Transparency of Beneficiary Ownership

in Russia

Julia KochetygovaDirector,Governance Services Standard & Poor’s

OECD RoundtableMoscow. November 12, 2004

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Specific circumstances related to ownership transparency in Russia

• Highly concentrated ownership. Non-disclosure means material implications regarding related party transactions

• Obvious need for protection from tax investigations (“Yukos affair”)

• Ownership security considerations (“Yukos affair”)

• Personal security considerations

• The law does not contain the requirement to disclose beneficial owners

• The law does not prescribe investigative powers to regulators except anti-monopoly cases

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Concentration of ownership (50 largest Russian companies)

Copyright Standard & Poor’s 2004

* Share of combined market capitalization (MC) of the relevant companies in total MC of the companies.

** Share of the corresponding stakes in total MC of the companies

Concentration of ownership Number of companies

Companies in MC*, %

Stakes in MC**, %

Widely held firms - largest stake less than 25%

0 0 0

Companies with at least one blockholder (>25%)

50 100 57

of which:

Majority owned companies (>50%) 36 51 33

Companies with a direct government stake (>25%)

9 33 14

Companies with big stakes (>25%) owned by government holdings

17 6 3

Companies with big (>25%) private stakes 30 64 40

Source: Russian Transparecny & Disclosure Survey 2004

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Concentration of ownership – international comparisons

Copyright Standard & Poor’s 2004

Country Average size of the largest stake, %

Russia 54

Chile 40

Germany 22

Japan 7

US 5

Sources:

Data on Russia: S&P Transparency & Disclosure Survey - 2004. 50 largest companies.

Data on other countries: S.Gillan, L.Starks. Corporate Ownership and the Role of Institutional Investors: A Global Perspective. Journal of Applied Finance. 2003. Largest companies surveyed.

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Transparency of ownership (50 largest companies)

Copyright Standard & Poor’s 2004

* Share of combined market capitalization (MC) of the relevant companies in total MC of the companies under consideration.

** Share of the corresponding stakes in total MC of the companies under consideration

Concentration of ownership Number of companies

Companies in MC*, %

Stakes in MC**, %

2004 2003 2004 2003 2004 2003

Companies disclosing at least one owner 46 40 79 85 39 44

Companies disclosing ALL beneficial large owners (>25%)

34 30 66 72 32 37

of which:

Companies disclosing ALL stakes >25% belonging to gov-t or gov-t owned holdings

25 25 39 35 18 16

Companies disclosing ALL large (>25%) private owners

14 9 30 39 15 21

Source: Russian Transparecny & Disclosure Survey; updated to reflect disclosure of Mechel in October 2004 and SUN Interbrew

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Consolidated data on disclosure of private ownership by 50 companies

* controlling, blocking as well as minority stakes

•The share of disclosed private ownership in consolidated private ownership (less free floats) – 36%

•Total value of undisclosed private ownership is $ 114 bn (As of Aug 2004)

•Value of the non-disclosed consolidated private ownership – $ 67 bn Copyright Standard & Poor’s 2004

Share of stakes, %

2004 2003 2002

Share of private stakes in total capitalization of the companies under consideration

81 83 86

Share of disclosed private stakes (*) in total private ownership

25 33 29

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CGSs of Russian companies and their components

№ Company CGSOwnership

structure and influence

Financial stakeholder rights &

relations

Financial transparency &

information disclosure

Board structure and process

1 Wimm-Bill-Dann 7,6 7,5 7,5 7,7 7,72 MTS 7,5 7,5 8,0 7,5 6,9

3 Rostelecom 6,4 5,8 7,5 6,8 5,5

4 Uralsviazinform 6,2 6,3 7,3 6,0 5,1

5 Lenenergo 6,0 5,5 7,3 5,8 5,3

6 North West Telecom 5,9 5,5 7,0 6,3 4,8

7 CenterTelecom 5,8 5,8 7,0 5,7 4,7

8 Dalsvyaz 5,8 6,0 7,0 5,3 4,8

9 VolgaTelecom 5,9 6,1 7,0 5,3 5,3

10 Sibirtelecom 5,7 5,8 7,0 5,5 4,7

11 Southern Telecom 5,6 5,8 6,5 5,8 4,5

12 Aeroflot 5,4 4,5 6,8 6,0 4,3

13 MDM-Bank 5,0 6,0 5,0 5,3 3,8

Average 6,1 6,0 7,0 6,1 5,2

Average for Sub-Comp 1.1 “Transparency of Ownership Structure” is 7.3

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Companies having most transparent ownership structures

Companies disclosing all large private owners (>25% or other big private stakes if these are closely held)

Copyright Standard & Poor’s 2004

Company Number of owners disclosed Total stake disclosed, %

Baltika 1 74 WBD 11 70 Irkut 11 65 Kalina 2 85 Lukoil 3 46 MTS 2 76 Norilsk Nickel 2 50 RBC 3 72 Severstal 1 83 OMZ 4 50MGTS 2 84Pharmacy Chain 36,6 4 75Sun Interbrew 2 69 Mechel 2 68

Company Number of owners disclosed Total stake disclosed, % MDM Bank 2 99 Sistema 1 78

Closely held companies

Publicly traded companies

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Drivers of Transparency

Key Conclusions Relevant companies

•Typically due to foreign listing, or request of a foreign partner. Most often - listing of ADR III on NYSE) or GDRs on LSE

•In connection with Russian listing (and/or seeking foreign funds), even though Russian exchanges do not require ownership disclosure

•Eurobond issues – disclosure by non-public companies as well

•Disclosure initiated by the shareholders, for their own fund-raising or reporting purposes

NYSE:, MTS, WBD, Mechel; LSE: OMZ, LUKOIL; foreign partners: NN

Exceptions: NYSE: VimpelCom; NASDAQ: GTI;

RBC, Irkut, Kalina, 36,6

Sistema, MDM Bank

Baltika, SUN Interbrew, MGTS, TNK-BP (BP only)

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Channels of Disclosure

Key Conclusions Relevant companies

• Listing documents or regular filings available online (very few)

•Main channel: listing documents (not always accessible due to constraining filing rules at exchanges). Consequently, selective disclosure, discrimination: Russian vs. English-speaking, those included in the mailing list

• Isolated disclosure events (non-continuos disclosure)

•Disclosure provided in an unofficial format (comments in public interviews, etc.)

WBD, MTS, MDM Group

Selective disclosure: Lukoil, OMZ; English language only: MTS, WBD, MDM-Bank

NN; (Yukos)

Aeroflot, SUEK, etc.

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Still, complicated ownership structures

Key Conclusions Relevant companies

• Even when beneficial shareholders are disclosed,ownership is via intermediariessuch as:

•nominee shareholders•shell companies•combinations of nominees and shell companies•cross-ownerships, treasury shares•shareholder agreements

•Many cases of partial disclosure: when only the holding entity (business group) is disclosed, but beneficiaries are not

  

NN, OMZ, TMKMDMIrkut, Mechel, PM, Yukos

OMZWBD, MTS (disclosed)

 TNK-BP (Alfa-Access-Renova); PM (Interros); VimpelCom and GTI (Alfa)  

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Conclusions

• Companies cannot be expected to do something that their owners are not always interested in

• Owners are not forced to support this: they have no obligation for disclosure

• Their voluntary disclosure drives transparency

• At the same time, of the three options for obtaining beneficial ownership and control information (OECD, September 2002), clearly, only up-front disclosure looks relevant for Russia

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Whose obligation should disclosure of beneficiaries be?

• Can companies always know their real owners?

• Do nominee owners and shell companies “own” the information about real owners to be able to give it out?

• Is the concept “all is permitted that is not forbidden” the right guidance?

• It is more logical to put the disclosure obligation on owners (under a risk to be disenfranchised) – like in the U.K., U.S., New Zealand?

• In the absence of the legal requirement for that, can this be voluntarily imposed by company charters? Put into the Code?

• Additionally, it can be enforced by listing requirements as well

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Solutions

• Transparency is a combination of:– Disclosure requirements– Strong enforcement mechanisms (investigative

power of regulators, and relevant initiation procedures)

– Legal culture (strong judiciary system)– Economic incentives– Security