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

. Last Updated: 07/27/2016

State Loses Control of Telecom

The government has lost majority control of national telecom provider Rostelecom after Saturday's annual general meeting waived dividends on preferred shares, granting holders of the stock voting rights for at least the next 12 months.

The state's 38 percent stake f which is held in trust by Svyazinvest f represented a majority of voting stock in the billion-dollar company until the 25 percent stake that is made up of preferred shares was granted voting rights.

A disparate group of foreign investors, who hold 42 percent of ordinary shares and 67 percent of preferred shares in their hands, therefore now control about 48 percent of Rostelecom's voting stock and are just a few thousand dollars' worth of secondary market purchases away from majority control.

Meanwhile, minority investors f local and foreign f could take charge of a major, strategic company with Russia-wide operations, should they choose to do so, analysts said. "The peculiarity of the situation is that minority investors, mostly Western investment companies and funds, will have 60 percent of the votes under the new circumstances," said Mikhail Alexeyev, senior consultant with J'son&Partners.

Theoretically, outside investors will be in a position to change the top management of the company and amend its charter, he added.

However, despite their new-found leverage f which they will likely retain until at least next year's annual general meeting f the foreign investors are a scattered group who are not expected to try to make major personnel or policy changes at the company.

The owners of preferred shares will likely take a friendly stance toward Rostelecom's board of directors, analysts said. "Rostelecom has long been fighting for its image in the Western markets and its management does not see any threat from its shareholders," said Alexander Kabanovsky, a telecommunications analyst with Brunswick Warburg.

According to Brunswick, over the past four years Rostelecom has invested more than $1 billion in developing its network. The company listed second-level ADRs and reiterated its friendliness toward external shareholders.

Meanwhile, the shareholders meeting voted in a new chief executive, Nikolai Korolyov, former first deputy director and long-time ally of Oleg Belov, current director general at Svyazinvest.

Rostelecom's decision not to pay dividends on preferred shares drew praise Monday from analysts who saw it as a positive step on the road to better corporate governance in Russia. "They opted for a civilized way of treating shareholders," said Lyudmila Kan, telecom analyst with Troika Dialog.

Even when they post poor results, Russian companies have often opted to pay tiny dividends on preferred shares to avoid the clause in most company's charters that grants preferred shareholders voting rights until the next annual general meeting should they receive no dividends.

"Rostelecom created a rare precedent on the Russian market by deciding against disbursing a dividend on preferred shares," Alexeyev said.

Rostelecom posted a loss of 11.04 billion rubles ($456 million at current exchange rates) for 1998 on revenues of 17.9 billion rubles for last year.

The loss was mostly attributable to a large foreign exchange losses and consequent re-evaluation of assets, analysts said.

The decision not to pay dividends on preferred shares had been expected for some weeks, but it was unclear whether or not foreign investors had moved to snap up Rostelecom preferred stock on that basis.

Trade in Rostelecom preferred shares had gathered speed on the secondary market in recent weeks, with the shares vaulting to 49 cents, a 53 percent gain in just four weeks.

The same period saw increased interest in Rostelecom ordinary shares, which advanced to $1.51, a 34 percent rise.

The prospect of Rostelecom slipping out of state hands was not welcomed by some elements of the Communist Party, the largest faction in the State Duma, which has often railed against letting major domestic enterprises slip out of Russian control.

"Some kind of reaction will follow," said Deputy Viktor Ilyukhin, head of the Duma security committee. "But so far it's premature to make any formal announcements because a thorough consideration should be given to this issue."