WHO IS TO BLAME?

Some market players were quick to explain this decline by pointing to such external factors as the NASDAQ, Turkey and the like. “It’s global flows moving [the Russian] market at the moment” Roland Nash, chief economist at Renaissance Capital in Moscow told the Wall Street Journal last week. “It doesn’t trade on fundamentals.” Because, in this view, the Russian economy is growing strongly, the country is awash in dollars and the exchange rate is stable, the explanation for Russia’s stock market woes must lie elsewhere. Other observers, however, argued that much of the blame lies with the lack of improvement in the investment environment, particularly for portfolio investors. “If people thought that Russian companies and the government were really interested in the benefit of shareholders, a lot of these companies would be worth two to five times what they are today,” Peter Boone of Brunswick UBS Warburg responded.

Putin’s attack on the oligarchs this summer–which featured indiscriminate tax and criminal investigations against Russia’s largest and most-traded companies, as well as calls for the renationalization of properties privatized under dubious circumstances in the 1990s–was not focused on curbing the endemic abuses of minority shareholder rights. It therefore did little to reassure nervous investors about the new president’s commitment to boosting shareholder value. Once Putin had “tamed” the oligarchs and apparently divested them of their political ambitions, the Russian and Western business media suggest that the captains of Russian industry returned to their old tricks. The Gazprom gas monopoly is widely believed to be diverting with impunity lucrative business and assets to a little-known trading company, Itera, whose ownership is a mystery. LukOIL, Russia’s largest oil company, announced in November that the long-promised release of financial accounts audited according to international accounting standards will be delayed still further. Norilsk Nickel, Russia’s largest metals company, is conducting a stock swap that critics allege will transfer some of its most lucrative assets to Norimet, a company of unknown ownership. Minority shareholders have protested the reorganizations now being pursued by the UES and Svyazinvest electricity and telecommunications holding companies, respectively. And a deal concluded last year (under pressure from Washington) between the Sidanko and TNK oil companies–a deal that was to have protected BP-Amoco’s US$500 million investment in Sidanko–now seems to be falling apart.

Minority shareholder rights in Russia are supposed to be protected by the Federal Securities Commission (FSC), which is currently investigating a number of these companies. FSC Chairman Igor Kostikov has called on the government to reject the proposed UES restructuring plan, and the Commission has sided with minority investors seeking to remove restrictions on foreign purchases of Gazprom shares. The FSC is also conducting investigations into Gazprom and Norilsk Nickel, in order to ascertain whether managers in these companies are in fact owners of Itera and Norimet. So far, however, these investigations do not seem to have turned up very much, and a November 30 FSC-set deadline to announce the results of the Norimet investigation passed without much fanfare (Wall Street Journal, December 1, 4; Reuters, November 30).

HOW BAD CAN IT GET?