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Russia: Privatization Really A State Diguised Fire Sale

Moscow, 8 August 1997 (RFE/RL) -- The Russian government is in the midst of selling away its economic assets to pay off a massive backlog of wage arrears by the end of the year.

But analysts say privatization revenues are only a stopgap measure in the drive to resolve the crippling non-payments crisis. Moreover, they say the government could be sacrificing crucial investments in the economy in order to quickly raise cash.

The government's war chest has been given a boost from several controversial sales over the last few weeks, helping the government exceed its privatization revenue target of 10 trillion rubles ($1.7 billion) this year. Past attempts to raise revenue from privatization have failed miserably. Last year, receipts from privatization were a mere one-tenth of targets.

Russia's Uneximbank, headed by former First Deputy Prime Minister Vladimir Potanin, has alone pledged to pour more than $1 billion into the budget in auctions for telecommunications holding company Svyazinvest and metals giant Norilsk Nickel.

While the Svyazinvest auction was seen as one of Russia's fairest, and largest sales ever, the tender for Norilsk was widely considered rigged by Uneximbank. Many observers viewed it as a final chapter of the loans-for-shares program, which allowed insider banks to win stakes in prized enterprises at bargain prices in exchange for loans to the government.

Uneximbank first won control of 38 percent of Norilsk in 1995 in exchange for a $170 million loan to the government. Earlier this week it paid $250 million to retain the stake. After repaying the loan, the government netted a mere $80 million for a major stake in the world's largest nickel producer.

The government is desperate to raise cash to pay off more than 30 trillion rubles in public sector wage arrears by January 1 1998. While the flood of funds from privatization will help the government keep its promise, analysts said longer-term structural reforms will be needed to stamp out arrears once and for all.

One Western economist noted that the government is essentially using privatization revenues for short term budget purposes, a practice that is generally frowned upon even in other transitional economies.

"What happens when you run out of things to sell?" she asked.

Stakes in a handful of Russian oil companies are to be auctioned off later this year, including a potentially lucrative sale of the state oil company Rosneft. Likewise, a plan to issue 5 trillion rubles of convertible bonds in national power utility Unified Energy Systems could inject much needed cash into the budget.

The push to privatize because of the budget crunch could undermine desperately-needed investments, some analysts said.

"There is an excessive emphasis on using privatization to get funds into the budget, rather than having a long-term strategy and using privatization to attract investments," said one economist.

While most of the cash from last month's sale of Svyazinvest go directly into government coffers, another 24 percent of the company is due to be auctioned off to Russian investors this fall, with most of the proceeds likely to go towards investment.

However, Russia is expected to attract far less direct investment into its telecoms sector than Hungary or the Czech Republic partly because of the attempt to keep foreign investors from obtaining a controlling stake.

Investment and restructuring are seen as key because enterprises are responsible for the bulk of the wage arrears crisis. The government's attempt to get its own financial house in order could help eliminate one source of the non-payments crisis. But economists say enterprise investment and restructuring is the only way to cut out the roots of Russia's economic problems.