In Russia, A Rising Chorus: Enough Is Enough

The market is in a mess pending shareholder reform

Viktor S. Chernomyrdin appeared shell-shocked. The Russian Prime Minister thought his government had inoculated markets against the Asian flu in December when it raised interest rates to 36%. But when Chernomyrdin flew to Davos, Switzerland, on Jan. 30 to hobnob with the world's business and political elite, investor after investor chewed him out.

They told him Russian markets could melt down unless the government boosts tax collection, cuts spending, and curbs its budget deficit. Then George Soros, who has invested more than $2.5 billion in Russia, blasted business leaders for violating minority shareholder rights--and made it clear he is selling some of his Russian stocks.

NOT ENOUGH. The wake-up call came none too soon. Caught up in political infighting, Chernomyrdin was paying little attention to the economy. When the government failed to back up the central bank's Dec. 1 rate increase with budget and spending cuts, investors started to lose faith in the Russian economy.

A spate of shareholder-rights scandals brought the market down further. In January, foreigners dumped at least $1 billion worth of shares, sending Moscow down 30% (chart). It has lost most of the gains it made in 1997, when its 111% return made it the best-performing emerging market.

Shaken, Moscow officialdom has struck back. The government now plans to slash spending. The central bank has pushed interest rates to 48% and pledges to do whatever is necessary to prevent a ruble devaluation. And President Boris N. Yeltsin, whose recent demotions of reformers Anatoly B. Chubais and Boris Y. Nemtsov generated fears that economic restructuring was being derailed, has promised to keep them on to 2000. Yeltsin also halted new borrowing in the first quarter, called for tax reform, and demanded strong measures to protect shareholders' rights. The moves pushed the stock market up almost 7% by Feb. 9.

But investors still are nervous. "Statements aren't enough," says Lucca Parmeggiani, portfolio manager for Zurich-based Vontobel Eastern Europe Equity Fund. He and other foreign investors want hard results--and say the next six months will be crucial.

Also key to any market revival is an expansion of shareholders' rights. One of the biggest violators is the oil industry. Last year, most independent production outfits were merged into huge energy holding companies, including Sibneft, Sidanko, and Yukos. Instead of reaping a merger windfall, the value of foreign investors' shares has been diluted. Sibneft, for example, sold shares in oil producer Noyabrskneftegaz to affiliates at a 50% discount to the market, according to Brunswick Warburg, a Moscow investment bank.

REAL SHARE? Russia's Federal Securities Commission is investigating possible abuses in the industry, and Michigan investor Kenneth B. Dart has lodged complaints of unfair treatment by Tomskneft, an oil production company whose parent recently merged into Yukos.

Another target of complaints is Sidanko, an oil holding company 85% controlled by Russia's giant Oneximbank and its affiliate, Moscow-based investment bank MFK Renaissance. British Petroleum bought 10% of Sidanko on Dec. 31 for $571 million. But some minority shareholders claim they were excluded from taking part in a convertible bond issue in December that will reduce their stake in Sidanko from 4% to 1.4%. The new share issue will be sold only to Oneximbank, Renaissance, and BP at a fraction of the current market value.

William F. Browder, managing director of Hermitage Capital Management and a dissenting shareholder says that the sale "raises questions about whether a Russian share is really a share." Oneximbank President Vladimir O. Potanin says the sale was legal and that Browder was notified about its terms before he bought shares for his Hermitage Fund.

Shareholder rights violations are hardly new in Russia, of course. But they're one more reason why foreign investors are getting antsy about the Moscow market and aren't jumping back in yet.

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