COMMENT: The Kremlin's 9 commandments for business

By bne IntelliNews March 6, 2007

Chris Weafer of Alfa Bank -

The Russian state fluffed the $8.8bn secondary placement of Sberbank shares last month and was forced to turn to its pet oligarchs to bail out the flotation. This is the second time in nine months; the historic Rosneft IPO last July was actually more of a private placement after international investors shunned the sale and the state was forced to turn to oligarchs and international oil companies wanting to work in Russia. These events are not one-offs, but part of the new paradigm President Vladimir Putin is developing to govern relations between big business and the state. Alfa Bank's Chris Weafer lays down the laws.

A significant amount of the domestic sourced funding that supported both the Rosneft IPO and the recent Sberbank equity issue has almost certainly come from a large group of Russian billionaires and the companies controlled by them. It actually is a very neat mechanism for the state to use the funds owned by these people to help advance the state's industrial ambitions. Of course, so far these have also been profitable investments for those investors.

This is a very substantial pool of capital that the state is expected to tap into again as the IPO program continues and especially if international investors remain nervous about the asset class.

When President Putin took office in 2000, one of his first actions was to meet with the group of so-called oligarchs and deliver the first of what may be described as the Kremlin's commandments for doing business in the "new" Russia.

In 2000 these were:

1. Stay out of politics.

2. Pay your taxes.

3. Operate within the law.

In late 2003, at another meeting with business leaders, there were two new commandments added to the list:

4. Wealthy individuals should use their wealth to help improve Russia and in support of state objectives.

5. Businesses in strategic sectors should work to further the state's plan for industrial and economic development.

At the recent meeting with the [Russian Association of Industrialists and Entrepreneurs, or RSPP], President Putin elaborated on rule 5 and also added a new commandment:

6. Companies operating in the natural resource sectors should plan to shift from exporting unprocessed material and now invest in downstream processing so as to increase the value-added segment of natural resource exports.

To the list above we can also add:

7. Foreign strategic investors are allowed to invest in strategically important companies or projects, but only up to a maximum of 49%.

8. For more "sensitive" companies and projects, that limit is reduced to a maximum of 25%.

9. International companies that offer reciprocal investment opportunities outside of Russia will increasingly be favoured as strategic partners for the Russian state-controlled companies.

Undoubtedly, we will see a 10th commandment sometime this year.

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