Second volte-face in a week, after the Aviastar fiasco, begs a serious review of the privatisation process (766 words)

Published: 10/5/2001

The Russian government is reported to be considering reversing the privatisation of 50% of Domodedovo Airlines, sold earlier this year to Russian Aluminium and Roman Abramovich. According to reports in Moscow business daily, Vedomosti, the government intends to revoke the results of the privatisation of Domodedovo Airlines (DA) through the courts, thereby cancelling the sale of 50% of the airline to Russian Aluminium for a reported $2m, orchestrated by the airline's management led by its General Director Alexander Akimov. The management team reported it had previously gained the shares from the government through the exercise of 3.8m options at 57 cents a share in a closed subscription in April 2001. The trade has obviously roused government suspicions, given that companies associated with Russian Aluminium, went on to buy a stake in Aeroflot on a price/sales ration of 0.23x: a significant premium on the 0.03x the $2m at which Domodedovo was valued. Julia Zhdanova, airline analyst at United Financial Group (UFG), observes that, while DA was undoubtedly not worth as much as Aeroflot, the discount is far too large given any reasonable assessment of DA's business. The court proceeding to reverse the process may prove to be tricky, since the privatisation process is reported to have been carried out in accordance with the company's Privatisation Plan giving employees an a priori right to acquire shares at par, or close to par value. There seems little doubt, however, that the government did not expect a single manager to acquire the shares through the exercise of options and certainly not simply to pass them through the shares to Russian Aluminium. But the point is that these events at best belie a continued naivety on the part of those government departments responsible and, at worst, an altogether more murky conspiracy to buy the airline cheap. The court outcome will be interesting to watch, given that it appears that the sales was perfectly legal within the government's own privatisation plan for the airline. It does, however, again raise the spectre of a government actively courting the investment from both domestic and international sources in the air transport and aerospace industry and still seeming to change its mind to seek a reversal of the deal because it did not get the initial transaction right. This is precisely what has happened this week at Aviastar with the departure of the New Community management team, which, regardless of its faults -and there are many - did appear to strike a legitimate deal with the government that was later reneged upon. On the evidence available, it would probably be difficult to prove the illegality in any of these cases, given that the government itself set the conditions and others simply exploited the situation. But the Putin administration should scrutinise the balance it is striking between economic and political imperatives. The desire to be seen to be ”doing right” is becoming increasingly important in a country where privatisation has historically been synonymous with theft by the very few rich oligarchs: a description that in the case of DA perfectly fits Roman Abramovich who controls Russian Aluminium. In the event of the sale being voided and the airline being returned to the state, it would seem likely that the government would quickly put it up for sale through the significantly more transparent auction - now its preferred method of sale. Undoubtedly, raising more than the original $2m from one of several potential bidders including East Line, Aeroflot (now with a major shareholder associated with Russian Aluminium) and Sibir will not be difficult. The increasing consolidation of the industry and large carriers eager to fill out route networks with an airline in a leading position in cross country routes will make many overlook a less than shiny operations record over the last 12 months. As part of the government's recent “clean” approach within the transport sector, there have been reports that a Mr Molozhavy, who was in charge of the privatisation of state assets in the transport sector, has been replaced by Mr Gusev, previously responsible for state property in the military sector. The change has led to some speculation that the government may be trying to take a firmer grip on the privatisation process, to improve both its yield as well as avoiding the embarrassments and potentially damaging incidents such as Aviastar and Domodedovo Airlines, that risk undermining the government's efforts to encourage private investment. If so, this is to be heartily welcomed.

Article ID: 2803