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. Last Updated: 07/27/2016

Feared Sell-Offs Report Elicits Yawns

A much-feared Audit Chamber report on privatization violations from 1993 to 2003 sent stocks tumbling nearly 3 percent Wednesday, but big business and market watchers fought off yawns.

The report, published on the parliamentary watchdog's web site Tuesday, appeared to be far from earth-shattering, Aton brokerage wrote in a research note, while Alfa Bank described it as much ado about nothing.

The report slammed privatization as not leading "to the creation of efficient owners or to the establishment of a socially-oriented market economy."

"Courts should ensure the restoration of the government's ownership rights on the basis of proven facts," the report said it in its most threatening-sounding comments.

But it also said there should be no mass re-examination of the nation's privatization results. "The inadequacy of Russian laws can't be the grounds for a sweeping reversal of the results of the 1993-2003 privatizations," the report said.

The sell-offs allowed 2 percent of the population to amass an income equal to 15 percent of gross domestic product and 10 percent of the population to control one quarter of the nation's wealth, it said.

"We stress that its recommendations and conclusions appear to be purely advisory in nature and do not represent an imminent threat to particular companies," Alfa Bank said in a research note.

The report, which audited 140 companies, specifically mentions violations by Yukos, LUKoil, Surgutneftegaz, TNK, Sibneft and Unified Energy Systems. Also listed are a number of metals, timber, coal and defense companies.

The Audit Chamber also advised that foreign ownership be limited in defense companies, saying that from past experience foreign investors have not brought any added value to the companies, while their participation has jeopardized development.

The report was released on the same day that President Vladimir Putin complained that oligarchs who made their billions during the chaotic 1990s still hold a grip over the state. "We are fighting this and will continue to fight this," Putin said at a congress of judges.

The RTS index dropped 2.69 percent to 611.07. Yukos shares, which have been in a tailspin for months as the company faces bankruptcy over a tax bill of more than $20 billion, shed 10 percent of their value. UES lost 3 percent, while LUKoil dropped 1.28 percent.

The privatization report, however, was only one of the factors depressing the market, analysts said.

"Concern on how this will be handled is one of the reasons -- along with the Ukraine risk and uncertainty on Yukos endgame consequences -- causing market nervousness this week," said Christopher Weafer, chief strategist with Alfa Bank.

"Most portfolio investors have decided that the prudent approach is to do nothing until these uncertainties are removed, and even local traders are largely inactive," he said.

Large companies named in the report refused to comment on its findings Wednesday, but industry lobby groups said it draws a line under privatizations and makes it highly unlikely that the Kremlin will wage war on businesses beyond Yukos.

"Yukos is a separate story that does not make the country look good, but we are praying to God that this is a one-off case," said Igor Yurgens, vice president of the Russian Union of Industrialists and Entrepreneurs.

"The understanding we got from the auditors is that they do not want a revolution, but to turn a page, and we fully agree with this," Yurgens said.

The big-business lobby group met with Putin last month, and the president reiterated that privatization results would not be revised.

"We have been firmly assured that if companies behave appropriately with regard to tax payments, there will be a constructive dialogue with the powers-that-be. This is what we are telling our members," Yurgens said.

"I think that Putin has enough political willpower to understand that any digging into the past will see Russia's investment rating plummet," said Grigory Tomchin, head of the All-Russia Association of Privatized and Private Companies, which was created in 1993 and lobbies on behalf of more than 500 companies.

"Privatization was a government decision, and companies were sold for what was a fair market price at the time," he said.

"By ruling to deprivatize, the government would encourage robbery."

In any case, even if the government wanted to renationalize property, there is no legal mechanism for doing so, said Yelena Krasnitskaya, a corporate governance analyst at Troika Dialog.

"Most privatized companies have changed hands over the years, and their current owners bought the assets in good faith," she said.

Privatizations "have been harshly criticized in the past, but that has never led to any consequences," she added.

Sergei Markov, a Kremlin-connected political consultant, agreed that the report is unlikely to be used in any attempt to take back assets.

"There has been a political decision to draw a line under past privatizations. ...

"The report might only be used if a company's policy runs counter to that of the government's, but even then it would serve as a tool and not as the reason," Markov said.

"The Audit Chamber provides tools to the government to run the economy at a time when it does not have other tools," Markov said.

Audit Chamber chief Sergei Stepashin is to present the report to the State Duma next Wednesday.

Staff Writer Catherine Belton contributed to this report.