares, special rights that allow the city to keep a voice in running the companies.


Luzhkov's request highlights the increasing importance of golden-share provisions, many of which were written during Moscow's 1994 privatization with three-year terms and which are due to expire soon. Golden shares are emerging as a useful tool for cash-strapped local and federal governments struggling to maintain control over strategic industries while selling off as much stock as possible.


One potential investor, however, expressed concern over the city's decision to extend the arrangements.


"Golden shares could be an inhibitor to investments. If you want to modernize and investors find out City Hall and unknown bureaucrats have veto power, you'd be less likely to get investors interested," said one developer, who asked not to be identified.


The list, dated July 8, was sent to Moscow's state property fund and includes companies under the Glavmostroi, Mosmontazhspetzstroi, Mosinzhstroi and Mospromstroimaterialy enterprises. It's not clear whether the mayor wants to extend City Hall's golden shares in other industries as well.


Russia's new privatization law, passed last month, extended the right to hold golden shares to municipalities. Previously, only the federal government had the right. Depending on the company's charter, golden shares grant rights such as automatic board seats and veto power over any reorganization at the company such as stock offerings.


Particularly in sensitive metals or defense sectors, privatization agencies wanted to retain veto power over key corporate decisions.


That was a key tool when "the government didn't really want to get into all the details about how many shares it had to own to maintain control," said Brian Zimbler, securities lawyer with Leboeuf Lamb Green & McRae.


"Sometimes workers had the majority [of shares], sometimes the management did, but the state needed to have veto power over major decisions to preserve a role in management," Zimbler said. "It forces the company to consult and check back with the government."


City Hall's interest in construction companies likely is linked to Luzhkov's intense drive to rebuild the metropolitan area, industry experts said.


In the course of Russia's pell-mell privatization process, Luzhkov in 1994 was able to convince the federal government that the capital should run its own separate privatization program and have oversight of city construction firms.


"Luzhkov has always taken a special interest in building," said Andrew Wixom, director of real estate development management services at Noble Gibbons.


The press has noted that "he frequently attends the most mundane structural and planning meetings in the city and takes a real interest in the building fabric of Moscow," Wixom added.


Golden shares have been widely used in countries like Britain, where privatization continues. Just this summer, the British government gave up its long-held golden share in British Telecom ahead of the company's proposed merger with U.S.-based operator MCI.


There's plenty of disagreement as to the merits of golden shares, particularly in Moscow, where major enterprises make few important moves without first checking in with landlord City Hall.


Golden shares "simply codify something that has been effectively true anyway," said James Fenkner, head of research at CentreInvest brokerage firm.


One privatization expert said the golden-share provision is necessary for political reasons.


"The golden-share clause was a compromise with the [State] Duma. The opposition's position was that the state was selling socialist property. If the government keeps this golden share, they'll show they're not selling national treasures," said the privatization expert.


Extending the life of golden shares also allows local governments to vote against layoffs at local businesses or other unpopular business decisions.


"This is true of the West as well, where politicians are very concerned about factories closing down and job layoffs," said Rory McFarquar, economist with the Russian European Center for Economic Policy.