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Russia: Western Telecom Consultants Fired In Blow To Privatization

Moscow, 27 November 1996 (RFE/RL) - Russia's privatization program suffered another setback after the government announced yesterday it had fired a Western consortium handling the sale of a major chunk of the telecommunications sector to international investors. Several Russian banks with close links to the government are now widely expected to organize the lucrative sale and acquire major stakes in the industry.

Russia's State Property Committee issued a statement yesterday announcing it had fired the investment bank NM Rothschild as an advisor on the sale. Rothschild led the consortium that was to organize an estimated $1 billion public offering of the state's telecom shareholdings.

Rothschild issued a statement yesterday, quoted by "The Moscow Times," saying the Russian government had apparently decided to "adopt a transaction structure which they regard as favorable in investment and national security terms." It said the Rothschild-led consortium had withdrawn from the project.

The State Property Committee gave no reason for its decision. But it said it was looking at a new scheme for selling shares of Svyazinvest, the state-owned company that holds controlling stakes in 85 local telephone companies.

The consortium led by Rothschild was to sell a 25 percent stake in Svyazinvest, which is expected to merge with Russia's main long distance operator, Rostelecom by the end of this year. The combined company is believed to be worth $4 billion.

Rothschild led the second failed attempt to privatize Svyazinvest. Last year, the Italian telecom company STET won a deal to invest in Svyazinvest, but the deal fell through because of disagreements over payment terms.

Russian authorities have declined to say whether they have appointed a new advisor on the project. But a spokesman for Alfa Bank, Igor Khazanov, told RFE/RL yesterday that Russian banks have held what he termed "unofficial" negotiations with representatives of the State Property Committee on taking over the project. Khazanov said representatives of both Alfa Bank and Most Bank took part in the talks. But he said no agreement had been reached.

Khazanov was commenting on a report in yesterday's British daily, "The Financial Times," which predicted the Russian government would fire Rothschild and exclude foreign investors from the telecom sale. "The Financial Times" said the consortium will be replaced by a Russian group believed to be led by Alfa Bank and Most Bank. Other reports have suggested that another possible recipient of shares in the telecom sale could be Uneximbank, which has close links with First Deputy Prime Minister Vladimir Potanin.

A spokesman for Most Bank, Yuri Sabotin, refused to comment on the report when approached by RFE/RL. But he said Most Bank is interested in gaining a stake in the telecommunications sector in general.

Vladimir Gussinsky, who heads a financial group that includes Most Bank, and Peter Aven, who heads Alfa Bank, were large contributors to Russian President Boris Yeltsin's re-election campaign. Most analysts say yesterday's decision is a political favor to Yeltsin's backers, and one that makes little economic sense.

The World Bank for one has criticized the government's plan to merge Svyazinvest with Rostelecom, saying it would stifle competition and investment by creating a telecom monopoly. The World Bank had provided some $2 million to Rothschild in consulting fees on telecom privatization. But Marina Vasilieva, the World Bank's spokesperson in Moscow, told RFE/RL that the bank considers the loan now finished.

Some observers predict that the revised sale will mean further delays in investment to upgrade Russia's ailing telecommunications network. It may also mean that the government, badly in need of cash, will receive less privatization revenue. But the real fear is that the Russian banks that are expected to organize the privatization will devise an unfair auction and secure shares for themselves.

For many, the government appears to be moving towards a repeat of last year's controversial loans-for-shares scheme, under which insider Russian banks won shares in blue-chip enterprises in exchange for loans to the government. In the end, the banks retained control of the companies, and the government kept the money.