Transparency of Beneficiary

Ownership
in Russia

Julia Kochetygova
Director,
Governance Services
Standard & Poor’s

OECD Roundtable
Moscow. November 12, 2004
 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)

Concentration of ownership Number of Companies in Stakes in

companies MC*, % MC**, %
Widely held firms - largest stake less than 0 0 0
25%
Companies with at least one blockholder 50 100 57
(>25%)
of which:
Majority owned companies (>50%) 36 51 33
Companies with a direct government stake 9 33 14
(>25%)
Companies with big stakes (>25%) owned by 17 6 3
government holdings
Companies with big (>25%) private stakes 30 64 40
* 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

Source: Russian Transparecny & Disclosure Survey 2004

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Copyright  Standard & Poor’s 2004
 Concentration of ownership –
international comparisons

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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Copyright  Standard & Poor’s 2004
 Transparency of ownership
(50 largest companies)
Concentration of ownership Number of Companies in Stakes in
companies MC*, % MC**, %

2004 2003 2004 2003 2004 2003

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

Companies disclosing ALL beneficial large 34 30 66 72 32 37

owners (>25%)
of which:
Companies disclosing ALL stakes >25% 25 25 39 35 18 16
belonging to gov-t or gov-t owned holdings
Companies disclosing ALL large (>25%) 14 9 30 39 15 21
private owners

* 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

Source: Russian Transparecny & Disclosure Survey; updated to reflect disclosure of Mechel in October 2004
and SUN Interbrew
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Copyright  Standard & Poor’s 2004
 Consolidated data on disclosure of
private ownership by 50 companies

Share of stakes, %
2004 2003 2002
Share of private stakes in total capitalization of 81 83 86
the companies under consideration

Share of disclosed private stakes (*) in total 25 33 29

private ownership

* 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
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Copyright  Standard & Poor’s 2004
 CGSs of Russian companies and
their components
Financial
Ownership Financial
transparency & Board structure
№ Company CGS structure and stakeholder rights &
information and process
influence relations
disclosure
1 Wimm-Bill-Dann 7,6 7,5 7,5 7,7 7,7
2 M TS 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 M DM -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)
Publicly traded companies
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 50
MGTS 2 84
Pharmacy Chain 36,6 4 75
Sun Interbrew 2 69
Mechel 2 68
Closely held companies
Company Number of owners disclosed Total stake disclosed, %
MDM Bank 2 99
Sistema 1 78
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Copyright  Standard & Poor’s 2004
 Drivers of Transparency
Key Conclusions Relevant companies
NYSE:, MTS, WBD, Mechel; LSE:
•Typically due to foreign listing, or request of OMZ, LUKOIL;
a foreign partner. Most often - listing of ADR foreign partners: NN
III on NYSE) or GDRs on LSE
Exceptions: NYSE: VimpelCom;
NASDAQ: GTI;
•In connection with Russian listing (and/or
seeking foreign funds), even though Russian
exchanges do not require ownership disclosure RBC, Irkut, Kalina, 36,6

•Eurobond issues – disclosure by non-public

Sistema, MDM Bank
companies as well
•Disclosure initiated by the shareholders, for Baltika, SUN Interbrew, MGTS,
their own fund-raising or reporting purposes TNK-BP (BP only)

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 Channels of Disclosure
Key Conclusions Relevant companies
• Listing documents or regular filings WBD, MTS, MDM Group
available online (very few)
•Main channel: listing documents (not always
accessible due to constraining filing rules at Selective disclosure: Lukoil,
exchanges). Consequently, selective OMZ; English language only:
disclosure, discrimination: Russian vs. MTS, WBD, MDM-Bank
English-speaking, those included in the
mailing list
• Isolated disclosure events (non-continuos NN; (Yukos)
disclosure)
•Disclosure provided in an unofficial format
(comments in public interviews, etc.) Aeroflot, SUEK, etc.

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 Still, complicated ownership
structures
Key Conclusions Relevant companies
  
• Even when beneficial shareholders are
disclosed,ownership is via intermediaries
such as:
•nominee shareholders NN, OMZ, TMK
•shell companies MDM
•combinations of nominees and shell Irkut, Mechel, PM, Yukos
companies
•cross-ownerships, treasury shares OMZ
•shareholder agreements WBD, MTS (disclosed)
•Many cases of partial disclosure: when only
the holding entity (business group) is  TNK-BP (Alfa-Access-Renova); PM
disclosed, but beneficiaries are not (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

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