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Russia: More Privatization Reversals To Come?

Moscow, 2 October 1997 (RFE/RL) - In a sign that pressure is building to clean up Russia's scandal-plagued privatization process, the Moscow Moscow Arbitration Court ruled this week that shares in the Cherepovets Azot factory should be returned to the government.

It is the first high-profile privatization to be reversed, targeting Russia's third largest bank, Unexim, which had acquired a 41 percent stake in the chemical factory, located northeast of Moscow, in 1994. The court ruled Monday that the shares should be returned to the government because Uneximbank had failed to meet the investment conditions stipulated in the tender.

Russian media have played up the case because it affects Uneximbank's founder, former first deputy prime minister Vladimir Potanin, who has been embroiled in a media war over his involvement in recent privatization sales. Potanin led a consortium that won a major stake in Russia's telecommunications holding company Svyazinvest in July, but the losing bidders cried foul play and launched a campaign against the sale through their media outlets.

Recent allegations that former state property chief Alfred Kokh, who oversaw the auction, accepted money from a Swiss company linked to Uneximbank for a questionable book deal have only intensified speculation that Svyazinvest was a sweetheart deal.

Sergei Dorenko, the anchor of a program on Russian Public Television (ORT), first publicized Uneximbank's mismanagement of Cherepovets in a report aired just after the Svyazinvest auction. He alleged that Uneximbank dodged its investment requirements under the tender by diverting $41 million to an off-shore bank.

Dorenko, in an interview on Radio Liberty, later claimed credit for the court's decision, saying his coverage of the story had forced the court to take a closer look at the case.

Russia's privatization chief Maxim Boiko, however, presented the court's ruling as part of his efforts to clean up the privatization process, which has been plagued by accusations that the state has handed property to insider banks at cut-rate prices. Boiko said that funds earmarked for investment in the Cherepovets factory had been used for other purposes and pledged to ensure what he called "honest" enforcement of investment terms following sell-offs of state property.

Whether the court's decision was politically motivated or not is open to speculation. But there is clearly pressure building on the government to plug some of the many loopholes that have been exploited during the privatization process.

Until just recently, the government had used "investment tenders" to sell off state property. But many of the owners were able to evade the investment conditions due to lax oversight, or as many believe, insider deals between the buyer and seller.

Russia's new privatization law attempts to spell out the rules of the game more clearly. Although the Cherepovets case was tried under Russia's criminal code after charges of fraud were brought, Russia's privatization law includes a provision which allows sales of state shares to be reversed if investment conditions have not been fulfilled.

The new law, which went into effect on August 2, also allows sales of state property to be overturned if there is evidence of collusion between buyer and seller, if the price of the sale has been fixed, or if beneficial conditions have been granted to one bidder over another.

While the law is clearly meant to address some of the wrongs that have dogged Russia's privatization, such as the Cherepovets case, some lawyers point out that the law is so vague that it makes overturning a privatization relatively easy for political or technical reasons. The law could affect not just major players like Uneximbank, but smaller investors as well.

William Simons, a lawyer with Pepper, Hamilton & Sheets and a faculty member at Leiden University's Institute for East European Law and Russian Studies in the Netherlands, says the law creates uncertainty for owners. He asks: "From a policy point of view, the main question is, once a transaction has been completed, is it a stable decision or can it be turned back?"

The law mentions nothing about shares that were auctioned off and then resold to third parties, nor does it clearly spell out a statute of limitations which would set a deadline for taking legal action.

Russia's State Duma last month set up a committee to investigate whether the sales of Svyazinvest, oil company Sibneft, metals giant Norilsk Nickel, and Tyumen oil company complied with existing legislation. The committee, culled from different parliamentary factions, is due to announce its findings on November 1.

The Duma committee, which appears to be guided by the new law, is charged with examining the starting prices of the state shares, procedures for the sales, and the role of state officials in the auctions.

Although many doubt the Duma's findings will result in any reversals, the Cherepovets case appears to have raised the ante.