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. Last Updated: 07/27/2016

Report: Don't Sell Svyazinvest, Restructure

A consultants consortium led by Arthur Andersen has suggested the government ought to postpone selling more shares in telecoms holding Svyazinvest until after a broader industry restructuring has been carried out f one that would perhaps merge local telephone operators into larger businesses along the geographical lines of the seven new super-regions created by President Vladimir Putin.

The consortium's report, delivered to the Communications Ministry this week, also suggests that Rostelekom, the national long-distance provider, should be kept as a separate operating unit and not folded into Svyazinvest and makes suggestions for regulatory changes for the industry.

At the moment, the nation's various local telephone operators are united in the Svyazinvest holding. It is not clear whether the consortium's report suggests breaking apart Svyazinvest or keeping it as the umbrella uniting all local carriers. Officials at Svyazinvest declined to comment on the consortium's proposals.

"Currently, the sale of a stake in Svyazinvest does not spark serious interest on the part of investors," said a statement circulated Tuesday by Arthur Andersen. "Investor attitude is unlikely to change unless restructuring is carried out in the company and the whole sector."

The consortium also includes Germany's Commerzbank, the British-based law firm Allen & Overy and the telecoms consultancy GIST, which focuses on emerging markets. Its proposals nicely dovetailed with the major themes outlined in a doctoral dissertation presented this week in St. Petersburg by Communications Minister Leonid Reiman.

Reiman, however, has gone a step further on Rostelekom. Svyazinvest owns 51 percent of Rostelekom, and Svyazinvest is in turn owned 75 percent minus one share by the state and 25 percent plus one share by Mustcom, a Cyprus-based investment vehicle that united Hungarian-born financier George Soros and Uneximbank founder Vladimir Potanin.

According to the newspaper Vedomosti, Reiman has suggested setting up Rostelekom as a separate business and dividing Svyazinvest's 51 percent stake in it proportionally between the government and Mustcom. In other words, the government would retain a 38.25 percent stake in Rostelekom, while Mustcom would get a 12.75 percent stake.

"[A more independent and aggressive Rostelekom] could have a major impact on the regional operators because they could be forced to pay," said Konstantin Chernyshov, head of research with NIKoil investment bank.

Rostelekom's clients, mostly regional telephone operators, have amassed huge debts to the national long-distance carrier, and the process has been gathering speed. In the first quarter of 2000, debts to Rostelekom surged 20 percent to some 6 billion rubles ($214 million) f or the equivalent of a quarter of its total sales over that period.

At the behest of Svyazinvest and the Communications Ministry, the consortium in February began to study the national telecommunications sector with an eye toward suggesting improvements.

"Our team worked closely with our client Svyainvest and the Communications Ministry, as well as with potential strategic and financial investors in conducting the research," said Mark Sanor, director of corporate finance at Arthur Andersen.

One analyst at a Moscow-based investment bank, who asked not to be identified, suggested that the consortium's proposals were influenced by a desire to tell Reiman what he already wanted to hear.

"Originally, the consultants drafted several proposals, but they were influenced by Reiman's team when working on the final version," the analyst said.

Commerzbank f after Arthur Andersen the second major participant in the consortium f owns a roughly 35 percent stake of Telekominvest, a Svyazinvest subsidiary where Reiman was once deputy director.

As if that does not already suggest Telekominvest and Svyazinvest are politically connected, consider just the 1998-1999 tax return filed f under Central Elections Commission rules f by Putin's wife, Lyudmila: Mrs. Putin declared income of 43,167 rubles (about $1,500 at current exchange rates) for those two years and indicated it came from Telekominvest.

In urging against rushing into a new privatization auction for some of the government's 75 percent stake in Svyazinvest, the consortium argued f as have Svyazinvest officials themselves f that the company would be undervalued at the moment.

"The current capitalization of Svyainvest is inadequate, and it doesn't make sense to sell such a huge industry for a few kopeks," said Svyazinvest general director Valery Yashin earlier this year. Yashin was Reiman's former boss when the two worked as director and deputy director of St. Petersburg Telephone.