Accessibility links

Breaking News

Russia: Yeltsin Pledges Fair Privatization -- An Analysis

By Floriana Fossato and Stephanie Baker

Moscow, 18 August 1997 (RFE/RL) -- Intervening in a financial and media scandal, Russian President Boris Yeltsin has insisted that his government plans to cut ties with powerful banks and financial groups in the privatization process.

Interfax news agency quoted Yeltsin on Friday as saying that future privatization deals should be "fair, based on strict legislative rules and allowing no deviations."

Seeming to contradict previous statements, Yeltsin indicated that the recent dismissal of Alfred Kokh as deputy prime minister and State Property Committee head arose over controversy surrounding the latest sell-offs of state property and by Kokh's links with some of Russia's most powerful banks.

Kokh, who had overseen privatization deals since 1996, resigned last week. He was replaced in both his positions by the deputy head of Yeltsin's administration, economist Maxim Boiko.

The recent privatization of substantial shares in Russia's telecommunications monopoly, Svyazinvest, and Russia's biggest metal company, Norilsk Nikel, set off a financial and media war.

Influential news media charged that the deals were illegally fixed. Allegations arose against the powerful Oneximbank group, which led the consortiums winning both deals. Kokh and other government officials were at the center of the dispute. They were accused of having privileged links with Oneximbank.

The deals and the following public scandal have divided Russia's previously allied financial elite into antagonistic sides. Observers said the fallout of the conflict may introduce new elements of instability into shaky Russian politics.

Financial analysts sharply criticized the sale of 38 percent of Norilsk Nikel as an insider deal fixed in favor of Oneximbank, led by former Deputy Prime Minister Vladimir Potanin. They also said the deal was the unavoidable continuation of the loans-for-shares privatization scheme written in 1995. Potanin was considered one of the main architects of that scheme.

Both Kokh and first deputy prime Minister Anatoly Chubais have overseen the scheme. Critics have said that the loans-for-shares deals, which handed shares in Russia's biggest oil and industrial companies to pro-government banks in exchange for loans, were biased in favor of the banks. Banks were allowed to have an important advantage, as the government authorized them to be the official organizers of future auctions. This allowed them to turn management control into ownership.

A new privatization law that went into effect on August 2 prohibits loans-for-shares deals.

The auction of a 25 percent stake in Svyazinvest, was a different case. Western financial analysis said the government, which organized the tender, may have appeared to favor Oneximbank. But they pointed out that the auction introduced a new stage of privatization. Russian government officials said the main new principle is to sell to the highest bidder, in order to raise cash for the budget. They added that future auctions will be modeled on the Svyazinvest tender.

The Oneximbank-led consortium included Deutsche Bank's Deutsche Morgan Grenfeld, Morgan Stanley Asset Management, and U.S. financier George Soros and bid nearly $2 billion ($1.9 billion) that the government plans to use to pay its huge debt to the army and the state sector.

A privatization official, Igor Lipkin, said that nearly $700 million was transferred to the federal budget from the deal last Thursday and another payment should be transferred by October 13. Prime Minister Viktor Chernomyrdin warned against reaching easy conclusions or making hasty allegations about the legality of the last privatization auctions. He said that an investigation into the legality of the sale continues.

At the beginning of August, Chernomyrdin called for the Norilsk auction to be postponed, but the next day, following meetings with several government officials and Potanin, he reportedly agreed that the sale should take place on schedule.

Kokh's successor, Boiko, pledged on Thursday that under his leadership, privatization auctions will be honest, effective and open and defended the Svyazinvest deal. Yeltsin said Friday he is sure Boiko will be even-handed toward all banks. He said this was the main reason for Boiko's appointment.

And in a somehow surprising comment, Yeltsin said scandals concerning the Svyazinvest and Norilsk tenders arose because "some banks are apparently closer to the heart of Alfred Kokh, and this is not proper." A previous statement from Yeltsin's office had expressed satisfaction at Kokh's work in what the statement called one of the most difficult areas of government.

Yeltsin's comments also contradict statements made Thursday by Chubais. He said Kokh had planned to leave the government long before he was replaced. Chubais said that Kokh's departure was unrelated to the latest developments in privatization.

Adding his voice to the controversy, First Deputy Prime Minister Boris Nemtsov has acknowledged the row surrounding the Norilsk Nickel sale. But he said the auction was conducted more democratically and openly than a May auction of a stake in the Sibneft oil company. Financial structures linked to the Security Council deputy secretary, business magnate Boris Berezovsky, won the Sibneft auction.

In an interview with RFE/RL in Sochi, where he has been vacationing, Nemtsov said the Norilsk sale caused a scandal because of the way rules governing loans-for-shares deals had been drafted. Asked whether Berezovsky should remain in the Security Council, Nemtsov said people who have direct business dealings should not take up state posts. Nemtsov also said the state should establish control over both the finances and the "ideological foundation" of the work of Russian Public Television ORT.

Although the state owns a 51 percent stake in ORT, Berezovsky has wielded substantial influence at the network since ORT began broadcasting on Channel One in April 1995. Last month ORT broadcast sharp criticism of the Svyazinvest auction, and Nemtsov slammed the losers of that auction for staging "hysterics on television." Another influential businessman, Media-Most head Vladimir Gusinsky, said yesterday that he has no complaints regarding the Svyazinvest sale.

In an interview with the Ekho Moskvy radio station on Thursday, Gusinsky said Most group -- not Media-Most -- had participated in the Svyazinvest auction.

He acknowledged that he, Berezovsky, Oneksimbank head Potanin met Chubais in France two days before the auction. But he claimed that Chubais and the businessmen had discussed only the "general rules of the game," not the Svyazinvest deal. Gusinsky also denied that Berezovsky had been involved in the consortium that submitted the losing bid for Svyazinvest. He said Berezovsky had attended the meeting in France "because the telecommunications sector affects Russia's national security." Potanin has claimed that Gusinskii and Berezovsky tried to strike a back-room deal to acquire the Svyazinvest stake at a bargain price.