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Russia: Future Of Telecom Privatization Hangs In Balance

Washington, 27 November 1996 (RFE/RL) - The privatization of Russia's massive telecommunications sector will involve thousands of millions of dollars, and global financial sources say there are signals that Moscow may decide to keep out all international involvement and turn the process over to a handful of local Russian banks led by two with close ties to President Boris Yeltsin.

No one directly involved will talk about what is going on, although a spokesman for Alfa Bank, Igor Khazanov, told our Moscow bureau that negotiations are being held at an "unofficial level."

The situation was brought to the fore when the "London Financial Times" quoted business sources in Moscow as saying the government would exclude foreign investors and turn the telecommunications privatization entirely over to a group led by Vladimir Gussinsky's Most Group and Peter Aven's Alfa Bank. They would not only handle a public offering of the stock, but would be major investors as well, the paper said. It also said they were "two of the largest financial contributors to Mr. Yeltsin's re-election campaign."

Financial sources close to the issue say final decisions have not yet been conveyed by senior Russian officials, but that signals are being sent that the government plans to go ahead with a privatization plan that ignores World Bank recommendations, turning the Russian telecommunications sector back into a giant monopoly that is completely disconnected from the rest of the global industry. Additionally, they say the plan will restrict the sale of shares to the Russian domestic market only by Russian banks.

Our economics correspondent in Washington says the story began last year when the Russian government tried to sell about 25 percent of Svyazinvest, a holding company created to handle the government's stake in 85 regional telecommunications operators.

The idea was to sell the shares to foreign strategic investors and a consortium of companies including Italy's Stet, France Telecom, Deutsche Telecome, U.S. West and others, expressed an interest. However, because the regulatory condition of the telecom sector in Russia was not clearly defined and because corporate governance relationships in the industry were not clear, the consortium withdrew from the process.

For a time, Stet made its own bid, but eventually withdrew and the entire offering failed.

After the presidential elections, the Russian government started the process all over again, asking the World Bank, as part of a larger privatization advisory service, to draw up a range of options for restructuring the sector.

Bank experts completed a lengthy technical paper containing five options, with two recommended as being the most desirable in terms of their implications for the long-term development and efficiency of telecommunications in Russia.

The Russian government even retained the European investment banking firm NM Rothschild to handle the underwriting of an international offering. Rothschild had been involved with the first, failed offer.

The sources say that when the World Bank presented its suggested options, the Russian government responded by choosing an entirely different direction. The government told the bank that it would merge Svyazinvest, the holding company controlling the local telecom operations, with Rostelecom, the country's sole long-distance operator, and then sell the shares of the new monopoly only to the general public in Russia.

World Bank experts told Russian officials that this would be contrary to everything that is being done in the industry globally -- that everywhere markets are being liberalized and that this would be a major re-monopolizing of the public and private sectors.

Secondly, bank experts told Moscow that selling shares just to the general public would create a very "diffused" form of ownership that would leave effective control of the system in the hands of a select few designated by the government. One of the values of getting strategic foreign investors, bank experts said, is to bring in new management which would have strong experience globally.

RFE/RL's economics correspondent says the bank signaled its displeasure with the plan, but said it would continue to provide technical assistance and participate in the privatization dialogue provided Moscow accepts a number of "competitive conditions" and "safeguards."

Sources say the bank demanded that the sector be opened to competition, with a requirement for local telephone service competition to be opened within one year of privatization and long-distance service to be opened to competition within three years.

Overall, the bank asked that the telecom system in Russia be mandated to offer inter-connection access to any company that wanted to come in and offer services by connecting to the existing network.

Initially, sources say, Moscow appeared to be on the way to accepting these conditions. But now, they say, the signals being sent to the bank by the Russian government are that the Rostelecom-Svyazinvest merger plan with stock shares sold only by Russian banks to Russian citizens is the top choice.

Experts say the value of international offerings of such stock issues is that disclosure and regulatory requirements imposed by other markets and countries bring the kind of strong scrutiny such major investments require.

Industry sources say that without this safeguard Rothschilds is losing interest and has informally told the Russian privatization ministry that it is withdrawing from its position as financial advisor.

Similarly, the sources say the World Bank has told senior Russian officials that unless the competitive safeguards are accepted, the bank will also withdraw from the process.

Sources say that no official communication from Moscow has passed to the World Bank or Rothschilds, and that it is unclear exactly where in the Russian government the decisions are being made. In the end, however, as a Washington expert noted: "There has to be a presidential decree -- a fortune hangs in the balance."