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. Last Updated: 07/27/2016

Cabinet Pushes New Law on Privatization

With President Vladimir Putin’s administration still trying to define its policy on managing state assets, the Property Ministry is busy trying to put its house in order — pushing for a new privatization law and consolidating its grip on regional property committees.

The bill, drafted by the ministry, will be made public after it is submitted to the State Duma sometime within the next month, but the ministry has disclosed some parts of its proposal.

The bill stipulates that all state companies must be divided into two groups — those with fixed assets worth more than 5 million statutory minimal wages (around $15 million) and those that are worth less, a ministry official who asked not to be named said in a telephone interview Wednesday.

The first group of companies could be privatized via auctions or by issuing derivative securities on Western exchanges, the official said.

The smaller companies could be sold through auctions or in six other ways: tenders; selling shares on stock exchanges; public offerings; transferring state property to the charter capital of private companies; management in trust with the option of property eventually being transferred to the managers; and, for the least attractive companies, selling to the first bidder in "noncompetitive tenders."

Deputy Property Minister Alexander Braverman has said the ministry’s main goal is to ensure transparency, but too little is known about the bill to say whether it will help make privatizations less susceptible to insider deals and under-the-table arrangements.

But instances of corruption are not always directly dependent on privatization methods, said Alexander Radygin, an expert with the Institute for Economy in Transition.

"As long as there is no judicial practice of punishing corruption in Russia, certain risks remain even when selling [assets] via auction," he told the Vedomosti business daily.

"There are too many inherent failings in the existing privatization law," said Roland Nash, an analyst with Renaissance Capital.

Currently, privatization allows a company’s management to maximize its own benefits, while regarding the value of a company’s shares as secondary, he said.

Nash said another big problem was that potentially effective managers often have their hands tied and can not downsize or make "rational investments."

Largely, this problem stems from non-monetary conditions with which investors are sometimes saddled as part of privatization deals. The ministry official said that most of the privatization methods applicable to the smaller companies, as defined in the bill, include non-monetary conditions — such as obligations not to change a company’s line of production for a certain period of time.

"One problem [with the bill] is it still allows for non-monetary conditions," Christopher Granville, a strategist with the United Financial Group brokerage, said in a telephone interview Wednesday. "And any non-monetary condition gives scope for potential abuse."

The ministry official said his agency aims to privatize stakes in around 10,000 companies in the next two years, adding that, since the start of privatization, the government has sold off some 120,000 state companies.

The official refused to comment on rumors that one salient procedural change proposed in the bill is to sideline the State Duma, which has summarily rejected the government’s annual privatization programs.

In addition to the privatization bill, the ministry has announced plans to tighten its grip on property sales in the provinces by reviewing the work of regional property commissions, or KUGI, with which it works on a contract basis.

The official said as many as 25 percent of the KUGI could be stripped of their functions because the ministry is not satisfied with their work. Instead of the KUGI, the ministry plans to open 20 to 25 of its own regional property management offices by the end of 2001 and about twice as many in the next three to four years, he added.