RUSSIA: Teaching The Privatisers An Expensive Lesson

By IPS Correspondents Reprint | | Print |

Andrei Ivanov and Judith Perera

MOSCOW, Aug 23 1997 (IPS) - Russia’s powerful Oneximbank held a 38 percent stake in metals giant Norilsk Nickel in trust against a 1995 mortgage, but this month sold it off to its own subsidiary at its own auction — having ruled out other serious buyers.

Oneximbank officials were part of the auction’s tender committee; even the prime minister’s personal order failed to stop the deal going through. The price paid by Oneximbank for the metals giant was far below the shares’ market value.

Ironically Norilsk Nickel’s staff and management welcome the purchase and endorse the changes wrought by Oneximbank since it took over in 1995; pay arrears have been largely met, production is up and financial management is making sense of the company prospects.

The furore surrounding the sale has forced president Boris Yeltsin to draft a decree limiting the freedom of Moscow bankers to plunder state assets without fear of competition or legal controls. In the meantime Oneximbank are waiting to hear whether the government will press the state prosecutor general to try to reverse the Norilsk deal in court.

Sergei Vetchinin, head of Norilsk Nickel’s press service says the company does not fear any lawsuits that may be filed by the prosecutor on the government’s behalf, “as long as they lie within the field of the law”.

Oneximbank had held the shares in trust since November 1995, when they were mortgaged to the bank as security for a 170.1 million dollar loan to the government. The bank, announced plans to auction off the government stake in Norilsk Nickel on Jul. 7.

Foreign firms had been excluded from the auction. One, Britain’s Trans-World Group, led calls for a postponement and a review of the auction conditions. Others who appealed to the prosecutor general to halt the sale included Mikhail Kuznetsov, an opposition member of parliament, Yevgeny Yasin, the Russian minister in charge of economic reforms.

Gennady Seleznyov, speaker of the State Duma, wrote to Yeltsin asking him to intervene. The Duma’s Accounting Chamber had scrutinised the procedure under which the shares were placed in Oneximbank’s charge, revealing what he claimed were “a number of serious legislative irregularities”.

On the eve of the actual auction, prime minister Viktor Chernomyrdin gave in and ordered the auction to be postponed. However Kokh, who was also a member of the tender commission, said both the committee chairman and the prosecutor-general Yuri Skuratov had decided that there was no point in persisting with attempts to defer the sale.

The sale went ahead. Swift, a representative of Oneximbank, bid 236.18 million ecu (252 million dollars) for the shares, more than 111 million dollars more than the auction starting price of 131.6 million ecu (140.8 million dollars).

Since Norilsk Nickel’s present market capitalisation is more than 1.4 billion dollars, analysts say Oneximbank should have paid at least another 275 million dollars more for its shareholding.

The only other bid came from a Russian company called Advanced Industrial Technology (PPT), representing a number of foreign trade associations and industrial companies, which offered 182 million dollars. Spokesman Sergei Barbashov told local media he had no complaints about the auction.

According to the Russian State Property Fund, legally there was nothing wrong with the auction. Fund chairman Igor Lipkin says the winner’s offer was 80 percent above the starting price — a record for such sales, both in the first loans-for-shares auctions in 1995 and in the recent re-sales of the shares themselves.

Oneximbank undertakes to set aside 200 billion (34.5 million dollars) to settle Norilsk Nickel’s debts to the pension fund, and to invest the same amount in social infrastructure and utilities for its work force. It is also setting aside a deposit of 300 million dollars to bring the Pelyatkinskoye gas condensate field on stream.

At the current stage of Russia’s economic development, Oneximbank president Vladimir Potanin says it is safer to lend money to enterprises under its control. Poor legal and accounting standards make unsecured third-party loans a risky business. “We want to be sure that the money we invest will be properly managed,” he told the London Financial Times this week.

Potanin has told Norilsk staff that the bank viewed the share acquisition as a strategic investment and was not contemplating selling the shares to anybody in the future. He said 1998 would be a year of substantial investment in Norilsk Nickel, including the company’s ore base, production capacity and social infrastructure.

Norilsk Nickel employees favour continued cooperation with the bank. Union leaders said, in a letter circulated by the Norilsk Plant, Norilsk Nickel’s core subsidiary, had improved its economic and social performance indicators in the first half of 1997.

Pay at the plant has been issued regularly, and pay arrears have been reduced from 1,000 billion roubles (172 million dollars) at the start of this year to 307 billion roubles (53 million dollars).

Meanwhile the huge Norilsk Plant, core enterprise of Arctic mining and smelting giant Norilsk Nickel, has continued to increase its production and exports and promises to be a major player on the world metals market in the coming years.

It has beaten this year’s January-July production targets for electrolytic nickel and cobalt by 1.9 percent and 3.2 percent respectively. And despite a maor fire on 17-18 July it has also beaten its electrolytic nickel and cobalt targets for that month alone by 0.8 percent and 5.6 percent.

Whereas in the past the company sold all its production to the state, since 1994 the company has been allowed to market its own production for export; sales office have been established in London and New York.

Commodity-grade output rose 11 percent as the company’s core and subsidiary divisions all increased production. Sales of nickel were 168,900 tonnes (up 1,900 tonnes on 1995), of which exports were 104,900 tonnes, up 20 percent.

Sales of copper were 342,900 tonnes, up 12,000 on 1995, and exports of this metal rose 120 percent to 241,400 tonnes. Exports rose to compensate for slack domestic demand.