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Monday, January 16, 2006

RAO Gazprom - Nationalization

01-10-2006 Kommersant by Renata Yambaeva - Last year, Russian business got from the state just what it had been asking for for years: a clear industrial policy. Turning its back on complicated theories, it simply did to the economy what it has done to the administration, starting up large state holding companies in each sector. The inevitable large-scale industrial nationalization, especially in oil, natural gas and heavy industry, will most likely continue in 2006, with results that have been foreshadowed in Yuganskneftegaz. Its merger with Rosneft was the beginning of the first state mega-concern. Taking Oil and Gas Personally Nothing a year ago even hinted at the coming state expansion into industry, the largest wave of industrial nationalization since the October Revolution. The auction of YUKOS production subsidiary Yuganskneftegaz in December 2004 seemed to be the chance result of the war against disgraced oligarch Mikhail Khodorkovsky. But the idea of founding "Gosneftegaz," a concerned consisting of Rosneft and Gazprom, was not new, and the need to auction of Yuganskneftegaz was a good excuse to revive it. In Russia, the state is usually personified. Personal factors are at work here too. Former chief of the presidential executive staff and chairman of the board of Gazprom Dmitry Medvedev and deputy chief of staff and chairman of the board of Rosneft Igor Sechin could not agree the unification and further division of their fiefdoms. Therefore, two state concerns were formed. Rosneft got Yuganskneftegaz. As compensation, Gazprom was given the right to "produce," and it acquired Nortgaz, one of the last independent gas producers, and purchases Sibneft, essentially the last independent oil producer. The Gazprom management is hinting at more acquisitions in 2006, including Rosneft assets. Medvedev was made first deputy prime minister in November.
Choosing Their Partners Carefully
The second state holding formed, in heavy industry, also came about after a fortunate coincidence – the need to fend of undesirable investors, and not from the desire to improve economic conditions. Heavy industry has received little official attention in recent years, despite attempts by industrialists to attract it. The idea for the National Power-Generating Machinery Corp. sprang up out of nowhere a last few months ago as Interros was trying to sell Power Machines to the German Siemens. Since the officials could not produce a cogent new development strategy for the sector in time, they simply ordered RAO UES of Russia to buy it. The second participant in the state holding has also been determined. It is the United Machine Building Plant (known by its Russian acronym OMZ), which was bought by Gazprom-affiliates last spring from Kakha Bendukidze, the once respected investor in Russia who is now a minister in the Georgian government. OMZ now has Gazprom representatives on its board of directors. Analysts and officials in unofficial conversations say that RAO and Gazprom are only temporary holders of the heavy industry assets, waiting for right manager to come along. Candidates for that position may be chosen in 2006.
The nationalization of this asset is deceptively similar to heavy industry. Here the undesirable investor was the SOK Group of Samara, which had practically controlled the company's finances for several years. As a result, AvtoVAZ came into the oversight of Rosoboroneksport, the state arms exporter. This was the most transparent of the year's nationalizations. It was carried out quietly but intently. It is thought that Rosoboroneksport acquired 61.8 percent of the stock, which had been kaznachaisky. The details of the deal have not been officially released and it is not really known what stock or money traded hands. Chairman of the board Vladimir Kadannikov, who had been chairman for almost 20 years, resigned at the end of October. Two months later, the majority of places on the board were taken by state representatives from Rosoboroneksport and Vneshekonombank. Interior Ministry and prosecutor's agents are conducting audits there.
Extra-Budgetary Accounting
Of the transactions mentioned above, the exact value of three of them is known – the purchases of Yuganskneftegaz ($9.35 billion; formally, it took place in 2004), Sibneft ($13.091 million) and 22.43 percent of stock in Power Machines ($101.4 million, another 30.41 percent of the company's stock is under RAO management). Unofficial sources say that the acquisition of OMZ cost a trifling $50 million. Sources close to Rosoboroneksport say that it laid out $700 million for AvtoVAZ. Unlike Yuganskneftegaz, almost exactly market price was paid for Sibneft. It is not known how much of that money really made it to the former owner, however. After Power Machines was appraised by KPMG, it was sold for a 30-percent discount. If the unofficial account is assumed to be true, the state overpaid for AvtoVAZ by more than $110 million. A total of about $23.3 billion was spent on nationalization. The money spent on Yuganskneftegaz was returned to the federal budget immediately after the purchase. AvtoVaz owed the state about $300 million. The main question is how effective the state will be as an owner. If Yuganskneftegaz is taken as an example, the situation is discouraging. Neither RAO nor Gazprom has any idea of what to do in heavy industry. New partners were being sought in the industry because of the need for large-scale investment and truly modern technology in it. AvtoVAZ stock fell by 15 percent between November 17 and 22. A month later, new general director of AvtoVAZ Rosoboroneksport employee Igor Esipovsky told the press that everything was the same as before at the new old AvtoVAZ, that is, it was still going onto a hole. Thus, Russian industrial policy amounts to dividing spheres of influence in business between official and unofficial structures of authority and protecting sate interests by forcing dubious investors, from the government point of view, off the market.

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