Transparency of Beneficiary Ownership in Russia Julia Kochetygova Director, Governance Services Standard & Poor’s OECD Roundtable Moscow. November 12, 2004

2 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

3 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 ownershipNumber of companies Companies in MC*, % Stakes in MC**, % Widely held firms - largest stake less than 25% 000 Companies with at least one blockholder (>25%) of which: Majority owned companies (>50%) Companies with a direct government stake (>25%) Companies with big stakes (>25%) owned by government holdings 1763 Companies with big (>25%) private stakes Source: Russian Transparecny & Disclosure Survey 2004

4 Concentration of ownership – international comparisons Copyright  Standard & Poor’s 2004 CountryAverage size of the largest stake, % Russia 54 Chile 40 Germany 22 Japan 7 US 5 Sources: Data on Russia: S&P Transparency & Disclosure Survey 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 Largest companies surveyed.

5 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 ownershipNumber of companies Companies in MC*, % Stakes in MC**, % Companies disclosing at least one owner Companies disclosing ALL beneficial large owners (>25%) of which: Companies disclosing ALL stakes >25% belonging to gov-t or gov-t owned holdings Companies disclosing ALL large (>25%) private owners Source: Russian Transparecny & Disclosure Survey; updated to reflect disclosure of Mechel in October 2004 and SUN Interbrew

6 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, % Share of private stakes in total capitalization of the companies under consideration Share of disclosed private stakes (*) in total private ownership

7 CGSs of Russian companies and their components Average for Sub-Comp 1.1 “Transparency of Ownership Structure” is 7.3

8 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

9 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)

10 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.

11 Still, complicated ownership structures Key Conclusions Relevant companies Even when beneficial shareholders are disclosed,ownership is via intermediaries such 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, TMK MDM Irkut, Mechel, PM, Yukos OMZ WBD, MTS (disclosed) TNK-BP (Alfa-Access-Renova); PM (Interros); VimpelCom and GTI (Alfa)

12 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

13 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

14 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